Japan's Trade Deficit Remains But Shrinks Slightly

Japan's trade deficit remained in force in March. While it improved slightly month-to-month, it continued to hover near its largest recent deficit reading. Japan now has a string of 12 consecutive monthly deficits on its trade account. These deficits are back in force after a previous string of 22 monthly deficits over 25 consecutive months in 2018-2020. Japan, once the most dominant exporter globally with seemingly structural trade surpluses, has become a persisting-deficit country. What happened?

Japan's trade deficit shifts – explained by oil In 2008, spiking oil prices pushed Japan's trade into deficit. Then oil prices backed off and the Japan's surplus returned. In 2011, Japan was hit with a Tsunami, an earthquake, and a nuclear accident – a trifecta-storm of trouble. With world oil prices fluctuating around $100 per barrel, Japan's trade deficit plunged deeper into the red-ink zone as Japan began to import more oil. By 2012, all Japan's nuclear power stations were shuttered, in response to the natural-disaster-induced nuclear accident and Japan was back dependent on oil imports. In mid-2014, with Japan's deficit well-established, oil prices suddenly collapsed, helping to swing Japan's trade deficit back into surplus. After spot oil fell to a low in May 2016, Japan's surplus shot up. Then, again in April 2020, oil prices fell briefly below $20/barrel and Japan's deficit contracted sharply- and briefly. Since then, Japan's deficit has re-emerged and grown as oil prices have surged. The story of Japan's trade balance is largely a story of oil and Japan's experiences in shutting down its nuclear power plants. Today Japan's trade picture is still painted by the whims of global oil.

The chart (above) shows only the recent deficit behavior. Export and import growth rates each have flattened out with imports holding to higher growth than exports. As a result, the trade situation is deteriorating with the deficit is plunging again and a good part of that is because of oil prices.

The yen has been steadily weakening without much impact on trade flows so far.

Real trade flows Export and import prices both rise at a 20% annual rate over three months, but over 12 months import prices are up by a much stronger 33% compared to 13% for exports. Meanwhile, real export growth has been flat or negative while real imports have accelerated, logging a 14.6% annualized gain over three months.

Global forces buffet Japan Japan is clearly caught between various global forces. Rising oil prices drive Japan's trade into a deficit position. China's Zero-Covid policy hampers growth in Japan's largest trade partner -weakening Japan along the way. Japan has also experienced a spike in Coronavirus infections that peaked in February, but the infection rate slowdown has paused and remains at a stubborn high pace in early-April. While deaths from the virus did spike sharply early in the year, the pace of virus-caused deaths continues to drop in Japan. Still, the virus has not yet become a moot issue for Japan.

With war in Ukraine and sanctions in play as well, an increasingly tenuous global scene, Japan's outlook is touch and go. The IMF has just cut its outlook for global growth as well as its outlook for growth in Japan. Japan's growth is now placed at 2.4% down from 3.3%, previously, largely on concerns over the fallout from the Ukraine-Russia war.

Globally, a lot of risk-related themes are in place. Japan, at least, is not suffering from inflation and is spared from having all these issues in addition to the central bank raising rates. Japan still has stimulus programs in gear. It is a good reminder that while there are global issues permeating the trading system, local policies and conditions still matter. It is largely because of its own domestic policies with extra monetary stimulus on top of a fiscal program that financed at least one bridge too far that the U.S. erred too much on the side of generosity. As a result, the U.S. now faces a horrendous inflation problem. And while the Bank of Japan may not need to hike rates anytime soon, the rate hiking actions in the U.S. and those yet to come from the ECB are bound to have repercussions in Japan as well.