Asian economic problems, specifically in the continent’s two largest markets Japan and China, sent Asian shares down on Monday. Economists and investors are increasingly talking about a significant economic slowdown in the region.
The Shanghai Composite dropped 2% by the end of Monday as did the Hong Kong Hang Seng index. In Tokyo, the Nikkei 225 finished the day 1% down.
Asian economic problems, especially in China, may have a domino effect on other emerging markets that depend on the exports of raw materials for economic growth, such as Brazil and Argentina. Even advanced economies, including Australia and Canada could become affected.
Record trade deficit in Japan
Japan registered a record trade deficit for January, according to the Ministry of Finance. Rapidly-rising imports are undermining Prime Minister Shinzo Abe’s efforts to boost the economy.
The Japanese Ministry of Finance reported a $27.3 billion (¥2.79 trillion) shortfall today, much higher than the ¥2.49 trillion forecast by 28 economists in a Bloomberg News poll. While exports rose 9.5%, imports rocketed by 25%.
A falling ¥en is pushing up import costs. Ever since the Fukushima nuclear disaster, Japan has dramatically reduced its dependence on nuclear power, and subsequently increased its imports of oil and gas, which have driven up import costs even further.
Naohiro Niimura, a partner at Market Risk Advisory Co., Tokyo, said in an interview with Bloomberg News:
“Japan is paying the price for the transformation of its energy policy. This trend in Japan’s trade balance will continue for a while, eroding the strength of the economy little by little.”
Japan April sales tax hike
Japan’s ballooning trade deficit is undermining the economy, which expanded by a disappointing 1% in the fourth quarter of 2013, much less than expected. With the April hike in sales tax consumer demand, which is currently already weak, is expected to drop, which will slow the economy down further.
Mr Abe insists he will go ahead with the sale tax increase as it is necessary to reduce the country’s enormous debt. However, to offset the effect of the increase he unveiled a stimulus package of ¥5.5 trillion in December.
During the whole of 2013, Japan’s GDP grew by just 0.7%.
The Telegraph quoted Rebecca O’Keeffee, head of investment at stockbroker Interactive Investor, who said “With Japanese data weaker than expected and their April consumption tax hike imminent, the state of the Japanese economy is cause for significant concern.”
Steep fall in Chinese exports
On Saturday, March 8th, China announced a steep fall in exports for February and a trade deficit, the largest in 11 months. Authorities blamed the bad figures on the Lunar New Year holiday period. However, many analysts at home and abroad believe the economy is in trouble.
A growing amount of data coming out of China since the beginning of 2014 point to a weakening economy.
Last week, Shanghai Chaori Solar Energy Science & Technology defaulted on the interest payment on its corporate bonds. Economists are expecting further defaults and wonder what the Chinese government will do.
Toward the end of last year the Chinese economy was seemingly doing well, in Q4 2013 China’s GDP (gross national product) expanded by 7.7%, a 0.2 percentage point higher than the official target.
Japan to step up nuclear power generation
Mr Abe announced today that Japan will restart power generation in nuclear plants confirmed as safe by the country’s regulators. He made the announcement during a Diet (parliament) session ahead of the third anniversary of the earthquake and tsunami that devastated the Fukushima Daiichi nuclear power station.
After the disaster Japanese authorities took nearly all of its nuclear power plants offline.
Mr Abe said today “I would like to restart (the reactors that are) confirmed safe by strict standards introduced by the Nuclear Regulation Authority, while winning local people’s understanding.”
Before the March 2011 disaster, approximately one third of Japan’s electricity came from nuclear power plants. Last year that proportion had dropped to 1.7%.
Video – Asian economic problems affect US stocks