Business / Economy | G20 Osaka

Japan should prep for worst from U.S.-China trade war, economists say

by Kazuaki Nagata

Staff Writer

With confidence in the free-trade system shaken, mainly by the heated tensions between the United States and China, ensuring trade friction doesn’t weaken the global economy will be a major item on the agenda at the Group of 20 leaders’ summit this week in Osaka.

According to economists interviewed by The Japan Times, the biggest risk to the world’s economy is the U.S.-China trade row. Some said the potential spillover effect would inflict enough damage to chill the economy, though they believe a recession would be unlikely.

The trade war could also deal a blow to the Japanese economy, which has seen few positive signs in recent months amid weak consumption and corporate earnings, and an October consumption tax hike to 10 percent from 8 percent just months away.

The global economy, which saw steady growth from 2017 to early 2018, has slowed but is expected to regain momentum next year. Growth is estimated to fall to 3.2 percent this year from 3.5 percent the previous year, but is expected to rebound to 3.4 percent in 2020, according to the Organisation for Economic Co-operation and Development.

A similar outlook emerged during the G20 finance chiefs’ summit in Fukuoka earlier this month. But that meeting also saw officials warn the U.S.-China trade war remains a downside risk.

“Growth remains low and risks remain tilted to the downside,” their communique said. “Most importantly, trade and geopolitical tensions have intensified. We will continue to address these risks, and stand ready to take further action.”

If the U.S. and China continue to slap tariffs on each other’s products, there will eventually be sizable economic consequences for both nations, two of the economists said.

Washington has already imposed 25 percent tariffs on $250 billion worth of Chinese products, while Beijing raised tariffs up to 25 percent on $60 billion of U.S. goods this month.

The Daiwa Institute of Research, a Tokyo-based think tank, estimates that if the situation escalates to the point where the U.S. imposes 25 percent tariffs on all Chinese goods except medical and rare earth products — and Beijing retaliates with the same tariffs on $50 billion worth of goods and an average of 14.5 percent tariffs on another $60 billion worth of U.S. products — it would dent their gross domestic products by 0.55 and 0.36 percentage points, respectively.

“It’s not a level (of impact) that would make the situation hopeless, but it is very sufficient to slow down the economy,” said Shunsuke Kobayashi, a senior economist at the Daiwa Institute of Research.

Kobayashi said both sides will likely take action before the situation escalates. For instance, he said, the U.S. Federal Reserve could slash rates and the government could prepare stimulus measures using the tariff revenue.

GDP and stock prices six months before the U.S. presidential election are typically seen as important indicators of electoral success, Daiju Aoki, regional chief investment officer for Japan at UBS Wealth Management in Tokyo.

So the trade threats may simply be a performance for the election, but the Trump administration will probably look to ease the soaring trade tensions somewhere down the line so as not to jeopardize his re-election bid, Aoki said.

According to Junya Inose, a senior economist at Mitsubishi Research Institute in Tokyo, the true risk lies not with the tariffs themselves, but in the trade war’s potential spillover effects. While the tariffs will indeed affect the economy, Inose said their impact can be calculated and measures to soften their impact can be taken in advance.

“The biggest problem is unpredictability,” he said, referring to the Trump administration. As examples, he cited the unprecedented decision to ban U.S. agencies from procuring products from Huawei Technologies Co., ZTE Corp. and several other Chinese tech firms.

Such abrupt and strict regulatory decisions that restrict the activities of companies and even entire industries can cause trouble for the unprepared and even morph into serious global economic problems, Inose said.

With the endgame for the two biggest economies increasingly unclear, Japan should brace for impact, the economists said.

According to Daiwa Institute of Research assessment, the trade war could slash Japan’s exports by as much as ¥1.3 trillion.

This, coupled with Japan’s sluggish domestic demand, would undoubtedly spell trouble for the world’s No. 3 economy.

“A scenario in which foreign demand recovers and the Japanese economy subsequently recovers has become more unrealistic,” Daiwa’s Kobayashi said.

Economists say real GDP growth this year is expected to be under 1 percent — well below Japan’s potential growth rate — in light of weak consumption and capital spending.

Also, based on data as of May 20, net profit fell at about 1,500 companies listed on the Topix index in fiscal 2018 ended March, resulting in a 7.1 percent slump to ¥34.2 trillion, according to SMBC Nikko Securities.

Adding to these concerns is the looming tax hike in October.

Economists say planned steps to soften the impact make Japan better prepared than in April 2014, when the first stage of the tax hike — a 3-point increase to 8 percent from 5 percent — dealt a severe blow to the economy.

This time around, the tax hike will exclude food items. The government is also making preschool education free, pressuring mobile phone carriers to slash charges and offering rebates for use of electronic payments.

After the 2014 hike, food producers engaged in price gouging, but their exemption will prevent this unsavory practice from recurring, UBS Wealth Management’s Aoki said.

“Even though the government has crafted measures to contain the damage compared to what happened in 2014, a consumption tax hike will still contribute to widening negative impacts when both corporate and household sentiment are down,” Aoki added.

This means Japan can’t easily rely on domestic factors to lift growth while outside factors remain uncertain from the trade war.

Instead, Japan — as G20 summit host — should play the role of mediator, balancing the interests of other members and setting up an opportunity to get them all on the same page, Inose of Mitsubishi Research Institute said.

“The best result I hope to see (from Osaka) is to pave the way to get the international community on rules-based principles.”

This is part of a series featuring key topics that will be discussed during the Group of 20 summit to be held in Osaka from Friday.