Tokyo joined Washington and others in welcoming China's decision to increase the flexibility in its currency policy over the weekend. But the close and complex interdependence between Asia's two largest economies suggests the impact could hurt, as well as help, Japan.
Unlike the U.S. and some European economies with huge trade deficits with China, Japan enjoys a relatively balanced trade with the nation. This rules out Japan as an instant beneficiary of the currency move.
Many Japanese companies, big and small, have shifted their production to China over the past decades, and now manufacture a range of products there, for local consumption and for exports to the rest of the world.
For these companies, a stronger yuan would add to the costs of locally procured materials and labor, a blow at a time when large Japanese companies such as Toyota Motor Corp. and Honda Motor Co. are struggling with labor unrest at their local factories.
But many of the same Japanese companies export products to China, including heavy machinery for the country's booming construction sector, and parts and manufacturing equipment used at Japanese transplants there. A stronger yuan would shore up the profitability of these businesses.
China is Japan's largest trading partner, with Japan importing $125 billion worth of goods last year, primarily items such as clothing and food products. But Japan's exports to China, at $112 billion, also are significant, with its trade deficit shrinking for the past four years.
Soaring exports to China and other emerging economies have been a driver of Japan's recovery in recent quarters, a trend economists expect to see continue given the strong outlook for these nations.
"A little bit of currency move will not knock down exports or have a substantial impact on corporate activity and the overall economy," said Junko Nishioka, an economist for RBS Securities.
Prices of many consumer goods imported to Japan from China will face upward pressure not seen as a bad thing in Japan, which is battling deflation, a leading cause of the country's protracted malaise. The numerous "100-yen shops" across Japan, where everything from a pair of socks to a bag of planting soil is sold for a little over $1, are cited as one reason for weak prices. Analysts say some 70% of items filling their shelves are made in China.
In addition, Japan can expect to see a further increase in Chinese tourists who now find visiting Japan less expensive. After sharp rises in Chinese visitors in recent years, the Japanese government in May eased visa requirements for middle-class Chinese. Many resort operators and shop owners in Japan's tourist sector are starting to accept Chinese credit cards and hiring interpreters to cater to these visitors, seeing a rare growth opportunity.
Japanese Finance Minister Yoshihiko Noda on Saturday welcomed China's pledge to make the yuan's rate more flexible. "I hope this will contribute to stability and balanced growth in the Chinese, Asian and therefore global economies."
Still, it is unclear how the decision will affect the yen's exchange rate against the yuan and other currencies.
At least in the short term, China's decision may be negative for Japan's export-oriented economy as the yen's rate against the dollar could rise along with its neighbor's currency. The dollar could fall below 90.00 yen Monday from 90.74 yen late Friday as the move by the People's Bank of China "will likely provide upward pressure temporarily on the yen," said Hiroshi Maeba, a senior dealer at Nomura Securities.
China's move also could complicate Japan's own currency policy. Japanese policy makers have for years relied on a strategy of keeping the yen weak to bolster Japan's exports to make up for weak demand from domestic consumers and companies. Prime Minister Naoto Kan during his recent stint as finance minister made remarks suggesting he preferred a weak yen.
But if China becomes serious about letting its currency appreciate, it would make it harder for Japan to justify such a policy. "In that sense, Japan cannot engineer an economic recovery by boosting exports," said Hiromichi Shirakawa, a Credit Suisse economist. "The Kan administration needs to consider measures to stimulate domestic demand."
Unlike the U.S. and some European economies with huge trade deficits with China, Japan enjoys a relatively balanced trade with the nation. This rules out Japan as an instant beneficiary of the currency move.
Many Japanese companies, big and small, have shifted their production to China over the past decades, and now manufacture a range of products there, for local consumption and for exports to the rest of the world.
For these companies, a stronger yuan would add to the costs of locally procured materials and labor, a blow at a time when large Japanese companies such as Toyota Motor Corp. and Honda Motor Co. are struggling with labor unrest at their local factories.
But many of the same Japanese companies export products to China, including heavy machinery for the country's booming construction sector, and parts and manufacturing equipment used at Japanese transplants there. A stronger yuan would shore up the profitability of these businesses.
China is Japan's largest trading partner, with Japan importing $125 billion worth of goods last year, primarily items such as clothing and food products. But Japan's exports to China, at $112 billion, also are significant, with its trade deficit shrinking for the past four years.
Soaring exports to China and other emerging economies have been a driver of Japan's recovery in recent quarters, a trend economists expect to see continue given the strong outlook for these nations.
"A little bit of currency move will not knock down exports or have a substantial impact on corporate activity and the overall economy," said Junko Nishioka, an economist for RBS Securities.
Prices of many consumer goods imported to Japan from China will face upward pressure not seen as a bad thing in Japan, which is battling deflation, a leading cause of the country's protracted malaise. The numerous "100-yen shops" across Japan, where everything from a pair of socks to a bag of planting soil is sold for a little over $1, are cited as one reason for weak prices. Analysts say some 70% of items filling their shelves are made in China.
In addition, Japan can expect to see a further increase in Chinese tourists who now find visiting Japan less expensive. After sharp rises in Chinese visitors in recent years, the Japanese government in May eased visa requirements for middle-class Chinese. Many resort operators and shop owners in Japan's tourist sector are starting to accept Chinese credit cards and hiring interpreters to cater to these visitors, seeing a rare growth opportunity.
Japanese Finance Minister Yoshihiko Noda on Saturday welcomed China's pledge to make the yuan's rate more flexible. "I hope this will contribute to stability and balanced growth in the Chinese, Asian and therefore global economies."
Still, it is unclear how the decision will affect the yen's exchange rate against the yuan and other currencies.
At least in the short term, China's decision may be negative for Japan's export-oriented economy as the yen's rate against the dollar could rise along with its neighbor's currency. The dollar could fall below 90.00 yen Monday from 90.74 yen late Friday as the move by the People's Bank of China "will likely provide upward pressure temporarily on the yen," said Hiroshi Maeba, a senior dealer at Nomura Securities.
China's move also could complicate Japan's own currency policy. Japanese policy makers have for years relied on a strategy of keeping the yen weak to bolster Japan's exports to make up for weak demand from domestic consumers and companies. Prime Minister Naoto Kan during his recent stint as finance minister made remarks suggesting he preferred a weak yen.
But if China becomes serious about letting its currency appreciate, it would make it harder for Japan to justify such a policy. "In that sense, Japan cannot engineer an economic recovery by boosting exports," said Hiromichi Shirakawa, a Credit Suisse economist. "The Kan administration needs to consider measures to stimulate domestic demand."
