GoldmanEconomics

SachsResearch22May2025|9:39PMJST

JapanEconomicsAnalyst

IsChinaExportingDeflation?(Ota)

■Concernsaregrowingamongsomemarketparticipantsaboutthepossibilityof"exporteddeflation"fromChina,wheredomesticdemandisweakandwhichhasbecomeatargetofUStariffpolicy,throughtheexportofrelativelycheapergoods.Inthisreport,weexaminewhetherdeflationfromChinaisbeing

"exported"toJapan,andestimatethepotentialimpactonJapaneseprices.

■Mostoftheyen-denominatedimportpricesforChineseproductstoJapanhavecontinuedtorisemoderately.However,comparedtoimportpricesofthesameitemsfromcountriesotherthanChina,manyChineseproductshavebecome

relativelycheaperinthepastfewyears.Lookingattheaveragepriceofall

productsexportedbyChina,wefoundthatinrecentyearstheirrelativepricehasfallenabout15%comparedtosimilarimportsfromothercountries.

■AbouthalfofthiscanbeexplainedbyaweakerrenminbiagainsttheUSdollar,whiletheotherhalfmayreflectaworseningsupply/demandbalancewithin

China,includingsluggishdomesticdemandamidaseverehousingdownturnandworseningovercapacityissuesinmanyindustries.Wealsoexaminedthe

possibilitythatChineseproductsthatlosttheirmarketintheUSduetotariff

increasesduringthefirstTrumpadministrationweresoldtoJapanatlower

prices,butconcludedthattheimpactwasrelativelysmall.Thissuggeststhatthemaindriverofexporteddeflationisthesupply/demandbalancewithinChina.

■However,asimportsfromChinaaccountforjustover20%ofJapan'stotal

importvalue,thedirectimpactonJapan'sCPlislimitedcomparedwithyen

appreciationwhichlowersallimportprices.WhilesalesofcheaperChinese

productsinthepastfewyearsmayhaveloweredJapan'snewcoreCPI

(excludesfreshfoodandenergy)byacumulative0.4%,weestimatethepeak

impactontheyoygrowthwaslimitedtoaround0.2pp.Therefore,barringa

significantdeteriorationinthesupply/demandbalancewithinChinagoing

forward,thisisunlikelytoresultindeflationarypressurestrongenoughto

undermineJapan'sunderlyingpricetrend.BasedonourChinaeconomicsteam'spriceoutlook,weexpectcumulativedownwardpressureonJapan'sCPlfrom

Chinaexporteddeflationtobelessthan0.2%goingforward.

TomohiroOta

+81(3)4587-9984|

tomohiro.ota@

GoldmanSachsJapanCo.,Ltd.

AkiraOtani

+81(3)4587-9960|akira.otani@GoldmanSachsJapanCo.,Ltd.

YurikoTanaka

+81(3)4587-9964|

yuniko.tanaka@

GoldmanSachsJapanCo.,Ltd.

AndrewTilton

+852-2978-1802|andrew.tilton@GoldmanSachs(Asia)L.L.C.

Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.ForRegACcertificationandotherimportantdisclosures,seetheDisclosureAppendix,orgoto

/research/hedge.html.

22May20252

GoldmanSachsJapanEconomicsAnalyst

IsChinaExportingDeflation?

MeasuringDeflationRiskfromChina

ThesignificanttariffincreasesimplementedbytheUShaveraisedconcernsamong

someaboutaheightenedriskofdeflationinglobalgoodsmarkets,particularlyamong

countriesexportingtotheUS.China,whichhasthesecond-largestexportvaluetotheUS,agreedtoa90-daypauseonretaliatorytariffsbetweenthetwocountriesinajointstatementonMay12,2025,reducingtheimmediaterisk.Nevertheless,Chinastillfaceshightariffs,andthusmajorconcernsaboutthenegativeimpactonitseconomylinger.WhileourChinaeconomistsexpectexpansionaryfiscalpoliciestooffsetthenegative

contributionofexternaldemandtosomeextent,excesssupplyinChinacouldpersistgiventhattheChinesegovernment'shighestpriorityappearstobethegrowthof

industrialproductionratherthanpromotingdomesticdemand.

TheslowingChineseeconomyandaccompanyingpotentialdeflationarypressureare

importantissuesforJapan,sinceimportsfromChinaaccountforslightlyover20%ofitstotalimportvalue.Infact,Chinesesteelexportpriceshaveplummeted(Exhibit1)duetoexcesssupplyamidarealestateslump(ReutersJune29,2023).ThishaspromptedtheEUandAsiancountries,includingVietnam,toimposeanti-dumpingdutiesonsome

Chinesesteelproducts.Thestill-presentpossibilityofanexpansionofdiscountedsalesfromChinaduetotheUS-Chinatariffdispute—inotherwords,theexportofdeflationfromChina—islikelytoattracttheattentionoffinancialandcapitalmarketsforthetimebeing.

Exhibit1:China'sSteelPricesHaveRealEstateSlump

Fallen

Sharply

AlongWith

the

JapaneseImportPriceof

(USDollarDenominated)

Flat-Rolled

Products

oflron

orNon-Alloy

Steel

Flat-rolledsteelproductshavebeensubjecttoanti-dumpingdutiesorinvestigationsinvariouscountriesandregionsinthelastfewyears.

Source:MinistryofFinance,DatacompiledbyGoldmanSachsGloballnvestmentResearch

Inthisreport,wefirstvisualizethedeflationarypressurefromChinaonJapantodateusingimportpricesfromChina.Herewedefinedeflationarypressurenotonlyasfalling

GoldmanSachsJapanEconomicsAnalyst

prices,butalsoaspriceincreasessmallerthantheyshouldbe(adeclineintherelativepriceofChineseproducts).1WethenexaminewhetherChineseimportpricesare

affectedbytheChineseeconomyandUStariffpolicy,andanalyzetheimpactonJapan'sinflationrate.

IsChinaExportingRelativelyCheaperGoods?

First,weunpackwhetherChineseproductshavebecomerelativelycheaperinJapanoverthepast10years.

ArepresentativeindicatorofimportpricesfromChinaistheimportpriceindexforChina(Exhibit2)fromtradestatistics.Thisindexhasremainedflatforthepastfewyearsanddoesnotappeartobeparticularlyhighorlowcomparedtoimportsfromothercountries.However,wedonotseethisasanappropriateindicatorforouranalysis.ThisisbecausethegoodsJapanimportsfromChinaandfromothercountriesarecompletelydifferent,socomparingaverageimportpricesfromeachcountrydoesnotallowustodeterminewhetherChineseproductsarerelativelycheaporexpensive.Inaddition,thisindexis

affectedbyvariousfactorsotherthanChina'seconomicconditionsandtariffdisputes,suchascommoditypricesandglobaleconomictrends.Withoutstrippingouttheseeffects,itisdifficulttopindowntheimpactoftariffsandChina'seconomictrendsonJapan'simportprices.

Exhibit2:AverageImportPricesFromChinaHaveBeenStableforthePastFewYears

Yen-DenominatedJapanImportPriceIndexbyPartnerCountry

Source:MinistryofFinance,DatacompiledbyGoldmanSachsGloballnvestmentResearch

Therefore,inthefollowinganalysis,wecalculateimportpricesfromChinaandimportpricesfromelsewhereforeachofaround1,200itemsJapanimports,inorderto

determinewhetherChineseproductsarerelativelycheaporexpensivebylookingatthepricedifference(relativeprice).ThepricedifferencebetweenChinaandothercountries

1Overthepastfiveyears,soaringcommoditypriceshaveledtoacceleratinginflationevenduringeconomicdownturnsinvariousregions.Insuchcircumstances,webelievethatanarrowdefinitionofdeflationassimplyadeclineinpricesisnotsuitable.Wediscussdetailsofourdefinitionlaterinthisreport.

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GoldmanSachsJapanEconomicsAnalyst

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forthesameitemcan,inprinciple,beconsideredtoreflectfactorsspecifictoChina.2

Exhibit3comparesthepriceofChineseproductsimportedbyJapanwiththeimport

priceofthesameproductsfromothercountries(theaverageimportpricefrom

countriesotherthanChinaiscalculatedbyweightingtheimportpriceofeachitembytheimportvaluefromChina;wethuscalculatetheaverageimportpricefromother

countriescorrespondingtotheaveragepriceofChineseproducts).Notethattheimportpricesofsmartphones,whichaccountforabout10%ofimportsfromChina,fluctuatesignificantly,sotheyhavebeenexcludedfromthefollowinganalysis(exhibitsincludingsmartphonepricesareshownintheBOXattheendofthisreportforreference).

Exhibit3showsthatuntil2023,theyen-denominatedpricesofChineseproducts

remainedalmostatthesamelevelassimilarimportedgoodsfromothercountries.However,since2023,whileimportpricesfromcountriesotherthanChinahavecontinuedtorise(reflectingtheweakeryen,etc.),pricesofChineseproductshaveremainedflat,indicatingthattheyhavebecomerelativelycheaperonaverage.

Exhibit3:Since2023,ImportsfromChinaHaveBecomeRelativelyCheaper

Yen-DenominatedImportPricesbyCountry(WeightedAverageofEachItem'sPricebyImportValuefromChina)

ImportpricesfromtherestoftheworldaretheweightedaverageofimportpricesfromcountriesotherthanChinaforeachitem,weightedbytheimportvaluefromChina.

Source:MinistryofFinance,GoldmanSachsGlobalInvestmentResearch

WecalculatedtherelativepriceofChineseproductsfromExhibit3(importpricesfromChina÷importpricesfromothercountries)toshowinExhibit4moredirectlyhow

muchcheaperChineseproductshavebecome.Yen-denominatedrelativeimportprices(orangelineinExhibit4,i.e.,redlinedividendbybluelineinExhibit3)since2015havegenerallyremainedaround100(i.e.,thepriceofChineseproductsmovedintandemwithimportpricesfromothercountries),butinthepasttwoyears,relativepriceshavefallensharply,indicatingthatChineseproductshavebecomeabout15%

2ThisisbecausecommonfactorsaffectingbothChineseandothercountries'products,suchasproductioncostincreasesforeachproduct(e.g.,highercrudeoilprices)andpricehikesduetorisingglobaldemandforparticularproductscanbeeliminatedbytakingpricedifferentialsoftheproductimportedfromChinaand

elsewhere.

GoldmanSachsJapanEconomicsAnalyst

22May20255

cheaper(theweightedaverageofabout1200items).

However,iftherenminbidepreciates,Chineseproductswouldbecomecheaper

comparedtoproductsfromothercountries,evenifChineseexporterskepttheirexportpricesfixedinrenminbiterms.IfcheaperChineseproductscouldbefullyexplainedbyaweakerrenminbi,thenthisrelativepriceestimatewouldnotbeparticularlymeaningful.Relativeimportprices(adjustedforCNY/USDexchangerateimpact;theblacklinein

Exhibit4)removetheimpactofCNY/USDfluctuationsfromyen-denominatedrelativeimportprices(orangelineinExhibit4).

Lookingattherelativepriceindexadjustedfortheimpactofrenminbidepreciation,3Chineseproductpriceshadremainedslightlyhigherfrom2015tillthepandemic(likelyreflectingthestrongeconomyinChinaandtheimprovementinthequalityofChineseproducts),butsince2023,whenChina'seconomicdownturnbecameclear,theyhavebeenabout10%cheaper.

Inotherwords,Exhibit4suggeststhatChineseproductsimportedbyJapaninthepasttwoyearshavebecomeabout15%cheapercomparedtoproductsfromothercountries,drivenbydeterioratingsupply/demandimbalancesinChina,includingbothsluggishdomesticdemandamidaseverehousingdownturnandworseningovercapacityissuesinmanyindustries,aswellastheweakerrenminbi(against

theUSdollar),aswediscussfurtherbelow.

Exhibit4:EvenExcludingtheImpactoftheWeakerRenminbi,ImportsfromChinaHaveBecomeNearly10%CheaperintheLastTwoYearsRelativeImportPriceIndexofChineseProducts

2015=100(3mma)2015=100(3mma)

Theincreaseinrelativepricesinearly2025ismainlyduetoincreasesinspecifictypesofpowergeneratorsandvaccinesandsomebloodserums,whichtendtobevolatileinthedataset.

Source:MinistryofFinance,GoldmanSachsGlobalInvestmentResearch

3TheFX-adjustedrelativepriceindexiscalculatedasrenminbi-denominatedimportpricesfromChina

dividedbyUSdollar-denominatedimportpricesfromothercountries.Tobeprecise,weneedtoconverttheimportpricesfromothercountrieswiththeeffectiveexchangeratesandtaketheweightedaverageof

Japaneseimportvaluesbycountry.Butinthisbottom-upmodelweneedtocalculatetheeffectiveexchangeratesforeachofabout1200items,whichisprohibitive.Therefore,forthesakeofsimplicity,weconverttheimportprices(fromtherestoftheworld)usingtheCNY/USDexchangerate.

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GoldmanSachsJapanEconomicsAnalyst

WhichChineseProductsAreRelativelyCheaper?

Next,toexplorethebackgroundoftherelativelycheaperChineseproducts,weexaminewhichitemshavebecomecheaper.Exhibit5showsabreakdownofthecomparisonofimportprices(inyen)fromChinaandothercountriesinExhibit3,bymajorcategory.

Exhibit5showsthatthedegreeandtimingofpricedeclinesforChineseproductsvarywidelydependingontheitem.First,thedeclineinimportpricesofindustrialraw

materialsfromChinahasbeennoticeablesince2022.Asmentionedabove,thislikelyreflectsthedeclineinpricesofsteelandotherbuildingmaterialsalongwiththerealestateslump.

Second,importpricesofdurableconsumergoodsandgeneralmachinerywerelowerthanpricesfromothercountriesevenbeforetherealestateslump.Thiswouldindicatethathard-to-seedeflationarypressureshavespreadforotherreasonsbesidestherealestatedownturnsuchasworseningovercapacityissuesaftertheCOVID-19pandemic.Indurableconsumergoods,cheapersaleshavestoodoutforhomeappliancessuchasairconditioners,andforPCsandrelatedcomponentsingeneralmachinery.

Third,thedeclineinrelativepriceshasbeenlimitedforelectricalequipmentand

non-durableconsumergoods,andexcludingtheimpactoftheweakerrenminbi,no

particulartrendtowardcheaperproductsisevident.Thisispartlybecause,forelectricalequipment,whilepricesofstoragebatteriesandconvertershavebecomecheaper,

pricesofintegratedcircuitshavetendedtoremainrelativelyhigher,withtherelativepricechangesoftheseitemsoffsettingeachother.Fornon-durablegoods,the

relocationofproductionbasesforlow-pricedclothingoutsideofChinahaslikelycontributedtotherelativeincreaseinpricesofsomeofChinese-madeclothing,offsettingdecreasesinrelativepricesofotherproducts.

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GoldmanSachsJapanEconomicsAnalyst

Exhibit5:TheDegreeofPriceDeclinesforChineseProductsVariesWidelyDependingontheCategory

Yen-DenominatedImportPricesbyCategory

ConsumerNon-durables

IndustrialRawMaterials

2015=100

2015=100GeneralMachinery

ElectricalEquipment

2015=100

ImportedGoodsfromChina(byCategory)

Foodetc

Electrical

Consumer

non-durables

Consumerdurables

Industrialrawmaterials

General

machinery

equipment

CategoriesarebasedontheMinistryofFinance'sspecialclassificationcodetable.Thesharpriseinnon-durableconsumegoodspricesin2020rflectsthepriceincreaseandsurgeinimportsoftherfabricproducts,includingfacemasks.

Source:MinistryofFinance,GoldmanSachsGloblInvestmentResearch

Exhibit6showsthecontributiondecompositionofExhibit4(blackline:excludingtheimpactofrenminbiexchangeratefluctuations),basedontheabove.SalesofcheaperChineseproducts(declineinrelativepricesofChineseproducts)havegradually

expandedsincetheCOVID-19pandemicin2020forgeneralmachineryanddurable

consumergoods(infact,increasedsalesoflow-pricedChinese-madeelectricvehicles(EVs)andbatteriesinEuropeandotherregionshadattractedmarketattentionbythe

GoldmanSachsJapanEconomicsAnalyst

22May20258

endof2022).However,therapiddeclineinrelativepricesinthepasttwoyearsshowninExhibit4ismainlyduetolowerpricesofrawmaterialssuchassteel,andas

mentionedabove,theimpactoftherealestateslumpinChinaappearstobesignificant.

Exhibit6alsoshowsthatChinese-madeelectricalmachinerypriceshaverisenrelativelymorethanproductsfromothercountriessince2015,possiblysuggestingan

improvementinthequalityoftheformer.However,thepremiumhasbeendiminishingsincethebeginningoftheCOVID-19pandemic.

Exhibit6:Low-PricedChineseIndustrialRawMaterialsAreOneFactorContributingtoImportedDeflation

FromChina

Percentcumulativechangefrom2015

■Foods&directconsumergoods■Industrialrawmaterials■Generalmachinery

■Electricalequipment■Transportationequipment■Consumernon-durables

■Consumerdurables

Thebargraphandlinegraphdonotmatchperfectlyduetorrorsarisingfromthefirstorderapproximationanderrorsarisingfromthe"other"categoryomittedfromtheexhibit.

Source:MinistryofFinance,GoldmanSachsGlobalnvestmentResearch

WhatTriggersChina'sExportedDeflation?

TwofactorsareoftencitedforChina'sexporteddeflation:aworseningofthe

supply/demandbalancewithinChinaandtariffincreasesbytheUS(exclusionfromtheUSmarket).

Exhibit4andExhibit6showthatUStariffpolicydoesnotnecessarilytriggerthe

large-scaleexportofdeflationfromChina.WhileChina'sexportstotheUSdeclinedsignificantlyfromtheendof2018to2019duetotariffincreasesbythefirstTrumpadministration,relativeimportpricesfromChinadidnotfallsignificantlyduringthisperiod.

Toanalyzethispointmoreaccurately,welookedattheextenttowhichthedeclineinUSexportsofeachoftheapproximately1,200itemsinExhibit6until2019ledtorelativelycheaperChineseproductsinJapan.Wefoundthata10pplossintheshareofChineseproductsinUSimportsledtoa1ppdeclineintherelativepriceinExhibit6(estimated

excludingtheimpactoftheweakerrenminbi;seetheBOXattheendofthisreportforestimationdetails).ConsideringthattheaveragemarketsharelostbyChinawas6ppin

GoldmanSachsJapanEconomicsAnalyst

2019,whentheUS-Chinatariffdisputeintensified,theimpactonChina'sexporteddeflationappearstohavebeenverysmall.

Thissuggeststhatthedeclineinrelativeimportpricesinthepastfewyearsmayhavebeenmainlyduetodeterioratingsupply/demandimbalancesinChina,includingbothsluggishdomesticdemandamidaseverehousingdownturnandworsening

overcapacityissuesinmanyindustries,ratherthantheUS-Chinatariffdispute.ThisconclusionisconsistentwiththefactthatChina'sexportstotheUSaccountforlessthan3%ofChina'sGDP.

OurChinaeconomicsteamhaslowereditsChinaPPlforecastfor2025-26,indicatingdeflationarypressurefromtheChinesedomesticeconomycouldintensifyfurther.

Exhibit7:WeExpectChina'sPPItoDeclineFurtherin2025and2026

2020=100

Source:HaverAnalytics,GoldmanSachsGlobalInvestmentResearch

WillChina'sExportedDeflationChangeJapan'sUnderlyingPriceTrend?

Finally,weestimatetheimpactofthepressurefromChina'sexporteddeflationon

Japan'sunderlyingpricetrend.Exhibit8showstheimpactofa15%declineinimport

pricesfromChina(seeExhibit4)onJapan'sCPIviaitssupplychain,usinginput-outputtables.4Forcomparison,wealsoestimatedtheimpactontheCPlofa15%declineinallimportprices(≈15%yenappreciation;inthisanalysis,weassumedthatcompanies

passedon100%ofcostincreasestosalesprices,andestimatedthelong-term

cumulativeeffect.Theestimatedimpactofa15%yenappreciationontheCPlisbroadlyconsistentwiththecumulativeimpactovertwoyearsobtainedfromourtop-down

estimate.)

4Usingthe2015Input-OutputTable(184sectors),weestimatedtheindirectimpactofimportedfinishedgoodsandintermediateinputsonfinalproductpricesthroughthesupplychain.TheseimpactswerethenweightedandaveragedusingCPIweights.

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GoldmanSachsJapanEconomicsAnalyst

Exhibit8:ImpactofLowerImportPricesfromChinaonJapanCPILargerThanShareofTotalImportValue

CumulativeImpactof15%DeclineinImportPricesonNewCoreCPI(ExcludesFreshFoodandEnergy)

Source:GoldmanSachsGlobalInvestmentResearch

Exhibit8showsthattheimpactofchangesinimportpricesfromChinaontheCPlis

aboutone-thirdoftheimpactofchangesinallimportpricesontheCPI.ConsideringthatChinaaccountsfor20%oftotalvalue,despitebeingJapan'slargestimportpartner,theimpactofChineseproductpricesisrelativelylarge.Thisislikelypartlybecausethe

itemsJapanimportsfromChinaincludemanyconsumergoodsincludedintheCPI,suchasclothingandhomeappliances.

AsshowninExhibit4,Chineseproductshavebecomeabout15%cheaper

comparedtoafewyearsago,whichtranslatestoacumulativedeclineofabout

0.4%inJapan'sCPIlevel.Whilethisisnotanegligibleimpact,thepeakimpactontheyoygrowthwaslimitedtoaround0.2pp,consideringthatthepass-throughfromimportpricestotheCPItakesmorethantwoyears.Inotherwords,whileChina'sexporteddeflationinthepastfewyearshasslightlymitigatedtherapidaccelerationin

Japan'sinflationrate,ithasnotresultedindeflationarypressurestrongenoughtoundermineJapan'sunderlyingpricetrend.

OurChinaeconomicsteamexpectsafurtherdeclineinthePPlin2025-26,so

deflationarypressurefromwithinChinaislikelytocontinue.However,witheconomicpoliciessupportingdemand,theyexpectthepaceofPPIdeclinetomoderatefromthepasttwoyears(byabouthalf),whichwouldresultinanegativecontributiontoJapan'sCPlofaround0.2ppandthepeakimpactonyoygrowthoflessthan0.1pp(asthe

negativecontributionwouldbespreadacrossyears).Therefore,wearenotchangingourinflationforecastsatthistime.

Thatsaid,wenotethatifdeflationarypressurewithinChinaweretointensifyfurther

goingforwardandatthesametimetherenminbidepreciatedsignificantlyagainstothercurrencies,wewouldexpectJapan'sCPIcouldexperiencemoresignificantdeflationarypressure.Inaddition,eveniftheoverallmacroeconomicimpactofthedeflationary

pressurearerelativelysmall,theimpactonindividualindustriescouldbesignificant.

TheimpactofdeflationoriginatingfromChinaontheJapaneseeconomythuswarrants

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GoldmanSachsJapanEconomicsAnalyst

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