Exports rebounded strongly in March 2021, supported by the global economic recovery

Japanese exports rose by 16.1% year-on-year in March 2021, after declining by 4.5% the previous month. This has been the biggest increase since November 2017. Although this strong performance partially reflects a positive base effect – Japanese exports were hard hit by the pandemic in spring 2020 – it was nonetheless much higher than the consensus expectations, which anticipated an 11.6% growth. Broken down by destination, Japanese sales abroad increased in the large majority of countries worldwide, especially in China, its leading trading partner, where Japanese exports were very buoyant last month (+37.2% year-on-year in March).

Globally, the strong performance of Japanese exports takes place in a context of international trade improvement and of a strong rebound of the Chinese economy. Japan should also benefit from the massive recovery package launched in the United States, which aims especially at bolstering US household consumption.

Exchange rate regime under pressure

Nigeria’s economy contracted by 1.8% in 2020 due to the pandemic and the downturn in oil prices. The prospects of a rebound are slim, with growth expected at 2.5% in 2021 according to the IMF. The lack of visibility over the evolution of exchange rate regime is one of the main factors curbing growth. The Finance Minister recently declared that the government was going to use the Nafex rate, the market’s benchmark exchange rate, implying a 7.5% devaluation of the official exchange rate. The Governor of the Central Bank denied this announcement, but pressure is growing. Unifying various exchange rates is one of the conditions for unlocking financial aid, which would ease the external liquidity pressures generated by the drop-off in oil exports. Foreign reserves held steady at USD 35 bn in 2020, but thanks to a considerable tightening of foreign-currency allocations to the private sector. Moreover, current account is expected to remain in deficit in 2021, despite the upturn in oil prices. A significant currency adjustment will also be necessary to address external imbalances. There is still a spread of nearly 30% between the official and parallel exchange rates, despite two devaluations in 2020.

US banks: Reactivation of the Fed’s reverse repo facility, a factor in reducing balance sheets

On 17 March, the US Federal Reserve (Fed) raised the ceiling on transactions under its Reverse Repo Program (RRP). Each eligible counterparty can now take, on each trading day, up to USD 80 billion in Treasuries held by the Fed on repo, from a limit of USD30 billion previously. Introduced in the autumn of 2013, one year before the ending of QE3 (the Fed’s third quantitative easing programme) and two years before the beginning of the post-crisis monetary tightening, this facility saw high levels of participation by money market funds (with interest rates of between 0.01% and 0.07% up to the end of 2015) and helped establish a floor for short-term market interest rates. Against a background of abundant central bank liquidity, the programme has the effect of reducing downward pressure on short-term rates by encouraging money market funds and GSEs to “lend“ part of their cash to the Fed rather than on markets (repo, Fed Funds) where demand has dried up. Although the reactivated RRP has not so far seen much uptake (the interest rate paid is zero), it could allow, over the coming weeks, a slimming down of bank balance sheets. The penalty that certain banks are preparing to introduce on deposits from institutional clients, in a bid to reduce their balance sheets, could push this cash towards money market funds and from there, via the reactivation of the RRP, to the Fed.

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