Time for Abenomics to get real as China stutters

posted on February 1, 2016

The biggest cause of the financial and capital market turbulence that has swept the world this year is China's economic slowdown. One of its biggest victims could be Abenomics, the vaunted economic policy agenda being promoted by Japanese Prime Minister Shinzo Abe.

If China remains in a funk, Abe may have to abandon his vision of a "painless economic revival" -- which relies on the Bank of Japan's monetary policy for stoking growth and using the resultant boost in tax revenue to fix the government's fiscal woes.

This may hurt

China has enormous excess capacity in manufacturing mainly because of the massive public spending by the government to keep the economy growing amid the global recession that began in 2008.

The Chinese steel industry, for instance, can churn out 1.2 billion tons annually but is currently using only two-thirds of its capacity. The auto industry, which can manufacture 38 million cars a year, has excess capacity of nearly 40%.

With those kind of numbers, a long and painful capacity adjustment is inevitable.

Finance Minister Lou Jiwei has said China's economy is in for five painful years of structural changes. Companies curb investment when trimming capacity. When it happens on a big scale, the entire economy is dragged lower. All the while, companies tend to cut the prices of their products to keep their factories running. The weakening of the Chinese currency, the yuan, only accelerates the trend.

As the world's second-largest exporter to China and third-largest importer from the country, Japan is bound to take a direct hit from its neighbor's economic shift.

source by nikke
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