Chief economist update: Japan feels the heat

Who better to talk about trade than the World Trade Organisation (WTO). In its latest report the WTO put into perspective the goings-on in the on-going global war on trade.

To wit: "A total of 39 new trade-restrictive measures were applied by G20 economies during the review period, including tariff increases, stricter customs procedures, imposition of taxes and export duties. This equates to an average of almost six restrictive measures per month, which is significantly higher than the three measures recorded during the previous review period."

Prompting a warning from WTO Director-General Roberto Azevedo that: "This continued escalation poses a serious threat to growth and recovery in all countries, and we are beginning to see this reflected in some forward-looking indicators..."

While China - and its bear market in equities and the depreciating yuan - will immediately come to mind, Japan's also taking a hit.

Bank of Japan (BOJ) Governor Haruhiko Kuroda already expressed his concerns when he joined the ECB Forum on Central Banking held at Sintra, Portugal on 18-20 June: "The indirect impact on the Japanese economy could be quite significant ...if this escalation of tariffs between the US and China continues"... while at the same time warning that it could disrupt supply chains in Southeast Asia. "I hope that this escalation could be rescinded. This is a matter of great concern for Japan."

Looking at the latest quarterly BOJ Tankan survey, it's already impacted on the land of the rising sun. The headline index for large manufacturers dropped to a reading of +21 in June from +24 in the previous month. This is the lowest reading in exactly one year and marks the second straight month of decreasing business confidence.

Japanese manufacturers' trepidation over the potential escalation of the trade war is clearly palpable in their export growth expectations - down sharply to 1.8% in fiscal year 2018 from 7.4% in FY 2017. This is hardly surprising given that the two major combatants - the United States and China - are its biggest trading partners. America accounts for 19% of Japan's total exports, China 18%.

The diffusion index - rise minus fall -- of input prices in manufacturing rose to 30 in the June quarter from 26 in March. This should be a positive for the BOJ's efforts at lifting domestic inflation but with the diffusion index for output prices only rising by one point to five in the June survey from four in March, this instead suggests that Japanese manufacturers' profits are being squeezed.

Not a good development given that both the headline (0.6% in May) and core (0.8%) rates of inflation remain way below the BOJ's target.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: ChinaAmericaBank of Japan Governor Haruhiko KurodaBOJ TankanCentral BankingECB ForumFYPortugalSintraSoutheast AsiaU.S.United StatesWorld Trade OrganisationWTO Director-General Roberto Azevedo
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