China key to Japan's recovery

Japanese Prime Minister Shinzo Abe's Yasukuni Shrine visit has dealt a blow to the recovering trade between the world's second and third largest economies. According to the Chinese Ministry of Commerce on Tuesday, China-Japan trade in 2013 reached $312.55 billion, a 5.1 percent year-on-year drop. While China's exports to Japan decreased by 0.9 percent to $150.28 billion, its imports from Japan were $162.28 billion, witnessing a drastic 8.7 percent decrease.

Besides other factors, Abe's hawkish policies have played a big role in the trade decline, which will eventually curb Abe's efforts to revive Japan's economy.

Abe has implemented a bold economic policy, known as "Abenomics", after he was sworn in as the prime minister for the second time in late 2012. Abenomics is believed to have helped the Japanese economy expand at a revised annual rate of 4.1 percent and 3.8 percent in the first and second quarters of 2013. But the growth in the third quarter dropped to a revised rate of 1.1 percent, down from the initial reading of 1.9 percent, creating worries over the effectiveness of Abenomics in sustaining Japan's growth momentum.

Japan's core consumer price index reading, which excludes the volatile fresh food prices, jumped slightly above zero in September and rose to a five-year high of 1.2 percent year-on-year in November. The country also has overcome its years-long deflation thanks to factors such as higher prices of energy and imported goods, as well as imported inflation that has moved from upstream to downstream industries all the way to the final product. So Japan's inflation is likely to stay above 1 percent in the coming months and its upward momentum will depend on the depreciation of the yen.

The yen has already weakened - it was 100 to 105 against the US dollar in December. If it drops further in the first half of 2014 and approaches the 110-to-1 mark against the dollar, Japan could have a 1.5 percent year-on-year increase in inflation by the middle of 2014 and hit the 2 percent mark by the end of the year.

According to the Japanese Ministry of Finance, the country's exports in November 2013 increased by 18.4 percent year-on-year, the ninth consecutive increase last year. The items that saw the biggest export gain include automobiles, general machinery, electronic and electrical goods, and chemical products. Transport equipment exports, for example, grew by 25.6 percent in November, and while their supply to the United States and the European Union grew by 30.5 percent and 20.8 percent, they recorded a 150 percent increase in the Chinese market.