South-Western College Publishing - Economics  
Japanese Growth Spurred by Chinese Demand
Subject Japanese Economic Growth
Topic International Trade
Key Words

Chinese Demand, Exports, Currency Interventions, and Economic Growth

News Story

Exports have been the engine of economic growth for the Japanese economy in recent years. This past year has been no different, but the export market has changed. Chinese demand for Japanese products has risen greatly, providing a large and stable market for Japanese industry. Historically, the U.S. market purchased most Japanese export products, but recently China has fueled the fire of economic growth by purchasing large amounts of exports and helping to bring Japan out of a recession similar to the recent U.S. slump.

Past Japanese recoveries have depended on increased exports of cars to North America, but the surge in Chinese demand has put idle Japanese capacity in steel mills and the semi-conductor industries back to work.

"We reckon that 80 percent of the growth in [Japanese] exports in the last 12 months is due to Chinese demand," said Jesper Koll, chief Japan economist for Merrill Lynch. "There is absolutely no question that here in Japan, all eyes are on China. If China slows down, Japan will crash."

In one example, the Komatsu Company increased sales of construction and mining equipment to China by 47 percent and the company expects to sell $1 billion in products to China in 2005. In 2003, China was the destination for about 40 percent of the company's foreign sales. The increase in Chinese demand has increased prices and turned losses into profits for Komatsu.

"The Japanese economy has always been led by plant-and-equipment investments of export-oriented manufactures," according to Eisuke Sakakibara, professor of international economics at Keio University. Noting exports last year of $518 billion, he said, "We are back on that path."

The Japanese government has added their support to the recovery by buying foreign currency to keep exports affordable to American and European buyers. The government bought $172 billion in foreign currencies last year and this month alone has purchased an additional $67 billion in an effort to keep the Yen from strengthening relative to other currencies. A strong Yen would make Japanese products more expensive for export markets.

Analysts consider this government effort necessary, but the growing demand coming from China is the main reason for Japanese economic growth and their climb out of an economic recession by the world's second largest economy.

(Updated April, 2004)


Draw a graph and explain how increased Chinese demand can increase prices for Japanese producers. Does this represent a movement along a demand curve or a shift in demand?

2. Based on your analysis in question 1, how do those higher prices translate into greater profits for the Japanese companies?
3. Explain why the Japanese government's efforts to buy foreign currencies keeps prices lower for American and European buyers. Give a concrete example of how this mechanism might work?
Source James Brooke, "Strong Economic Growth in Japan", The New York Times Online, February 18, 2004.

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