Japan: Trade deficit narrowed in July

Despite their rebound in July, exports have remained rather sluggish due to stagnant world trade and the offshoring of production capacity. Imports have weakened substantially in recent months due to the sharp decline in consumer spending after the consumption tax hike in April. The trade deficit only improved marginally to JPY 1024 billion.

Real exports rebounded in July after having declined in the two preceding months. Nevertheless, the numbers remain very weak. The three-month rate of change, an indicator for the underlying trend, actually worsened (-2% q/q). Compared to a year earlier, exports rose by 3.2%. Exports to the European Union were even 10.2% higher. However, this is largely due to a base effect, as exports were very weak in July 2013.
These data certainly do not signal a revival of international trade. On the contrary, the indicators are not well oriented. According to the CPB World Trade Monitor, the momentum in world trade was close to 0 in May (latest observation). Moreover, the OECD composite leading indicator (CLI) might have topped out. In particular, the decline of the CLI for China, Japan’s main trading partner, is worrying.
The weakness of exports is not only related to the stagnation in world trade, but also to the offshoring of production capacity in recent years to cheaper production sites, mainly in Asia.
Real imports declined by 1.3%, a correction after the very strong imports (+3.5%) in the previous month. The three-month rate of change remained in negative territory (-4.9%). This can be attributed to the sharp decline in consumer spending after the 3-point consumption tax hike in April.
The seasonally adjusted trade deficit inched down in July to JPY1024 billion. The huge deficit is partly related to the increase in imports of fossil fuels since the halting of the nuclear power plants after the earthquake and tsunami in March 2011. In the short-term, this should not be a problem, as Japan is world’s largest creditor.
The Japanese government hopes to reduce the trade deficit by restarting some nuclear reactors. Moreover, the government’s structural reform programme – the so-called third arrow – should strengthen Japan’s industrial base.

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