China’s ‘COVID zero’ and yuan’s rise against yen add pressure on Japan’s economy

Japan’s economy, which has already faced downward pressure amid the war in Ukraine and depreciating yen, may also be affected by China’s radical “zero COVID” policy and the yuan’s bullish trend. .

With energy and commodity prices surging globally following Russia’s invasion of Ukraine, a major oil and gas producer and exporter, resource-poor Japan could experience “bad inflation,” a combination of economic recession and higher costs.

The yen is certain to extend losses against other key counterparts, including the US dollar and euro, as the Bank of Japan has maintained its ultra-loose monetary easing, likely driving up import prices and accelerating domestic inflation.

Under such circumstances, China’s business environment, often influenced by the communist-led government’s anti-epidemic restrictions, and the strength of the yuan, known as the renminbi, are expected to deal a further blow to Japan’s economy, the third largest. biggest of the world.

Even after the end of the 2022 Beijing Winter Olympics and Paralympics, China has vowed to continue taking drastic measures to tackle the spread of COVID-19, such as imposing lockdowns on cities when outbreaks occur and putting in quarantine travelers from abroad.

Late last month, Chinese authorities decided to lock down Shanghai, which has a population of around 25 million, with each half of the city shut down in turn for nine days until next Tuesday.

Speculation has also abounded that China, Japan’s biggest trading partner, would avoid implementing actions to lower the yuan to curb a rise in domestic prices as the prolonged pandemic has severely undermined consumer and business confidence.

The yuan soared 6.4% from the beginning of this year to 19.26 yen on Thursday, while the dollar soared 6.0% to 122.41 yen during the same period, according to Mizuho Bank, the main branch. bank of Mizuho Financial Group Inc.

“We don’t know when China’s trade and transportation hubs will suddenly lock down and we will be forced to suspend our operations. We can’t come up with a management strategy,” said Hiroshi Nakano, a 43-year-old worker at a Japanese manufacturer.

“Also, the yen’s sharp decline against the yuan has reduced our profits as our local corporation manufactures products here in China and ships them to Japan. We have become reluctant to boost investment and production in China,” Nakano added.

A weak yen against the yuan raises the prices of imported goods from China to Japan, although it supports Japanese exporters as they are able to sell their products cheaper at home and increase the value of their income abroad in yen terms. .

Workers and volunteers observe a compound where residents are being tested for COVID-19 during the second stage of a pandemic lockdown in Shanghai's Jing'an district on Friday.  |  AFP-JIJI
Workers and volunteers observe a compound where residents are being tested for COVID-19 during the second stage of a pandemic lockdown in Shanghai’s Jing’an district on Friday. | AFP-JIJI

However, Japan’s imports to China rose 16.4% from a year earlier to 20.4 trillion yen ($166.6 billion) in 2021, while its exports to the nation rose 19.2% to 18 trillion yen, posting a trade deficit of more than 2 trillion yen.

The People’s Bank of China says it has been trying to keep the yuan basically stable against a basket of currencies from its trading partners. So far, the country’s central bank has also expressed a willingness to make financial market conditions more accommodative.

In 2021, the world’s second-largest economy expanded 8.1% from a year earlier, but grew just 4.0% in the October-December period on growing concerns about another wave of coronavirus infections. .

At the twice-decade congress of the ruling Communist Party in the fall, Chinese leader Xi Jinping is poised to secure a controversial third term as the nation’s leader.

In a bid to ensure that Xi has been able to proclaim his achievements in controlling the virus, the zero-COVID policy is likely to remain in place, which will hit the broader economy, foreign affairs experts said.

China set a 2022 gross domestic product growth target of around 5.5% at the opening of an annual session of parliament in early March, but Premier Li Keqiang said reaching the target would not be “easy”. given “many complexities and growing uncertainties.”

The pace of China’s economic slowdown triggered by tough COVID-19 restrictions has been “faster than” estimated, said Naoto Takeshige, a researcher at the Ricoh Institute for Business and Sustainability in Tokyo.

Meanwhile, China’s producer price index, a measure of the prices of goods traded between businesses, rose 8.8% from a year earlier in February.

The yuan’s rise may drag down exports from China, dubbed the “world’s factory,” but the country’s monetary authorities may refrain from curbing appreciation to avoid “stagflation,” where economic stagnation is combined with higher inflation.

With global energy prices likely to continue rising for the time being amid rising tensions between Russia and Ukraine, China could “accept the strength of the yuan,” said MUFG Bank, the central banking unit of Mitsubishi UFJ Financial Group Inc. , in a report. .

Yuzo Sakai, chief manager of forex business promotion at Ueda Totan Forex Ltd., also said investors have shown few signs of actively buying the yen against the yuan again as they believe the BOJ will maintain its aggressive monetary easing.

“Recently, many market participants have become more confident that the BOJ will not start tightening its monetary policy soon, unlike the US Federal Reserve and the European Central Bank. There is no impetus for them to increase their yen holdings,” Sakai said.

“Higher import costs are expected to affect both the domestic and corporate sectors in Japan in the future,” it added.

Business confidence among major Japanese manufacturers worsened for the first time in seven quarters in March, affected by energy and raw material costs, the The BOJ’s Tankan survey showed on Friday.

In 2021, Japan’s economy grew by just 1.6% from a year earlier on an inflation-adjusted basis.

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