No Matter How Well Japan Recovers China Now Has A Serious Problem On Its Hands

China Hands Oil

Photo: Newscom/Zuma

It will be nearly impossible for China to escape inflationary side effects from the disaster in Japan, according to Societe Generale analyst Wei Yao.If Japan recovers well, China will be faced with an uptick in demand, creating demand-pull inflation. If Japan does not, then China will be faced with a downturn in supply, creating cost-push deflation.

From Wei Yao:

In a nutshell, if Japan experiences a prolonged period of uncertainty and sees recovery delayed, there would be a significant risk of a sizable downturn in production due to disruptions in the supply chain and cost-push inflation. However, if Japan resumes production and starts rebuilding in H2 2011 as we expect, then economic conditions beyond the very near term may eventually necessitate further Chinese policy tightening.

So either way, China has a problem. Yao suggests the PBoC stay the course, yet remain open to changing direction if things change.

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