Friday, January 24, 2014

Japan Still Wrestling With Deficits

Don’t be surprised to see another big deficit in Japan when the external trade figures for December are released next Monday morning. Based on the available data, export growth rose to 18.9% on-year in the first 20 days of December from 17.4% in the same period of November. Import growth rose more apparently to 30.6% from 23.2%. As a result, the trade deficit in the first 20 days widened to a new record high of 1.38 trillion yen.

There are both structural and cyclical reasons to explain the sluggishness in Japan’s external trade. On the structural front, export competitiveness is weak due to the technology gap with trade rivals. The improvement in export volumes has remained slow over the past one year, despite the fall in export prices as a result of yen depreciation. On the other hand, import demand has remained rigid despite the rise in the yen-denominated import prices. This is because the dependence on energy imports has increased after the 2011 earthquake and nuclear crisis.

From a cyclical perspective, the recovery in global demand is tepid and domestic demand in Japan is relatively strong. Import demand for consumer goods, such as smartphones and other telecommunication products, has increased sharply since the December quarter.

With the trade deficit continuing to deteriorate, the current account has also slipped into deficit since the December quarter. We expect the current account balance to remain under pressure in the March quarter, before making a modest, cyclical improvement in the June quarter of 2014 along with a correction in domestic demand (following April’s sales tax hike) and a faster pickup in external demand.

A weak trade and current account balance should weigh on the yen this year. For now, the negative sentiment of the yen is receding to a degree. Investors are pushing back the expected timing of the next Bank of Japan easing move, after the central bank showed a high degree of complacency about the growth and inflation outlook at this week’s policy meeting.

Meanwhile, global risk appetite is falling due to the expectations of further tapering by the US Federal Reserve at next week’s policy meeting and the disappointment from China’s January flash purchasing managers index.