Business / Financial Markets

China-U.S. trade spat's influence likely to send Tokyo stocks into another slide in 2019

Kyodo

The Tokyo Stock Exchange ended its final day of 2018 trading slightly lower Friday and the bourse is likely to face another difficult 12 months due to the U.S.-China trade spat that is likely to continue to threaten global growth.

Other concerns include the planned consumption tax hike at home and a stronger yen, with both endangering corporate profits.

The 225-issue Nikkei average ended down 62.85 points, or 0.31 percent, from Thursday at 20,014.77. The broader Topix index of all first section issues on the Tokyo exchange finished down 7.54 points, or 0.50 percent, at 1,494.09.

Analysts expect the Nikkei could drop to as low as 18,000 — the lowest since November 2016 — in 2019. Analysts forecast the index’s upside at around 23,500.

The Nikkei saw losses continue toward the end of the year as concerns increased over the outlook for the world economy.

“Economies in Europe and Southeast Asia will suffer in particular in line with the slowing Chinese economy, as they are deeply involved in trade with China,” said Yutaka Miura, senior technical analyst at Mizuho Securities Co.

The tit-for-tat trade dispute between the United States and China rattled the global stock market this year.

Washington imposed tariffs on about half of the goods imported from China each year, while Beijing has levied its own tariffs on more than 80 percent of all goods from the United States.

Their recent agreement to hold off on raising tariffs for 90 days helped ease market jitters only temporarily. But with the market seeing no indication that the trade spat will abate, there is a good chance the dispute between the world’s two biggest economies will escalate further and trim global growth.

“It is difficult for the U.S.-China trade rift to be resolved (soon) as it is a part of a larger battle where the two nations are fighting to take the lead of the world … the market is expected to move in line with new developments,” in trade discussions, Miura added.

The Organisation for Economic Cooperation and Development in November slightly lowered its outlook for global economic growth for next year to 3.5 percent, citing headwinds generated by the trade rift as the reason for the downward revision.

The latest forecast represents slower growth from the 3.7 percent estimated for 2018.

“Many Japanese firms rely on China for their business and a further slowdown in the world’s second-largest economy will affect sectors such as the marine transportation, iron and steel, and machinery sectors,” according to Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.

Analysts said a further escalation in the trade war with the United States could put extra pressure on China’s growth after its economy expanded at 6.5 percent from a year earlier during the July-September quarter, its worst pace in more than nine years due to a slower increase in investment in fixed assets including spending on property construction and infrastructure.

Construction machinery-maker Komatsu Ltd. and electronics component firm Murata Manufacturing Co. will likely take a hard hit among other companies with relatively high exposure to China, analysts said.

Concerns also remain over the prospects for the United States, as the world’s biggest economy is expected to begin to experience a toll from the trade rift in 2019, while positive effects of President Donald Trump’s tax cuts are beginning to wane, analysts said.

Weakness in the U.S. dollar could also crimp Japan Inc.’s profit growth following record profits expected for the current fiscal year to March 31.

Uncertainty over Britain’s exit from the European Union and Italy’s fiscal budget issue, as well as the U.S.-China trade dispute, will likely push investors to buy the Japanese currency, considered a safe-haven asset. If the U.S. Federal Reserve ends its yen rate-hike campaign earlier than some market participants expect, the yen’s uptick will gather momentum further, analysts said.

The dollar may fall to as low as ¥100 in 2019, weaker than the ¥107.40 expected for the current business year that was projected in the latest tankan business sentiment survey by the Bank of Japan.

A stronger yen eats into export profits of companies like Toyota Motor Corp. and Sony Corp. when cash is repatriated and undermines price competitiveness of Japan-made products overseas.

Auto stocks could come under extra pressure if the United States demands a significant reduction of Japanese vehicle imports in upcoming trade talks with Tokyo.

Analysts said the Japanese government’s plan to implement a consumption tax hike to 10 percent, from the current 8 percent, in October is expected to dampen consumer spending.

Only a moderately positive impact is expected from the government’s stimulus measures which are intended to mitigate the impact of the tax increase. The government has said it will give a maximum 5 percent reward-point rebate on purchases made by cashless methods and tax breaks for vehicle and house buyers.

“The point system will only delay the immediate negative effect of the tax hike, the effect will start appearing in the long-term as the point system is not going to last forever,” said Mitsubishi UFJ Morgan Stanley Securities’ Fujito.

The BOJ estimates the higher tax rate will place a net burden of ¥2.2 trillion on households through fiscal 2020.

Still, some analysts said the Trump administration could launch measures to stimulate the U.S. economy prior to the 2020 presidential election. The potential end to the Fed’s rate hike policy sometime next year could also lift Japanese stocks through a surge on Wall Street.

“It has been a trend in the last 50 years that stocks were strong in the year ahead of a presidential election, so it is possible that Trump will introduce new policies to boost stocks,” said Maki Sawada, vice president of the investment research and investor services department at Nomura Securities Co.