Japanese shares suffered through their second-worst session of 2019 on Friday, plunging more than 2% on renewed trade concerns and Shinzo Abe’s decision to remove South Korea from an export white list, deepening the trade spat between America’s two staunchest regional allies.
The move by Abe marks a serious escalation, although it’s been in the cards for weeks. Moon Jae-in called the decision “reckless” and promised to hit back.
The age-old conflict over conscripted labor and “comfort women” is now set to spiral into what some say is the most acute bilateral crisis in decades, threatening to undermine Washington’s efforts to present a united front against North Korea, although given Donald Trump’s cozy relationship with his “good friend Chairman Kim”, that might be fine with the White House.
This comes at the worst possible time for South Korea, which has struggled mightily in the face of the trade war. Jitters about a turning of the semi cycle have made things worse.
Earlier this month, the BOK slashed its economic forecasts in the course of cutting rates.
The BoJ, meanwhile, has it’s own vexing quandary to deal with. Governor Kuroda kept policy unchanged at the July meeting and events since then have underscored why standing pat in the face of mounting global headwinds and easing from other central banks is perilous for Japan.
Although the Fed’s “hawkish” rate cut looked set to give the yen some respite from any strength that might have accompanied an overtly dovish lean from Jerome Powell, the risk-off sentiment engendered by Trump’s new China tariffs drove USDJPY to the lowest since April 2018 on Friday.
That isn’t the best news for the BoJ given how elusive the inflation target remains. (The bank cut its inflation forecasts again this week.)
All of this is a microcosm of the broader macro picture. The above checks every box: 1) fraught bilateral relations predicated in part on nationalistic sentiment, 2) a developed market central bank low on ammo and facing unwanted currency strength at a time when inflation remains stubbornly muted, and 3) an emerging market dealing with the fallout from the trade war.
What’s not to “like”?
As a reminder, manufacturing PMIs in both Japan and South Korea are in contraction territory.