Singapore sounds an early economic warning for Japan

21-January-2019

Economic news out of Singapore rarely drives decision-making in Japan. Unless, of course, we’re talking about a sudden 8.5% plunge in exports that spooks Tokyo’s policymakers.

The worry is the predictive quality that often comes with U-turns in Singapore’s terms of trade. Japan’s nearly US$5 trillion, trade-reliant economy doesn’t turn on a dime. Singapore’s smaller $350 billion engine often works like an early-warning device for where Japan is soon headed, good or bad.

Hence the unwelcome harbinger of gloom from the south.

Singapore’s year-on-year export nosedive in December followed a 2.8% drop in November. The breakdown of the numbers suggests two things: One, this is no aberration as US President Donald Trump’s trade war against China bites far and wide. Two, the collateral damage is deepening.

The problem as Bank of Japan (BOJ) officials prepare for a January 22-23 meeting is that headwinds are already battering Tokyo’s confidence. BOJ officials are telegraphing yet another cut in the inflation forecast. As the 2% target slips away, the central bank entered the new year with its monetary tail between its legs.

The Japanese government’s efforts to cheer households are working at cross-purposes with inflation trends.

Case in point: a move to make pre-school education free and looming cuts to mobile-phone charges. While grand for consumers, such policies are wreaking havoc with Kuroda’s mandate to end deflation.

Ditto for plans for another hike in sales taxes — a bump to 10% from 8% is slated for October. It hangs over households and businesses like a financial sword of Damocles, cutting into confidence.

The last boost in 2014 from 5% to 8% tipped Japan into recession. Increasing the burden on consumers who haven’t seen a hefty raise in decades might not be the wisest course as the trade war hits global growth.

Indications from Singapore suggest bigger troubles to come, say economists like Irvin Seah of DBS Bank. Recent trade dynamics smack of downside risk, he warns.

And then there’s what’s to come. The December bloodbath in US stocks may have left Trump squeamish about slapping additional tariffs on China. That is almost sure to have him upping the pressure on either Japan or Europe.

The former target may well mean levies on imports of cars and auto parts, a move that could slam South Korea’s economy (albeit, Seoul and Washington do have a free-trade agreement.)

“A tariff on foreign cars would allow Trump to satisfy his protectionist tendencies,” says analyst Dan Wang of Gavekal Research. “But by focusing on autos, Trump would limit the anxieties of the equity market to a single sector.”

Or not. The damage to Asia’s supply chains would be almost incalculable. Even so, Trump economic advisor Larry Kudlow is a creature of share prices. Relatively positive news on the US-China trade talks buoyed Wall Street.

“More important,” Wang says, “auto tariffs would be Trump’s gift to the autoworkers in the manufacturing-heavy states that helped to elect him.”

Therefore it is a gamble he could deem worth taking; such a tax on foreign autos could offer Trump a bigger political win than tightening the screws on China. Besides, Trump is seeing the extent to which the fallout from his trade war is boomeranging back in Washington’s direction.

Slowing demand in the world’s second-biggest economy is imperilling America’s. And the negative wealth effect related to cascading stocks is taking a toll on confidence in both China and the US.

Yet as Singapore’s downshift shows, there’s already enough trauma in the global system to worry Japanese investors. It fits with warning signals from other regional bellwethers. Korea’s export stumble is a bad omen for Asia. So is the inventory glut at Taiwan Semiconductor Manufacturing Co, a key cog in regional supply chains.

All this may point to a Japanese recession this year, Hideo Hayakawa, former chief BOJ economist, recently said. Trump’s trade war has Japan Inc scaling back investment plans. It has executives even less confident about hiking wages and kicking off the virtuous cycle Abenomics has so far lacked.

The tax hike Japanese Prime Minister Shinzo Abe is determined to enact is an added worry. Additional tariffs are an even bigger wildcard. Japan’s economy, it’s worth noting, contracted 2.5% in the third quarter. Blows to business and household confidence since then augur poorly for a rebound.

Events in tiny Singapore demonstrate why.

Source: ASIA TIMES