Japan at risk of deflation as US trade wars and Brexit uncertainty impact value of yen

The Bank of Japan is starting to feel the pinch, as the price of oil and a significant drop in mobile phone costs among other factors. Japanese price growth could fall to 0% by summer 2019.

The Japanese economy is looking increasingly vulnerable at present, as uncertainty around the future of its trade deals with the US and Europe put the value of the Yen under threat.

Continued uncertainty around Britain’s departure from the EU is making an impact across the globe now, as Japanese car manufacturers have now been forced to put their contingency plans into action in the absence of any clarity on exactly what Brexit will mean for them. While Honda has made the difficult decision to close its plant in Swindon, Nissan has had to ditch its plans to produce the new XTrail Sports vehicle in Sunderland.

The South China Morning Post has speculated recently that President Trump’s attention is likely to turn to Japan following his recent trade war with China. US trade officials are currently pushing to agree a trade deal between the US and China. There are currently some significant tariffs in place for imports and exports of cars and car parts between the US and China which have damaged the Chinese economy, causing job cuts, reduced wages and a lack of expenditure. Prices have dropped on goods that incur trade tariffs and China’s export market is slowing down. Tariffs, coupled with technology export restrictions, are squeezing China’s businesses.

It now seems Donald Trump’s attention is turning to Japan, as he has recently made remarks about the years of unfair trade between Japan and the US. Following these comments, the Japanese Economy Minister, Toshimitsu Montegi, is keen to start trade talks with the US as it currently threatens to impose higher tariffs on car exports in the same way as it has done for China.

Imposed tariffs can threaten economic growth and also decrease demand for oil. The value of crude oil dropped 40% between October and December 2018 due to over-supply concerns and slower economic growth. Experts have forecast a drop-in demand for oil this year, although production cuts and slower outputs from the US may however help oil prices recover.

The Bank of Japan wants to reach 2% inflation, but has recently had to reduce its inflation forecast for the next financial year from 1.4% to only 0.9% in response to recent events across the globe, which are having far flung repercussions for many of the world’s economies. Japan is no exception, and with trade talks on the horizon what happens next could be interesting.