Trade balance to start weakening - Nomura

Analysts at Nomura explained that the Japanese trade balance is expected to start weakening.

Key Quotes:

"Consensus (Bloomberg) forecasts the seasonally adjusted trade balance scheduled overnight to decline to JPY209.9bn in December from JPY536.1bn the previous month. November’s surplus was the largest since April 2010, but the oil price recovery and the recent JPY weakness are likely to worsen the Japanese trade balance again.

In fact, our economists expect a more significant deterioration in the trade balance, forecasting the first trade deficit (-JPY128.4bn) since October 2015. The initial reaction of USD/JPY to Japan’s trade balance has been limited recently.

JPY tended to react positively (USD/JPY depreciation) to positive surprises in Japanese trade balance from 2009 to 2012 when the balance turned from surplus to deficit. However, since around 2014, JPY has tended to depreciate (USD/JPY appreciation) when the trade balance has improved, although the size of reaction has been small. USD/JPY has been correlated strongly with the rate differential, which likely weakens USD/JPY reaction to Japan’s trade balance for the time being, even though the balance is likely to be deteriorating.

The trade balance may gradually attract more market interest though, as protectionism and trade war may become the important market themes this year.

President Trump is reported to have suggested that US-Japan vehicle trade has been unfair (Reuters), and he has signed an executive action to withdraw from the TPP. The US government may focus more on the bilateral trade balance than the total trade balance of Japan, but the deterioration in the trade balance could weaken JPY appreciation pressure from trade talks, while the deterioration may also be JPY negative from a flow perspective."