The link between China and Japan recently raised its head in the currency markets when President Trump upped the ante over trade-talks. Following a session in Shanghai that yielded only anger, the American trade-talk delegation quickly left for home. It appears that China has little intention of altering its course and will concede little or nothing in future talks. This highlights that China is a state-run economy based on a business model geared to expand by crushing its competition. Within hours, President Trump threatened to increase tariffs on Chinese goods flowing to America. This signals a growing impatience on the part of the White House to move trade-talks forward and finalize a deal.
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| China Faces Growing Trade Problems |
Immediately currency markets witnessed the yen surge in response. This makes it difficult to argue that a correlation does not exist between the value of the yen and problems in China. The yen has become a major conduit by which wealth is transferred out of China. This tight relationship can be seen each time trouble surfaces in China's economy. When this happens the yen rises in value as wealth exits China through business back-channels.
It is also important to remember that economic weakness in China carries over and has a negative impact on Japan's overall GDP. Feeding into this relationship is the fact Japan does not desire a stronger yen which hurts exports. Since the yen constitutes just about 4 percent of the global world currency reserve, the boost in its value is generally short-lived as the wealth flowing out of China moves on to other countries across the globe.
Last year, the U.S. combined goods and services deficit with China was a hefty $309.8 billion US. Presidents Trump and Xi Jinping at their April 2019 meeting at Mar-a-Lago mapped out a
