Japan trade deficit hits record $17.4 bln

Japan’s trade deficit widened to a record $17.4 billion in January, as imports outpaced exports yet again. Imports grew by 7.3 percent year-onyear in January, compared to the previous month’s 1.9 percent and have been witnessing a growth spurt since the onset of the radical policy reforms put forward by the nation’s new Prime Minister Shinzo Abe, in November. During the past three months, Abe’s determination to lift the economy out of deflation has depreciated the yen by more than 13 percent against the US dollar, and its weakness has in turn driven up the value of energy imports. Having said that, the weakness of the yen did improve Japan’s competitiveness. Exports rebounded, accelerated and grew more-than-expected, by 6.4 percent year-on-year in January, its first rise in eight months. The record trade deficit however has sparked some con- cerns about whether it may prompt the prime minister to back track on his aggressive policy stance, especially if the rise in exports fails to gradually offset the rise in imports. Imports are forecasted to remain high due to the nation’s reliance on energy from abroad, as its nuclear power stations remain idle following the Fukushima disaster back in March of 2011.

The trade balance is the difference in value between a country’s total exports and imports. When a country is in a trade deficit, then it is a net importer: its imports are outweighing its exports in value. Over ten years up to 2010, half of Japan’s real GDP growth was accounted for by net exports. The trade balance itself is a component of the current account balance. The current account balance records the purchase and sale of goods and services and is comprised of the trade balance, net income from abroad (repatriated profits, dividends, interest payments) and net current transfers (remittances, pensions, grants, international aid). Japan has been running a current account surplus for decades. However, if the trade deficit persists, then the fate of the current account surplus will depend on foreign income from abroad. Japan’s trade balance is also relevant as a leading indi- cator of the global economy. Case in point, Goldman Sachs highlighted a 90 percent correlation between its Global Leading Indicator (GLI) and Japan’s trade balance, with a three month lead. In other words, a deteriorating trade balance in Japan could be indicative of a further decline in global momentum in the medium term.

The record trade deficit should not lead to doubts about Abe’s radical monetary policies just yet. The trade balance typically tends to worsen around the Lunar New Year holiday, which slows production and sales, yet the export sector has undeniably improved, and better than expected at that. Whether the export sector will continue to improve will be determined by three key factors: the health of the European Union (EU), the nation’s tensions with China and the strength of the yen. Taking each of these factors in turn: the EU is still one of Japan’s biggest export markets. Mired with debt, demand for Japanese exports will remain low. But the recovery, albeit fragile, in the US economy, is helping to offset Europe’s lackluster demand. Although exports to China have been dire over the territorial dispute in the East China Sea, both nations are beginning to resolve their differences and tensions appear to be subsiding. Thirdly, the strength of the yen will ultimately depend on whether Abe will maintain his aggressive stance on the policy front. Under growing pressure from Mr. Abe to beat deflation, the Bank of Japan (BOJ) agreed to double its inflation target to 2 percent and commit to an open-ended asset purchase program from 2014 onwards. Deflation has plagued the economy for years on end that consumer expectations of falling prices have become deeply embedded, discouraging consumption. Thus, if the prime minister remains determined to overcome it, expect the yen to stay weak. Whilst there are lingering worries about whether the next BOJ governor may take a less aggressive stance on the monetary policy front, it is unlikely that the prime minister will take on someone with less radical reforms in mind. All in all, Japan will go through a very policy-active year in 2013.