Check out what happens to Japan's exports amid China dispute

If exports to China decrease 5%, Japan's GDP growth will be slashed by 0.1ppt.

Accordng to DBS, as pointed out in this space before, export weakness is the main downside risk to the Japanese economy. Exports and industrial production both fell in MoM terms in July. August exports will likely remain discouraging, in line with the sluggish trade data seen in other parts of North Asia.

Here's more from DBS:

The official forecast of industrial production points to a stagnant production growth in August and a contraction in September, probably reflecting the business sector’s expectations about a worsening of external demand in the coming months. While the recent QE measures taken by the Fed and the ECB have boosted the financial market sentiment, when and how well the global real economy will recover remains an open question.

Moreover, exports demand from China looks set to deteriorate further in the near term. The tensions with China over the disputed island have resulted in large scale anti-Japan demonstrations in major Chinese cities in recent days. Exports of consumer goods to China would be hit directly.

As the sales of Japanese branded consumer products (such as electronics and cars) fall in China, the China-based Japanese companies will also cut their imports of industrial components/parts from Japan. Exports to China account for about 20% of Japan’s total exports.

If exports to China decrease 5% (QoQ), Japan’s GDP growth can be cut by 0.1ppt. As GDP growth is low to start with (0.2% QoQ sa in 2Q), a small reduction could drag down growth into the negative territory.

In addition, a temporary slowdown in services exports also appears inevitable, as a rising number of Chinese citizens boycott traveling to Japan. Chinese tourists as a percentage of total tourist arrivals in Japan have risen to more than 16% since 2010, thanks to the relaxation of visa policy over the past few years.

A reversal in this upward trend will certainly bode ill for Japan’s tourism sector, which has just recovered from the 2011 earthquake and tsunami disasters.