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Japan's record economic growth faces shaky outlook

Trade war and Chinese slowdown threaten six-year expansion

Exports from the Port of Osaka have underperformed year-earlier numbers for six straight months.   © Reuters

TOKYO -- Japan's economic expansion dating to December 2012 remains intact thanks to wholly unexpected growth in the first quarter, but mounting headwinds have pushed the economy onto unsteady footing.

Real gross domestic product grew 2.1% on an annualized basis during the January-March period, according to preliminary figures released last week. But the Cabinet Office reported that business conditions for March were "worsening" -- the first time in six years such an economic assessment has come down.

A troubling pattern can be seen at two of Japan's main ports. Exports from the Port of Osaka have dipped below year-earlier figures for six straight months through April. The Port of Yokohama's losing streak has lasted five months so far. The purchasing managers' index, or PMI, also indicates a worsening environment for exports.

The two ports are known for exporting semiconductor production equipment and components. The main reason for the poor performance stems from China. Demand for smartphones has ebbed, and the semiconductor market has been in correction mode since the second half of last year.

Capital spending has dried up for chips installed into the latest smartphones, and the effect has rippled throughout the industry. Since the end of 2018, "Chinese semiconductor makers and others have requested extensions on bids," said Nobuyoshi Suda, executive officer at Organo, a Tokyo-based producer of equipment used to clean semiconductors.

Apic Yamada, a Nagano Prefecture manufacturer of semiconductor fabrication equipment, has been similarly impacted.

"Business partners in China and Taiwan have successively postponed capital expenditure decisions," said a source with the company. During the fiscal year ended in March, more than 10 clients were late in starting new production lines.

The global semiconductor market will total $446.2 billion this year, IHS Markit reported earlier this month, down 7.4% from 2018. This represents a downgrade from December when the British research group predicted the market would expand 2.9%. Not only have general market conditions worsened, the slowing Chinese economy also has delivered a heavy blow. The forecast contraction would be the worst since 2009.

The U.S.-China trade war compounded the problem that began with receding demand for mobile phones. Germany's Robert Bosch, the world's largest supplier of auto parts, revealed May 9 that global auto production is expected to shrink 3% this year. Volkmar Denner, the board chairman at Robert Bosch, said the trade war needs to be settled quickly.

The punitive tariffs Washington levied on Chinese products caused a downturn in exports of industrial robots to the U.S. That, in turn, undercut internal demand for China's stainless steel, and the excess sheets ended up being redirected to Southeast Asia and Japan.

At the end of March, distributors' inventory for stainless steel in Japan climbed to a level topping what was seen prior to the global financial crisis of a decade ago.

"The inventory is not decreasing as anticipated," said a sales manager at a steel trader.

Demand for cardboard is slipping as well. Used cardboard bound for China fetched the equivalent of about 11 cents per kilogram in April, or less than half of the record high logged five months ago. A group of used-paper wholesalers in the Tokyo area will cancel exports in June, the second month in the row.

PMIs in Japan, China and the eurozone have all dipped below the expansion-or-contraction threshold of 50. As indicators of exports, these numbers show that conditions have grown unfavorable as of late, though they have not reached the nadirs witnessed during the 2008 financial crisis or the European debt crisis in 2012.

Negative market readings are less severe compared with the production indicators. Though equity markets in both developed and emerging nations are trending downward, there is no chain-reaction effect seen in stock sales. The volatility index hit a four-month high in May, but investor sentiment has not cooled off.

Japanese companies are actively floating debt that will fund growth. In April, public offerings of corporate bonds totaled 1.55 trillion yen ($14.2 billion), a high not seen in 31 months. Takeda Pharmaceutical, for one, plans a float of up to 500 billion yen.

A growing number of observers believe the economy through the second half of this year will defy the headwinds and rise.

"The second half will have a recovery of capital spending chiefly due to super-high-speed 5G investments," said Tadashi Kawagoishi, an executive officer at Mitsubishi Electric. Investments in electric vehicles are also poised to be growth drivers.

Trends in China and the U.S., however, will be critical factors going forward. On top of tariffs against China, the U.S. has essentially banned telecom equipment supplier Huawei Technologies from procuring American-derived components. The restrictions apply to non-U.S. companies like Panasonic, which has suspended some business with Huawei.

Huawei bought roughly 700 billion yen worth of material from Japanese companies last year. The roster of affected companies includes Sony, which makes image sensors, and Toshiba Memory. This places Japan squarely in the middle of the Pacific trade war, which threatens the country's record postwar expansion.

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