By: DailyForex.com
Japan has seen a 10.3% decline in its exports in the year to September. The decline is due to a combination of factors, but a global slowdown in demand and the continued strength of the Yen compared to other major currencies (against fundamental drivers) are key factors.
China is a major export market for Japanese goods, but despite the relative strength of the Chinese economy, imports have fallen. The Yuan has been unofficially pegged to the US Dollar, so it has floated down with the Greenback, pushing up the cost of Japanese imports. China has also seen a slowdown in its own economy, despite levels of growth that would spark envy in most world capitals. However, Sino-Japanese relationships have been soured in recent months over a flare-up of a long-standing territorial dispute over some islands in the East China Sea that Japan, China and Taiwan all claim. The dispute has led to attacks on Japanese concerns in China and worsening sentiment has harmed Japanese exports to China which have fallen by 14.1% in the year to September. The sectors worse affected by the decline have been automobiles, electronics and general machinery.
Japan has the largest public debt problem in the world with a total debt estimated at $13 trillion. Currently, Japanese sovereign debt is regarded as investment grade with the yield on a 10-year bond standing at 0.8% - compare this to Spanish 10-year bond yields of 5.5% (having “calmed” from above the 7% mark). If confidence in Japan’s ability to meet its current debt obligations was to fail, this yield figure would rise dramatically. Whilst it is to be hoped that the territorial dispute can be resolved diplomatically, any suggestion that a military conflict could breakout (even a “minor”, local round of hostilities) would have a catastrophic effect on global economic confidence in Japan’s abilities to meet her obligations.