Tokyo shares take a hit as China uses money as a weapon

There was something of a panic on the financial markets in Tokyo this week when China suddenly announced it would allow its currency – the yuan – to drop in value.

It was a decision taken at the top level in Beijing, following signs that China’s rate of economic growth is slowing. A weaker yuan makes Chinese exports more competitive – or cheaper to buy with foreign currencies.

That could have a negative impact on Japanese companies which compete against Chinese rivals, which partly explains a sharp fall in the value of shares on Tokyo’s main indices.

Business links

However, many Japanese companies also do extensive business with China and often cooperate rather than compete with the Chinese. And the fall on the Tokyo stock exchange came after a wave of selling in the US, amid general worries about the state of the global economy.

As the shares fell, the Japanese currency rose. As the Financial Times pointed out: “the Japanese yen was given a boost thanks to its role as a perceived haven during a time of geopolitical uncertainty.”

Trade War

China’s decision to devalue its currency was interpreted as a sign that it is not prepared to give ground in its trade war with the United States.

Last week, President Trump said he would impose a ten percent tariff on $300bn worth of Chinese goods, effectively hitting all of China’s imports to the US with duties, according to the BBC.

In response, the People’s Bank of China has “effectively weaponised the exchange rate, even if it is not proactively weakening the currency with direct intervention” said Julian Evans-Pritchard from Capital Economics.

China as peacemaker

Prime Minister Shinzo Abe will meet Premier Li Keqiang at the G7 summit in the French city of Biarritz later this month and will invite the Chinese President Xi Jinping to come to Japan soon.

And in December, China will host a meeting of the Japanese and South Korean leaders in Beijing, partly aimed at resolving their long standing disputes, which have their roots in the Second World War.

Good example

Professor Kerry Brown wrote on LinkedIn this week that “if anyone wants to see how to craft a relationship with China, look to Japan and see what they are doing.”

Professor Brown, who is Director of the Lau China Institute at King’s College London, believes that Japan and the People’s Republic of China have an important relationship, which has huge implications for Asia and the rest of the world.

“I think the secret of Japan and China is that Japan – despite knowing a huge amount about China – always says so little. It just acts and doesn’t say.

“It is always a relationship which starts from the worst possible base in terms of history and mutual antipathy and is therefore structurally super realistic. What looks like a bad place to be, in this case at least, is not quite as bad as it looks,” wrote Professor Brown.

Compared to the other fractious relationships dominating the headlines this summer, it’s a relief to learn that the Sino-Japanese situation is stable – at least for the time being.

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