- China poses deflation risk; Trump policies may spur inflation
- Opposing rate paths in Japan, US may cause market dislocations
Japan’s economy is at risk from price pressures from its two largest trading partners, according to the chief of the country’s banking association.
The threat from China is deflation, said Akihiro Fukutome, chairman of Japanese Bankers Association, in an interview. From the US, he sees inflation picking up if Donald Trump returns to office and implements his policies.
Japan is highly dependent on trade and therefore sensitive to economic influence from other countries. Exports of cut-rate steel and chemicals from China can undercut domestic manufacturers, while tax cuts in the US could potentially spur higher prices there.
“The biggest risk is the resurgence of inflation (in the US),” said Fukutome. “A rise in long-term yield is my worst-case scenario, though possibility is still low.”
The Bank of Japan’s recent decision to scrap negative rates and to normalize monetary policy is unlikely to cause major disruptions to the country’s economy and markets, as the move had been well priced in, he said.
Still, with the BOJ tightening and the US Federal Reserve forecast to start cutting rates later this year, he sees potential for market disruptions stemming from the opposite directions.
“I have never seen anything like this before,” said Fukutome. “Depending on the timing (of policy decisions), it could cause volatility in currency, stock and other markets. I think it’s a big risk factor.”