By Tomoyuki Tachikawa,
Japan's economy, which has already been facing downward pressure against a backdrop of the Ukraine crisis and the yen's depreciation, may also be plagued by China's radical "zero COVID" policy and the yuan's rising trend.
With energy and commodity prices increasing globally in the wake of the full-fledged attack on Ukraine by Russia, a major oil and gas producer and exporter, resource-poor Japan might experience "bad inflation" -- a combination of an economic downturn and higher costs.
The yen is certain to extend losses against other key counterparts including the U.S. dollar and the euro as the Bank of Japan has kept up its ultraloose monetary easing, probably driving up import prices and accelerating inflation at home.
Under such circumstances, China's business environment, often swayed by the Communist-led government's anti-epidemic restrictions, and the strength of the yuan known as the renminbi, are expected to deal a further blow to Japan's economy, the world's third largest.
Even following the end of the 2022 Beijing Winter Olympics and Paralympics, China has pledged to continue taking drastic steps to tackle the novel coronavirus spread, such as imposing lockdowns on cities when outbreaks occur and quarantine on travelers from abroad.
In late March, Chinese authorities decided to lock down Shanghai, which has a population of about 25 million, with each half of the city shut down in turns for nine days through next Tuesday.
Speculation has also been rife that China, Japan's biggest trading partner, would shy away from implementing actions to push down the yuan to curb a surge in domestic prices, as the prolonged pandemic has severely undermined consumer and corporate sentiment.
The yuan spiked 6.4 percent from the beginning of this year to 19.26 yen as of Thursday, while the dollar soared 6.0 percent to 122.41 yen during the same period, according to Mizuho Bank, the main banking arm of Mizuho Financial Group Inc.
"We don't know when China's business and transportation hubs will be suddenly locked down and we'll be forced to suspend our operations. We cannot craft a management strategy," said Hiroshi Nakano, a 43-year-old worker for a Japanese manufacturer.
"Moreover, the yen's sharp decline against the yuan has cut our profits, as our local corporation makes products here in China and ships them to Japan. We have become reluctant to bolster investment and production in China," Nakano added.
A weak yen against the yuan jacks up prices of goods imported from China to Japan, although it supports Japanese exporters as they can sell their products cheaper in the country and increase the value of their overseas revenues in yen terms.
Japan's imports to China, however, gained 16.4 percent from a year earlier to 20.4 trillion yen ($166.6 billion) in 2021, while its exports to the nation rose 19.2 percent to 18.0 trillion yen, posting a trade deficit of more than 2 trillion yen.
The People's Bank of China says it has been trying to keep the yuan basically stable against a basket of currencies of its trading partners. So far, the country's central bank has also expressed willingness to make financial market conditions more accommodative.
In 2021, the world's second-largest economy expanded 8.1 percent from the previous year, but it grew only 4.0 percent in the October-December period with concern mounting over another wave of coronavirus infections.
At the ruling Communist Party's twice-a-decade congress in fall, Chinese President Xi Jinping is set to secure a controversial third term as the nation's leader.
In an attempt to ensure Xi has been able to trumpet its achievements in bringing the virus under control, the zero-COVID policy is likely to remain in place, weighing on the broader economy, foreign affairs experts said.
China set a gross domestic product growth target for 2022 at around 5.5 percent at the opening of an annual session of parliament in early March, but Premier Li Keqiang said attaining the target is "not easy" given "a lot of complexities and rising uncertainties."
The pace of China's economic slowdown triggered by tough COVID-19 restrictions has been "faster than" estimated, said Naoto Takeshige, a researcher at the Ricoh Institute of Sustainability and Business in Tokyo.
Meanwhile, China's producer price index, a measure of the prices of goods traded between firms, climbed 8.8 percent from a year earlier in February.
The yuan's rise may drag down exports of China, dubbed the "world's factory," but the country's monetary authorities might refrain from stemming the appreciation to prevent "stagflation," where economic stagnation is coupled with higher inflation.
As global energy prices are sure to keep increasing for the time being amid escalating Russia-Ukraine tensions, China could "accept the strength of the yuan," MUFG Bank, the core banking unit of Mitsubishi UFJ Financial Group Inc., said in a report.
Yuzo Sakai, chief manager of foreign exchange business promotion at Ueda Totan Forex Ltd., also said investors have shown few signs of actively buying back the yen against the yuan as they believe that the BOJ will maintain its aggressive monetary easing.
"Recently, many market participants have become more confident that the BOJ will not start tightening its monetary policy soon, unlike the U.S. Federal Reserve and the European Central Bank. There is no impetus for them to boost their yen holdings," Sakai said.
"Higher import costs are expected to take a toll on both the household and corporate sectors in Japan down the road," he added.
Business confidence among major Japanese manufacturers worsened for the first time in seven quarters in March, hurt by energy and raw material costs, the BOJ's Tankan survey showed Friday.
In 2021, Japan's economy edged up only by 1.6 percent from the previous year in inflation-adjusted terms.
