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Some of all fears

18 September 2012 By Wayne Arnold

Investors aren’t particularly bothered by China’s anti-Tokyo protests. While smashed cars and shuttered factories are worrying, the two countries have more to lose in trade and investment than to gain from tit-for-tat reprisals. Companies that are big in China like Nissan may suffer in the short-term, but Japan Inc. has more to fear from U.S. Federal Reserve chairman Ben Bernanke than from Beijing.

Judging by the two country’s stock markets, you wouldn’t guess a dispute over uninhabited islands north of Taiwan had caused the world’s second-largest economy to explode in anger against the third-largest. Japan’s stock market lost only 0.4 percent on Sept. 18, the yen rose, and the cost of insuring Japanese sovereign debt climbed only slightly. China arguably looks the victim: the Shanghai market is down about 3 percent this week. But even that is a trifle when compared with its 17 percent decline in the past year.

China might seem to have the economic advantage: it’s Japan’s largest export market, accounting for 18 percent of Japanese exports. And China is a crucial part of Japan’s supply chain – Chinese subsidiaries of Japanese companies sell 23 percent of their production back to Japan. Some Japanese companies have also come to depend on China for sales growth. Nissan sells more than a quarter of its vehicles in the country, its largest market.

But any move to punish Japan would likely prove, as Beijing’s mouthpiece the People’s Daily has observed, a double-edged sword. Chinese imports from Japan are largely capital goods such as steel, heavy equipment and industrial robots, which are difficult to substitute. Japan is China’s third-largest foreign direct investor and fourth-largest importer. And while China may be a key supplier, rising costs have been driving more Japanese companies to shift elsewhere.

It’s possible that the protests will flare up into a bigger conflagration. But a bigger threat to both economies may be the $40 billion-a-month barrage of cash Bernanke has vowed to blast into the global economy every month until the U.S. job market improves. That’s likely to sink the U.S. dollar, reducing returns on China and Japan’s foreign reserves, and put pressure on exports. Investors are betting Bernanke’s bazooka is the only weapon that will be fired.


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