Japan’s Trade Trends Wither…to the Delight of GDP

Japan's trade trends continue to show deterioration. The early press reports on Japan's trade picture have focused on weak Japanese exports and how this weakness is going to constrain domestic growth. But such analysis dwells on only half of the picture in trade.

International trade and the theory of relativity The international contribution to GDP comes from the current account and with some small adjustments it becomes something called GDP net exports. This measure is the difference between exports and imports- as always expressed in real terms since we are always interested in real GDP growth. When exports exceed imports, there's a boost to GDP from trade; if imports exceed exports, there's a subtraction from GDP. It is not just exports that matter, or just imports; it’s one flow relative to the other. They both matter. Like any other flow quarter-to-quarter, the impact of the flow, in this case the net flow, on GDP, depends on the change in this balance or net. The second quarter in Japan saw that trade made an enormous impact on GDP; in fact, trade accounted for all the growth in GDP in the second quarter by itself. As we look at Japanese trade trends, July is starting the third quarter with the same forces as those in gear during the second quarter.

Strength though weakness… Seasonally adjusted exports were up by 0.5% over 12 months and that's a weak showing. However, imports are falling by 14.7%. That means imports are weaker than exports and it implies that the contribution from imports to GDP is going to be larger than the contribution of exports to GDP. Since imports are a subtraction from GDP, the weaker import number implies a positive kick to GDP, even as exports slow. Of course, we're very early in the third quarter and we're going to be concerned with the year-over-year change but what happens in the third quarter compared to the second quarter. In July itself, exports and imports each rose by 2% marking a sort of standoff in terms of their impact on GDP. But I simply do not see the rationale for being worried about Japanese growth because Japanese exports are weak. Global trade is weak. It looks like Japan is having weaker imports than exports which should be a positive development for Japan's GDP accounts.

Foreign exchange Japan's exchange rate against the dollar has deteriorated only slightly; based on year-over-year changes it's only 3.1% weaker. The real broad exchange rate that is trade weighted and price adjusted yen against all of Japan's trading partners is weaker by only 1.7% over the past 12 months. There is some evidence of growing weakness in the exchange grade from 12-months to 6-months to 3-months.

Export and import yen prices and volumes Export and import prices show export prices down 0.2% over 12 months. Import prices are down by 14.2% over 12 months. This means a lot of the weakness in imports has come on the price side rather than on the volume side. However, the volume statistics echo what we see in the nominal data as well with real exports growing by 0.8% over 12 months and real imports falling by 0.5%. Over 3 months exports fell at a 0.3% annual rate in real terms while imports fell at a 5.1% annual rate in real terms.

Trade is about relativity The important thing to remember when assessing trade flows is that trade is about relativity. It's not about Japan’s prices; it's about Japan's prices compared to foreign prices. It's not about Japan's growth; it’s about Japan's growth compared to foreign growth. It's not about Japan's export growth; it's about Japan's export growth compared to its import growth… and so on.

Last quarter showed the trade account taking over and dominating GDP as Japan posted a GDP growth number above 6% - an unexpected result. This quarter is off to a slower start, but the balance on goods trade in July is roughly similar to what it was in June. But it's quite clear from the graphic at the top that the deficits continue to be on a shrinking trend. So long as that is the case, the trade account is going to boost Japanese GDP, not subtract from it.