The worsening trade deficit situation in Japan – When will it normalise?

The Japanese Finance Ministry released its January 2014 trade data during the early Asian trading hours on February 20, 2014 which showed that the country’s trade deficit has widened to Japanese Yen (JPY) 2.97 trillion (USD 27.3 billion), The latest January 2014 trade data was more than the 2.49 trillion consensus estimate being made in a poll of economists surveyed by Bloomberg News. Imports rose 25.0 percent year-on-year (yoy) and outbound shipments (exports) rose by 9.5 percent. The rise in exports was compared with the median estimate of a 12.6 percent in a poll taken by a Thomson Reuters, following a 15.3 percent gain in December 2013.

The combination of lower than expected economic growth, combined with the relative weakness of the Japanese Yen currency (USD/JPY 101.00 – 102.00), are far from what the majority of the economists surveyed by Bloomberg News of approximately USD/JPY 115.00 to 120.00, which are levels needed to be weakened in order to achieve price stability in the Japanese economy. The relative weakness of the Japanese Yen currency has also caused import prices to surge, while exports have only been seeing limited gains from the currency’s slide of more than 20.0 percent against the US Dollar in the past two years. The recent data releases including Japan’s 2013 fourth quarter Gross Domestic Product (GDP) growth of 1.0 percent versus an expected 2.8 percent, has resulted in serious doubts over the relative success of Abenomics for the past year or so. Along with the latest January 2014 trade data, combined with the upcoming consumption tax hike to 8.0 percent from the current 5.0 percent, the relative  slow progress in the outcomes of the economic reforms together with the consumption tax issues are not likely to be embraced wholeheartedly with many Japanese individuals, tourists and corporations.

Japan is currently facing a huge energy shortage stemming from the shutdown of the Fukushima Nuclear Power facilities, combined with the weak Japanese Yen currency did not help to offset the relative slowdown in the economy. The Bank of Japan (BOJ) has earlier unveiled its plan on Feb 19 following the conclusion of the two-day meeting to boost lending volumes where lending facilities worth approximately JPY 7.0 trillion from JPY 6.0 trillion, and leave its monetary base unchanged at JPY 70.0 trillion per year.

The latest trade figures for the month of January 2014 did expose the many vulnerabilities happening for a matured economy like Japan. The Prime Minister, Mr. Shinzo Abe, and his brand of economic reforms known as ‘Abenomics’ has been called into action, and tight scrutiny among the domestic voters, and foreign investors. The start of 2014 has generally not bode well for Prime Minister Abe as he and his Cabinet team seeks to revitalise the Japanese economy through the use of fiscal and structural reforms.

The January 2014 trade data is also important for the Japanese government as they embark on participating in free trade talks, namely the Trans Pacific Partnership (TPP) that could provide some improvements towards the overall trade picture. There is a greater need for the Japanese economy to start opening up industries/sectors which were previously being closed to foreign direct investments (FDI), including agriculture, intellectual property (IP) rights registry, public infrastructure developments, among others. With a relatively closed door policy in an increasingly globalised world, the Japanese government must be able to take bold steps in facilitating free trade, and not putting up obstacles that will set Japan back to its deflationary past.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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