Asia Economy

Japan’s Economy Feels the Sting of China’s Slowdown

Jonathan Soble
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In its small way, Tsutomu Nyuwa's metalworking shop in Yasugi, Japan, has been feeding the economic boom 700 miles away in China.

Many of the precisely machine-tooled gears, bearings and other components turned out by Mr. Nyuwa and his 14 employees end up on Chinese work sites, in the engines of the giant earthmovers that have powered China's breakneck pace of construction.

But with Chinese growth now slowing, Mr. Nyuwa's business is slumping — along with the rest of the Japanese economy, which data released on Monday showed is in recession again.

Japanese equipment makers like Komatsu, Kubota and Hitachi Construction Machinery are selling fewer excavators and bulldozers in China and, in turn, are buying fewer parts from manufacturers like Mr. Nyuwa. Orders from the construction sector are off 40 percent this year, he estimates.

"It's definitely come back down to earth, and we feel it," Mr. Nyuwa said of the Chinese market.

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Japan, more than many other developed countries, needs everything to go right for its economy to grow. Its population and work force are shrinking. Once-big industries like consumer electronics are retrenching under pressure from lower-cost rivals. Prime Minister Shinzo Abe won power three years ago on a promise to accelerate Japan's economic metabolism, but despite some notable successes — joblessness is low and many large companies are earning record profits — a broad increase in growth and incomes remains elusive.

Japan's economy contracted 0.8 percent in the third quarter, signaling the second recession since Prime Minister Shinzo Abe took office in December 2012.

With the economy on the edge, even small setbacks can have major repercussions. In the latest quarter, companies wary about the outlook cut back on their investments in factories and equipment, tipping the economy into its fifth recession in seven years. Exports to China dropped sharply, worsening the falloff in activity and contributing to the general unease.

China's slowdown has reverberated around the world.

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Demand has declined for oil, iron ore and other products from commodity-exporting countries like Australia, Brazil and Ecuador. Developing economies that have grown dependent on Chinese investment in resource projects have been left vulnerable.

Others, like Japan and Germany, have provided many of the machines used to build China's skyscrapers and equip its thousands of factories. For them, it is manufacturing industries that stand to lose.

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Japan supplies "all the things used in China's infrastructure expansion," said Paul Sheard, the chief global economist at Standard & Poor's, the credit ratings agency. Because of that, Japan now risks being hurt as that expansion slows.

China's economy is hardly in ruins. It grew at an annualized rate of 6.9 percent in the third quarter, according to the official government estimate. While that was enviable by the standards of more advanced countries, it was the lowest rate since 2009, in the depths of the global financial crisis. And sectors that have been especially eager buyers of Japanese capital goods, like manufacturing, construction and mining, are in worse shape than the economy as a whole.

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China overtook the United States as Japan's top trading partner a decade ago. Roaring exports of things like mining trucks, textile looms and semiconductor fabricators have been a bright spot for Japanese industry, which has lost ground in more visible areas like consumer electronics. Diplomatic disputes that have divided Tokyo and Beijing have failed to halt a deepening interdependence in commerce.

China's commercial relationship with Japan has been shifting, however. Rising labor costs in China have prompted many Japanese companies with factories there to spread their bets, turning to countries in Southeast Asia like Thailand and Indonesia.

In their place, Japanese retailers have poured into China to target newly wealthy consumers there. Convenience stores and clothing chains like Uniqlo have been expanding rapidly.

Tomokatsu Shiina, an architectural designer in Tokyo who regularly works in China, recently returned from Shanghai, where he was overseeing design for a Japanese discount shoe retailer's first store in the city. "These are budget consumer items," he said. "That's where the activity is now."