JAPAN’S economy is at risk from price pressures from its two largest trading partners, according to the chief of the country’s banking association.

The threat from China is deflation, said Akihiro Fukutome, chairman of Japanese Bankers Association. From the US, he sees inflation picking up if Donald Trump returns to office and implements his policies.

Japan is highly dependent on trade and therefore sensitive to economic influence from other countries. Exports of cut-rate steel and chemicals from China can undercut domestic manufacturers, while tax cuts in the US could potentially spur higher prices there.

“The biggest risk is the resurgence of inflation (in the US),” said Fukutome. “A rise in long-term yield is my worst-case scenario, though possibility is still low.”

The Bank of Japan’s (BOJ) recent decision to scrap negative rates and to normalise monetary policy is unlikely to cause major disruptions to the country’s economy and markets, as the move had been well priced in, he said.

Still, with the BOJ tightening and the US Federal Reserve forecast to start cutting rates later this year, he sees potential for market disruptions stemming from the opposite directions.

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“I have never seen anything like this before,” said Fukutome. “Depending on the timing (of policy decisions), it could cause volatility in currency, stock and other markets. I think it is a big risk factor.”

Fukutome is CEO of Sumitomo Mitsui Banking, a core unit of Sumitomo Mitsui Financial Group. He became the chairman of the banking association this month. The position is annually rotated among Japan’s three biggest banks.

Fukutome also said Japanese banks want greater flexibility in providing equity funding to startups.

Traditionally, the country’s banks have been hesitant on lending to startups since they do not have a track record to establish their creditworthiness. That has shifted and they are expanding finance to these companies in recent years as the government calls on financial institutions to back new ventures.

Current rules allow banks to hold a stake beyond 5 per cent in startups less than 10 years old through investment subsidiaries. Many promising ones, especially those in the field of “deep tech”, are older than that, because their enterprises tend to take more time to become a viable business given a long research-and-development phase, Fukutome said.

“We have been helping startups with debt, but there are very few suppliers of equity finance in Japan,” he said. “We want a little bit more of deregulation here, otherwise we cannot contribute as much as we want.”

In Japan, except for startups and other exceptions, banks are banned from owning a stake bigger than 5 per cent in a company. BLOOMBERG