What’s good for U.S.-China-Japan hurts emerging markets

Close Connection

While he said cheaper commodity prices would be good for advanced nations, they would hurt producers. Deutsche Bank AG analysts estimate the Chinese have accounted for about a quarter of worldwide demand for major raw materials in recent years. Chinese purchases of copper, coal, iron ore and oil are all “closely connected” to loan-growth conditions and so are at risk if the credit crunch continues, according to Bank of America Merrill Lynch analysts.

Companies and countries that produce materials for transportation, power and property development will be particularly hit, said Larry Hatheway, chief economist at UBS AG in London. More than 80% of the exports to China from Russia, Brazil, Australia, Canada and Indonesia are for domestic use, UBS calculates.

“If China slows, this will have a disproportionate impact on commodity producers and chunks of emerging markets,” said Hatheway. “Property and infrastructure are big uses of nickel and copper, etc, so a slowdown in China will obviously mean a pretty generalized effect on the commodity universe.”

Deflation Fight

Japan, the world’s third-largest economy, is trying to end 15 years of deflation-fighting by easing monetary and fiscal policies and pursuing deregulation. The effort overseen by Prime Minister Shinzo Abe is starting to pay off. Factory output rose the most in May since December 2011, retail sales climbed and consumer prices ended a six-month slide.

“Abenomics is aimed at ending deflation and rebuilding the nation’s fiscal health by spurring longer-term growth,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. “It’s essential and seems to be on the right track.”

A byproduct is nevertheless a falling yen. The currency weakened the most in the first half of this year versus the dollar since 1982. It also dropped 12% against the euro and about 7% versus the sterling, threatening to undercut European trade.

“Japan is exporting deflation risk to Europe, increasing competitive pressures when much of Europe is suffering chronic growth deficiency,” said Lena Komileva, managing director at G+ Economics Ltd. in London.

Emerging markets again may suffer, BlackRock’s Peter Fisher said June 27 on Bloomberg Television’s “Surveillance.” While hurting exports, the weaker yen is drawing investment away from these countries and toward Japanese equities -- the Nikkei 225 Stock Average has gained 39% so far this year.

“That’s a whole lot of pressure” on these nations, said Fisher, a former U.S. Treasury and Fed official.

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