Japan as a canary in a coal mine

The recent G20 meeting seems to be no use to stop yen's surge, at least for now. It's not sheer coincidence that Japan's exports tumbled in September. We have to acknowledge that Japan's exports would be a sign foreshadowing the coming shape of the world economy. This time, it would signal for a bad omen.

Japan's exports grew at the slowest pace this year in September, a sign the country is losing its chief engine for growth as demand abroad tempers. Overseas shipments increased 14.4 percent from a year earlier, the Finance Ministry said in Tokyo today.

The median estimate of 21 economists surveyed by Bloomberg News was for a 9.6 percent gain. From a month earlier, shipments fell a seasonally adjusted 0.1 percent.
Today's report adds to signs that Japan's export-fueled rebound is cooling, increasing pressure on Prime Minister Naoto Kan to implement his stimulus plans and on Bank of Japan Governor Masaaki Shirakawa to come up with fresh ways to support the economy. Manufacturers including Honda Motor Co. are also grappling with the country's appreciating currency, which has continued to strengthen even after the government intervened in the foreign-exchange market last month.

"Export growth will slow further and keep depressing the economic expansion," said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. "It's highly likely the economy will contract in the fourth quarter."

The Japanese currency has gained more than 14 percent against the dollar this year, threatening to erode exporters' repatriated earnings from abroad. It traded at 81.10 at 10:29 a.m. in Tokyo compared with 81.33 before the report was released.

Nearly 80% of Japan's overall growth in this century is derived from exports, and one fifth of overseas shipments from Japan these days have been to China, replacing the US as the top trading partner with Japan. The relation between two of the world's biggest economies can't easily be severed in terms of interconnectedness deeply rooted in economic structure, no matter how they don't like each other.

The sluggish growth of Japan's exports was more or less anticipated beforehand, because Chinese economy cooled down in the third quarter to 9.6% growth. Moreover, the yen hit a 15-year high against the dollar, which last month triggered BOJ's intervention in currency markets for the first time in almost 7 years. Some analysts think of the result as beyond forecast, which could usher in easy resilience in the economy. But given that 14.4% growth is the slowest this year, the world economy would now have less room to absorb external demand.

Look at the graph below, the negative relation is obvious between the yen and Japan's exports, as is widely believed.

It's no wonder that Nikkei has grown far less than its counterparts in 2010.

Unknown to many is that Japan's exports are not only a vital engine of the country's economic growth but also playing a pivotal role to presage the world economy. The graph below indicates that shipments from Japan are intensely correlated with industrial production in the US, especially since 2000. In that sense, Japan is dubbed a canary in a coal mine.

This result would be seen as a warning to companies especially operating in China, which have found little demand in domestic markets and searched for thriving business opportunities over the globe.