Is Japan Economically Dependent on China?

Is Japan Economically Dependent on China?

Japan has almost twice the foreign trade with China than America.

Let’s examine the correlation of the Japanese and Chinese stock markets.

With the rapid development of economic globalization and regional economic integration, the connection between the Chinese stock market with the Japanese stock market gradually deepening, especially in recent years, China has been deepening the reform of financial system, with international capital market, especially the implementation of the QDII and QFII, make China’s capital market closer links with the global financial markets. As the economic and trade exchanges between China and Japan continue to deepen, the linkage of stock markets between the two countries is also strengthening.

People used to focus on A-shares and Hong Kong stocks, while the Japanese stock market, which is also located in East Asia, has received little attention, but it has performed better in recent years, and is the pole of the world’s major stock markets. Among them, The Nikkei 225 index successfully broke through 30,000 points on February 15, 2021, hitting a record high in nearly 30 years. As of Feb. 24, 2021, the Nikkei 225 index has gained 250.92% since 2012, trailing only the NASDAQ and ranking second among major global indexes, according to Wind data.

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In general, the correlation is not strong between the Japanese and Chinese equity markets. Generally, scholars’ research conclusions have found this as well. Moreover, the reason may be that China’s stock market mechanism is not sound. As a result, the mechanism of existing shares issued by the administrative intervention becomes more and more. Thus, it is difficult to form an effective arbitrage mechanism. Which limits the price distribution function into full play in the market. And reduces the efficiency of market operation. 

While China’s stock market is only affected by policy uncertainty at home, Japan’s is buffeted by policy from three dimensions: China, Japan, and the world.

The change of correlation between Chinese and Japanese stock markets can be well explained by the uncertainty of economic policies in China and Japan. The change trend of correlation between stock markets is basically consistent with the change of policy uncertainty.

In addition, due to the low correlation and weak correlation between The Japanese stock market and A-shares, investment risks can be effectively dispersed. Moreover, the correlation between the Japanese stock market and other important stock markets in the world is low. Especially with the European and American markets and The Chinese market, the correlation coefficient is less than 0.3. As a result, investors can diversify their investments in the two markets, effectively diversifying risks for the global asset allocation.

Written by Anyu Mei

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Is Japan Economically Dependent on China?