A Note on How Asia-Pacific Giants Australia, China and Japan Manage The Geopolitical Risk for Prices

Abstract

We examine how geopolitical risk-induced uncertainty affects inflation in the Asia-Pacific giants: Australia, China, and Japan. Our findings show that such uncertainty tends to drive up inflation in Australia and Japan, likely due to trade and political tensions, while it helps to reduce inflation in China. We argue that China appears to proactively lessen the impact of GPR-related uncertainties by capitalizing on its substantial economic and trade advantages. This strategy effectively buffers its economy and inflation against the full effect of these risks. As a result, economic growth may decelerate, which can soften demand for goods and services, ultimately contributing to lower inflation. Additionally, geopolitical risks impact inflation in Australia and Japan for up to six months, whereas China manages this effect within just two months. Our results remain robust across various model specifications and different proxies for geopolitical risk.