Japan's Trade Flow Momentum Shrinks...but so Does Its Deficit

The sequential growth rates show exports moving from 6% growth over 12-months to falling at a 10% pace over 6-months and then reversing to post a substantial 23.6% annual rate increase over 3-months. Imports grow by only 0.1% over 12 months, fall at a 30% annual rate over 6-months and then trim that to a decline of 13.6% at an annual rate over 3-months. Both exports and imports show improvement over 3-months compared to 6-months but exports transition to a strong, positive, growth rate while imports better than half their rate of decline.

The exchange rate against the dollar has fallen on balance over 12 months by 5.6%, over 6-months it rises at a 17.6% pace but then over 3-months it's off at a 9.6% annual rate. The table lists average exchange rates over 12-months, 6-months, and 3-months but it calculates percentage changes on a point-to-point basis on those horizons. The average yen change rate has improved slightly over 3-months compared to 12 months moving up to a level of 133 from a level of 136 on its twelve-month average.

The broad-yen has fared somewhat similarly; this exchange rate measures the yen’s value against its trading partners on a trade weighted basis. The broad yen is lower by 2.7% over 12-months, strengthening at a 9.5% pace over 6-months, and weakening at a 7.7% annual rate pace over 3-months.

Export and import prices show very different behavior and on the price front we see that there's been a lot more weakness in import prices while export prices have generally clung to small positive gains. Export prices are up 1.7% over 12-months and up at a 1.6% pace over 3-months. Import prices fall by 2.9% over 12 months and fall at an 18.5% annual rate over 3-months.

As a result of these extreme price moves - and very different price moves between exports and imports - real exports and real imports behave very differently. Real exports, that are exports adjusted for inflation, rise 4.2% over 12-months, are flat over 6-months and are rising at a 21.6% annual rate over 3-months. Real imports rise 3.2% over 12-months fall at a 1.2% pace over 6-months and then rise at a 6.1% annual rate over 3-months. Exports are still much stronger than imports over 3-months but real imports over 3-months are growing at a 6.1% pace not falling at a13.5% as the nominal flow shows. Accounting for inflation changes everything.

Japan's economy in the first quarter surprised with its growth, rising by more than what had been expected. However, in the quarterly trade data it was clear that bold export and import flows were slowing down as we see in the big picture for this month. But, this month, there is an exception with exports showing a significant pickup over three months. We'll have to see if that is going to hold up when we get to the next quarter’s data.

Globally, trade is also slowing down; the manufacturing sectors of economies show more weakness than the services sectors and that is playing out in terms of weaker trade flows. Inflation continues to be high throughout most of the global economy. Japan has less of a problem with this than other G-7 countries because it has been emerging from a past-period of deflation and while its current inflation rate is over the top of its target, it is not as excessive as the inflation has been in Europe and in the US. For the most part G-7 excessive inflation pressures linger and where central banks have been raising rates to combat inflation; Japan is an exception. Markets are beginning to brace for the Federal Reserve in the US to stop raising rates. They are beginning to look ahead to a period of rate cuts, that the Fed itself mostly denies... The ECB still has more rate hiking ahead of it because its inflation rate is still quite a bit excessive compared to its target although there is clear evidence of headline inflation decelerating there. And, in Japan, the outlook for policy continues to be unknown as the new central bank governor has been content to continue with the policies that are in place including yield curve control, but these policies have resulted in substantial purchases and ownership by the central bank of government bonds in Japan.

Globally the inflation outlook is still unclear because the war in Ukraine continues and Russia's alliance with OPEC, in the OPEC-plus agreement, last decided to cut-back output to try to firm-up oil prices in the face of weakening global growth. So, we can't be quite sure what policies OPEC has planned for the future or what resolve it has to implement those policies. But with the US and with Europe still focused on ‘green’ policies it has been hard for them to unlock new sources of cheap energy to offset high prices from OPEC the risk to inflation from oil, as well as other sources, remains in play.