Japan’s China Row May Spur GDP Fall This Quarter, JPMorgan Says

Disputed Islands With 45 Years of Oil Split China, Japan
Anti-Japanese protesters are confronted by police as they demonstrate over the disputed islands, known as Diaoyu in Chinese and Senkaku in Japanese, in Shenzhen, China. Photographer: Lam Yik Fei/Getty Images

Japan’s territorial spat with China may cause the Japanese economy to contract this quarter and hasten a current account slide as exports decline and Chinese tourism to Japan drops off, according to a JPMorgan report.

The dispute will knock 0.8 percentage point off Japan’s gross domestic product in the October-December period, JPMorgan Securities Japan Co. economists Masaaki Kanno and Masamichi Adachi wrote in an e-mailed note yesterday. They now estimate fourth-quarter GDP will contract 0.8 percent from the previous quarter, compared with a previous estimate of no growth.

The squabble over islands claimed by Asia’s two largest economies imperils a $340 billion trade relationship ahead of China’s power transition and a possible general election in Japan this year. Carmakers are hardest hit, with Mazda Motor Corp. deliveries in China last month falling 35 percent.

“As its global role has increased, China has become much more important in Japan’s international trade,” Kanno and Adachi wrote. “While there remains a lot of uncertainty ahead and the risk of the dispute escalating cannot be ruled out, we assume that it will diminish in two quarters under the new governments in both countries.”

JPMorgan joins Morgan Stanley and BNP Paribas AS in predicting Japan’s economy will shrink for two consecutive quarters through the end of December.

The worst diplomatic crisis between the two countries since 2005 may also accelerate a deterioration in Japan’s current account surplus, the JPMorgan economists said, predicting the excess could disappear before the end of 2014. This compares with its estimate in January that the nation would begin posting a deficit in the first quarter of 2015.

Exports Fall

Japan’s exports fell 5.8 percent in August from a year earlier, the third straight monthly decline, with shipments to China, its largest trading partner, dropping 9.9 percent and those to the European Union slumping 22.9 percent.

Mitsubishi Motors Corp. on Oct. 5 reported Chinese sales slumped 63 percent in September from a year earlier, while the Yomiuri newspaper said on the same day, without citing where it received its information, that Toyota Motor Corp.’s deliveries in China fell 50 percent from August.

The dispute has caused cancellations of 40,000 seats on All Nippon Airways flights between the two countries, the airline said last month. JPMorgan said it is assuming a 70 percent decline in the number of Chinese tourists visiting Japan this quarter, compared with the average first-quarter figures in 2011 and 2012, lowering receipts by 67 billion yen ($852 million), or 38 percent of the expected decline in exports.

China’s economy may also be adversely affected, as the unrest may prompt Japanese companies to accelerate the diversification of investment and trade in Asia away from the nation, the JPMorgan economists said. More than 5,000 affiliates of Japanese companies operated on the mainland as of the end of March 2011, employing 1.6 million people, according to a Japanese trade ministry report.

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