Japan's Imports Rise Strongly; Exports Grow But Lag Imports

Japan's trade deficit widened in July rising to ¥2.1 trillion from ¥1.95 trillion in June. Goods exports rose by 2.1% in July; goods imports rose by 3.5%. Imports continue to outpace exports over various horizons from 12-months and over shorter periods.

Growth rates show imports at an increase of 51% over 12 months, rising at a 59.9% annual rate over six months and at a 66.2% annual rate over three months. By comparison, exports are up at a 21.2% annual rate over 12 months, a 28% annual rate over six months and at a 40.4% annual rate over three months.

Imports are rising strongly on the back of rising energy prices but also on the back of a weakening yen that increases the import bill. Of course, that increase also includes energy prices because not only are the dollar prices for energy high but when translated into yen at the weaker yen exchange rate the cost of energy rises again.

Ironically, exports are doing better; the export growth rate is 21% over six months moving up to a 40% annual rate over three months. The weaker yen will provide a great opportunity to increase Japanese exports in nominal terms. When the yen weakens, against the dollar, it causes the dollar price of Japanese exports to fall and that should increase exports. At the same time, Japanese exporters can take some of that decline of the yen into a price increase and actually raise their yen prices while lowering their dollar prices and getting a double kick in export value. This, in fact, might be starting to happen but because import prices are so strong you still don't see it in the trade balance.

This is not unusual because of something known as the J-curve phenomenon. The J-curve phenomenon refers to the fact that when a currency changes its value the price effects go through first while the volume effects occur later. In this case when the yen gets weaker, import prices in Japan will go up quickly. In time, Japanese consumers may decide that goods are more expensive, and they may buy fewer of them. That will cause import volumes to recede blunting the impact on import value from the price rise. On the export side, the weaker yen should encourage foreigners to purchase more Japanese products, but that volume effect takes some time and in the meantime there is a bigger increase in import value than in export value that widens the trade deficit which gets worse before it gets better.

The table shows that over 12 months the yen is averaging ¥119.6 against the dollar, whereas over three months it's at ¥133.2. In July it has slipped further to ¥136.7. Over 12 months – point-to-point – the yen has fallen by 24% against the dollar whereas over three months it's falling at a 37% annual rate, a slightly faster pace. The broad yen index that figures the yen value against Japan's most important trade partners, broadly shows the yen is weaker over 12 months, at a -16.9% annual rate. Over three months it's falling at about the same pace, at a -17% annual rate.

The price data showed that export prices are rising by 19% over 12 months and at a 20% pace over three months. Import prices are up 47.9% over 12 months and at a 57.6% annual rate over three months. Import prices are really killing Japanese imports and the trade balance.

J-Curve in action We can see some of the impacts of this J curve effect by looking at these price and volume trends together. Real exports, for example, are up only 1.9% over 12 months, but they are rising at a 17% annual rate over three months; exports have really picked up their pace in real terms. On the other hand, imports remain relatively flat; they are up by 2.1% over 12 months and up at just a 5.4% annual rate over three months. In the face of sharply higher import prices, import volumes are starting to show some restraint. On the other hand, in the face of weakening yen we see export volumes beginning to ramp up a hopeful sign for the trade balance in the future. This month there were some increases in Japanese exports of automobiles and semiconductor products.

Apart from the exchange rate effects, Japan also has issues related to its trade partners. Its largest trade partner is China; its second largest trade partner is the United States. China's economy has been struggling in the face of its zero COVID objective as rolling lockdowns are a policy that goal has engendered. There also is an ongoing property problem that is straining the economy and creating some financial market distress.

Looking ahead these problems aren't getting better and there are signs that China's economy is weakening and that COVID is spreading. As for Japan's trade with the United States, consumer spending in the U.S. has been weakening and in the first and second quarters the economy posted negative GDP results setting a very difficult market for foreign exporters. So even now, as the yen has weakened giving Japan a competitive advantage. It will be selling more competitively into a market where demand is going to be more restrained. Global economic conditions remain difficult. The European central banks and the Fed in the U.S. are raising interest rates to restrain inflation and they will also be restraining growth. That in turn will restrain Japan's export markets.