Japan’s Deficit Stabilizes as Exports and Imports Plunge

Japan's trade deficit in December was at 1.7 trillion yen, approximately the same as in November, down from the level of 2.4 trillion in October. Exports fell in December at a sharp 3.5% pace while imports fell at an equally sharp 3.4% pace. In November exports fell by 1.4% while imports fell by 6.3%. Trade flows have suddenly contracted sharply.

Sequential growth rates for exports show a 12.5% annual growth rate in nominal yen terms over 12 months that falls to a 1.4% growth rate over six months and degenerates to a -12.5% growth rate over three months. Imports are up at a 26.4% annual rate on the same basis over 12 months then decline at a 2.5% annual rate over six months and then decline at a 19.2% annual rate over three months. Much of this is on the back of changes in oil prices.

The exchange rate has also been on the move as the yen has fallen 18.5% against the dollar over 12 months and 11.5% on a broad trade weighted basis over the same period. Over three months, however, the yen is rising at a 21% annual rate against the dollar and an 18% annual rate on a broad trade-weighted basis.

Export prices are up by 12.2% over 12 months then they fall at a 2% annual rate over six months and fall at a 13% annual rate over three months. Import prices are up by 23% over 12 months, fall at a 7.1% annual rate over six months and then fall at a 32.7% annual rate over three months.

Trade volumes show real exports up by 0.2% over 12 months at a 3.4% agreed over six months and by 0.8% at an annual rate over three months. Exports are clinging to growth, but there's not much of it. Real imports on the other hand have been strong; they rise at a 2.7% annual rate over 12 months at a 4.9% annual rate over six months and at a 20% annual rate over three months.

Japan's trade results show that both exports and imports are falling off sharply in nominal terms over the last several months. And as this has happened, the Japanese trade deficit has bottomed and began to improve but ever so slightly. It could be that the past weakening the yen is having some impact on the trade balance and if that's what's going on then it won't be very long-lived because the yen has been making a comeback although it still has not come back to make up for all its weakness.

The best fundamental for Japanese trade is the news that China has moved off its zero COVID policy and in seeking to restore normal growth since China is the most important trade partner for Japan. A better growth rate in China will help Japan’s trade picture to improve more than a turnaround in any other country globally. China is Japan’s most important trade partner with the U.S. in second place.

Japan's monetary policy is still trying to sort out where its greater risks are. After fiddling with its target early in the year the Bank in Japan has settled down and did not make any other alteration to its monetary policy in January, although markets had anticipated something… Bank of Japan Governor Haruhiko Kuroda is cruising into the end of his term in office and soon there will be a new head of Japan’s central bank appointed and then we'll see if the policies of Kuroda are sustained, modified, or reversed. But for now, although some had looked for Kuroda himself to begin to make further changes in his policy of yield curve control that simply did not happen in January. Markets are still wary of what the future has to offer for Japan. The outlook for growth, inflation, and central bank policy, is still up in the air.