The impact of the China shock on Japan’s economy

Japan has weathered the China shock well so far, largely because the sharp weakening of the yen has kept Japanese exports competitive. However, the exchange rate is unlikely to keep weakening rapidly over the coming years and we think that Chinese exports will eventually become a more serious threat to Japanese manufacturers. Whether that triggers a more forceful protectionist response will depend on whether policymakers feel confident to cope with any retaliation, in particular curbs on rare earth exports.