This in turn was no doubt exacerbated by the news that not only are the big four Chinese banks skipping this week's IMF meeting in Tokyo, but the PBoC governor and the finance minister are also sitting it out, instead sending along their respective deputies. Japan's biggest carmakers extended yesterday's losses after reporting drops in China sales as rioters torched dealerships and smashed cars in protests sparked by a China-Japan territorial dispute over a group of islands. Toyota fell 1.8 percent to 2,947 yen. Honda Motor Co. slid 1.2 percent to 2,332 yen. However Nomura strategists Hiromichi Tamura, Hisao Matsuura and Jun Yunoki believe the effects of a Chinese boycott of Japanese products would likely be limited for most sectors... the key exception being automotive. Based on discussions with our analysts, we estimate that China will account for 4.9% of Japanese corporate sales in FY12 and 5.7% of net profits (Figure 1). The figures are much higher for the manufacturing sector at 8.0% and 11.4%, respectively. Applying these percentages to estimates for Russell/Nomura Large Cap Index companies gives sales in China of ¥21trn and net profits of just over ¥800bn. Moreover, boycotts that amounted to sales falling by more than half for three months would play out like this: Applying a contribution margin ratio of 20% to our sales estimate of ¥21trn gives an impact on net profits of just over ¥300bn, equivalent to only around 2% of our total net profit forecast of around ¥15trn. While the deterioration in Sino-Japanese relations is a serious problem, we do not think the impact of the boycotts will be enough to warrant a change in outlook for earnings or share prices of Japanese companies overall. The biggest direct impact is likely to be on the key consumer durables of automobiles, and we are concerned that there could be knock-on effects over the medium term. A bigger risk, they say, a sustained Chinese slowdown. Not surprising, given the margins earned in China appear to be rather larger than those earned elsewhere. Oh, and wait... As indirect effects, we note the potential for a deterioration in consumer spending in Japan via a decline in the number of Chinese tourists and a reappraisal of Japanese equities and bonds held in China (Figure 2) Just for reference, there was about 709tn yen worth of outstanding general Japanese Government bonds as of the end of June - and about 6.7 per cent, or 50.9tn yen, were held by foreigners as at the end of March. By our calculations, Chinese bondholders account for about 2.5 per cent of total outstanding JGBs. But presumably this includes the PBoC - and presumably, the PBoC is less likely to stage a diplomatic offensive via its forex reserves than via supranational meeting attendance... However, Tamura and colleagues note that a slowdown in China's economy is probably a much more concrete risk. Like many countries, Japan has benefited greatly from China's rapid growth and its sensitivity to a slowdown is estimated to be quite sizable: Since 2005, the regression sensitivity of Japan's real GDP growth rate to China's real GDP growth rate has been 1.4 and the sensitivity of recurring profit growth to Japan's real GDP growth rate has been 8. Applying these figures, we calculate that a 1ppt slowing in China's economic growth would weigh down Japanese recurring profits by around 10%. As such, a downturn in China's economy would be an almost incomparably larger problem than a Chinese boycott of Japanese goods. Related links: Senior Chinese officials snub IMF meeting - FT