China and Japan: Can this Marriage Last?

Cina Coren

A fight over disposable diapers between two families turned physical recently when a large retail store ran out of the product. It happened in Kobe, Japan, and it wasn’t the first time the two sides had confronted each other, having met on previous diaper-buying binges.

According to the English-language Japan news site, Rocket News 24, the diapers would be taken back to China and resold there without any problem since both diaper-grabbing competitors were part of larger family groups who were Chinese nationals. The Japanese disposables are particularly popular in China where shoppers are willing to pay a premium for Japanese products simply because they don’t trust domestic manufacturers.

The yuan's decline against the U.S. dollar has so far had a limited direct impact on the value of the yen.

Nappies are certainly not the only Japanese product preferred by Chinese consumers over their own local variety and this entanglement illustrates clearly how dependent the two countries are on each other economically despite the diplomatic frictions that exist between them.

Strong Chinese Tourist Market

Among the reasons for the strong Chinese tourist market, two stand out the most: the lower yen and fewer visa restrictions for Chinese tourists. In addition, cheap flights between China and Japan have made travel between the two countries easier than ever before.

Chinese tourism in Japan bottomed out in 2011 at ¥813 billion but managed to rebound to ¥1.8 trillion the next year. The amount of money spent by Chinese visitors in 2014 was up by 83 per cent over 2013, reaching ¥2.3 trillion or one-third of all the tourist money spent in Japan. The Chinese left ¥88,000 in Japan, mostly through shopping rather than for accommodations or sightseeing.

In fact, it would seem that Chinese tourists are single-handedly keeping Japanese department stores in business.

Recovery on Track

According to analysts, Japan is doing quite well. Economic recovery is currently on track with its GDP pointing to renewed business confidence in the second quarter. Cheaper taxes on imports and a weaker yen are helping reduce the country’s trade deficit. Job conditions have improved and manufacturing is seeing a revival. Unemployment remains steady which benefits the overall economic state of the country [but is not particularly advantageous for some Japanese employees that are being let go by high tech companies looking to shrink their bottom line.]

Still, the current situation in Japan might be coming to an abrupt end.

Some economists believe that China’s recent stock market plunge and the resulting government-approved devaluation of the yuan could result in a decreased sales volume of Japanese goods both in China and in Japan.

Japanese Finance Minister Taro Aso said at a news briefing on Friday that recent moves by China to allow its currency to depreciate are definitely a concern and could pose severe problems for Tokyo. He believes that if Beijing’s devaluations were indeed only efforts to make its currency system a market-based one, Japan would back the actions. He was more concerned, however, that if China tries to manipulate the yuan in order to give its exports a competitive advantage, Japan would be forced to take some counter steps.

It is unclear what these moves would be. Meanwhile, the Japanese currency has fallen by over 60 percent against the U.S. dollar since hitting a peak of 75.35 yen to the dollar in October 2011. It was trading near 123 yen per dollar on Friday.

According to Aso, "Chinese factors are a big part of this, without a doubt."

Yen Drops

The yen's drop has been accelerated by considerable monetary easing since 2013 by the Bank of Japan, which in an effort to stimulate growth, is buying trillions of yen in assets each month. This tremendous infusion of cash into the Japanese economy is a major factor in driving the yen lower, and it has resulted in increased profits for major corporations that depend in large part on revenues acquired by overseas ventures. A continuation of this is expected to pushed share prices higher.

Prime Minister Shinzo Abe's strategy for keeping the country afloat is to continue to inject cash into the economy in order to curb deflation and falling prices and boost growth by encouraging consumers and companies to spend more.

Japan's Nikkei 225 stock index fell 3 percent Friday to 19,435.83 on Friday, slipping below the psychological 20,000 mark on widespread selling.

The yuan's decline against the U.S. dollar has so far had a limited direct impact on the value of the yen. But insecurity over future policy and over the impact of China's economic slowdown is echoing across markets throughout the world and Tokyo is watching the situation with more than just one keen eye.

Cina Coren
Cina Coren is a former Wall Street broker and financial advisor. She holds a Master's degree in Communications and spent many years writing for international news outlets and journalistic publications. Today, Cina spends most of her time writing internet articles and blogs, and reading various newspapers to stay on top of the news.

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