Japan: Soaring trade deficit in September

The trade deficit widened to JPY1070 billion in September. This is due to increased energy imports since the closing down of the nuclear power stations and deteriorated terms of trade following the weakening of the yen. Recently, the latter has caused friction between Prime Minister Abe and the Governor of the BoJ.

Exports were surprisingly strong in September. Boosted by strong demand from China and Korea, they rose by 1.8% in volume. As a result, exports were 1.6% higher in Q3 from the previous quarter.
Nevertheless, the seasonally adjusted trade balance worsened to JPY 1070 trillion. This was mainly due to stronger imports (+4.1%), as the import content of Japanese exports has increased following the offshoring of labour-intensive activities. On the other hand, imports have been held back by subdued consumer demand following April’s VAT hike. In Q3, they rebounded by only 0.7%, following a sharp fall in Q2 (almost 7%).
The substantial deficits on the trade balance are the result of the increased dependence on imported energy following the shutdown of almost all nuclear reactors after the Tohoku earthquake and tsunami. In the short term, these deficits are not a real concern, as Japan is also the world’s largest creditor nation.
In September, the terms of trade improved modestly compared to the preceding month, thanks to the weakening of oil prices. However, viewed over a longer period, Japan suffered a considerable loss in the terms of trade. Compared with a year earlier, export prices rose by 3.7%, whereas import prices increased by 4.5%.
This is related to the depreciation of the yen, which lost 8% against the US dollar over the same period. This has increased the prices for imported energy, mainly liquefied natural gas and petroleum products. Also exports prices rose, albeit to a lesser extent, as exporters did not lower the prices substantially in dollar terms in order to gain market share.
The recent rapid depreciation of the yen, 4% against the US dollar in September on the preceding month, is a logical consequence of Japan’s very accommodative policy stance and expectations of monetary tightening in the US.

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