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Wednesday, January 29, 2003

Japan - The Chinese Connection

The news that China is now the world's number one exporter to Japan has provoked considerable commentary inside Japan. From calls for a revaluation of the Chinese Yuan to recognition that the economic futures of the two countries are now inextricably linked. In particular proponents of the latter view draw attention to the fact that demand from China allowed Japan to increase its trade surplus in 2002, for the first time in four years. Among the factors that have caused the value of Japanese imports from China to rise for four straight years since 1999 is the trend among Japanese manufacturers to shift production to China to take advantage of cheap labor and resources or, to put this another way, to increasingly rely on Chinese outsourcing. And while Chinese products grab an ever greater share of global markets, as their economy shrinks under the impact of deflation Japanese products are gradually losing theirs. Japan in 2001 supplied the United States with 11 percent of its imports, down 1.4 percentage points from the year before. Over the same period, its share of South Korea's import total fell 0.9 point to 18.9 percent.

Some see a threat, others opportunity. But all agree-China can't be ignored. Already in Japan, made-in-China goods are everywhere, accounting for 18.3 percent in value of all imported goods last year. At one major supermarket chain, a full third of all imports come from China, having replaced the United States as the top source five years ago. A company executive said technical assistance from Japanese trading houses helps ensure the quality of the cheap Chinese products. The phenomenon affects all industries. Machinery accounted for 33.5 percent of total import value from China last year. Computer imports from China grew 81.7 percent in 2002 from the previous year, while semiconductor imports grew 21.5 percent.

Masaki Yabuuchi of the Japan External Trade Organization said Chinese manufacturers have become more competitive ever since a strengthening yen drove Japanese manufacturing to their shores in the latter half of the 1990s. Japanese direct investment in China surged in 1995, when the yen appreciated to 79 against the U.S. dollar, he said. The result was a massive increase in manufacturing capacity. One Japanese firm taking advantage of that capacity is NEC Corp. The company plans by March to import about 1.2 million Chinese-made personal computers, or 70 percent of its consumer PC sales for the fiscal year. By fiscal 2004, the electronics giant intends to raise that figure to 85 percent.
Source: Asahi Shimbun

The constant inflow of Chinese products whose low prices reflect China's cheap labor and other manufacturing costs may intensify Japan's deflation problem. To cope with rising imports from China, government officials intend to seek a revaluation of the Chinese currency. Japanese calls for such a move may draw international attention. According to a preliminary report on the nation's trade in 2002 released by the Finance Ministry on Monday, imports from China rose 9.9 percent from a year earlier to 7.72 trillion yen, surpassing those from the United States at 7.22 trillion yen. Such sharp rises in imports of cheap Chinese products have provoked some observers to voice strong concerns, saying inflows of cheap Chinese goods may exacerbate deflation. Although China has enjoyed high growth rates, its inflation rate has remained almost zero. In addition, the value of the Chinese yuan is "too low compared with the currency's actual capacity," said a senior Finance Ministry official. If China's exports continue to rise, this would be tantamount to China exporting deflation to other countries, the official added. At a meeting of finance ministers and central bank governors of the Group of Seven leading industrialized nations, to be held in Paris next month, the ministry intends to place the value of the yuan at the top of the agenda, as calls mount for a concerted effort to see off the growing threat of deflation in the world economy.
Source: Daily Yomiuri

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