Chief economist update: Japan becomes collateral damage in US-China trade war

In any war, there's bound to be those that are caught in the crossfire and others treated as collateral damage.

The global stock market rout that developed as a result of the renewed "little squabble" (as Trump recently put it) between the US and China is evidence enough that no country is safe from the higher tariff tit-for-tat between these two economic behemoths.

Trump hasn't completely set his crosshairs on Tokyo, but not only is Japan caught in the crossfire of the recent Sino-Yankee trade tensions, it's become collateral damage via the appreciation of the Japanese yen.

The week before the war began, the Japanese yen had been depreciating against the US dollar - down 1.4% versus the greenback in the year to May 3 this year and halfway into reversing last year's 2.7% appreciation.

Safe haven purchases of the yen following the resumption of trade hostilities between Washington and Beijing sent the Japanese currency higher by 1.8% from the previous week, so much so it's year-to-date depreciation has turned into a 0.4% appreciation.

The last time the Bank of Japan (BOJ) held its monetary policy meeting and decided to keep policy as they were on the April 25, the yen was trading at ¥111.59/US$, down 1.7% from ¥109.7 at the end of 2018.

This gave the BOJ's economic assessment (at the time) credence that: "Japan's economy is likely to continue on a moderate expanding trend, despite being affected by the slowdown in overseas economies for the time being."

"Although the year-on-year rate of change in the consumer price index (CPI) has continued to show relatively weak developments compared to the economic expansion and the labor market tightening, it is likely to increase gradually toward 2%, mainly due to the output gap remaining positive."

Then again, even before the renewed strength in the Japanese yen, recent eco surveys and stats weren't going well.

The BOJ's quarterly Tankan survey of confidence among the country's big manufacturers dropped by seven points - the biggest decline since December 2012 - to a two-year low reading of 12 in the March quarter from 19 in the December 2018 quarter.

According to a BOJ official: "Many manufacturers said they grew concerned over the outlook of the Chinese and other Asian markets on the back of slowing demand".

This is now compounded by the yen's appreciation.

The Tankan large manufacturing outlook index portends the pessimism continuing in the coming quarter with the reading falling to eight in the March quarter from 15 in the previous three-month period.

While inflation measures improved - headline consumer price inflation accelerated to 0.5% in the year to March from a 15-month low of 0.2% in February while core inflation inched up to 0.8% from 0.7% - both remained well below the BOJ's 2% target.

The yen would remain strong for as long as the US-China "little squabble" remains in play, necessitating additional BOJ policy accommodation.

Read more: Bank of Japan
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