Japan: trade deficit hits a record
Published 27 October 2014
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This article is no longer current. Please refer to Overseas Business Risk – Japan
Summary
Japan’s trade deficit for the first half (H1) of FY2014 was its largest ever, due largely to continuing demand for fuel imports. This trade imbalance will remain for the foreseeable future without major nuclear restarts. However, external surpluses should remain with ample income earned from overseas investments.
Detail
Japan’s trade balance was 5.43 trillion Yen (£32bn) in deficit in H1 FY2014 (up from 4.996 trillion Yen in the same period last year). This was the largest H1 deficit since 1979 when comparable data became available. Fuel imports such as Liquid Natural Gas (LNG) were mainly responsible for imports increasing 2.5% compared to a year ago (YOY). Exports during the period rose 1.7% YOY, led by strong exports of metal processing machinery and cars.
Demand from Asia and Europe supported exports growth during H1. Meanwhile, Japan imported more YOY especially from Asia, the USA and Europe. UK exports to Japan rose 5.3% over the period to 345.6bn Yen (£2bn). Japan’s exports to UK increased 11.5% YOY to 593.8bn Yen (£3.4bn), resulting in a 21.4% YOY higher UK trade deficit with Japan.
The trade deficit in September was 953.3bn Yen (£5.5bn), larger by 185bn Yen (£1.1bn) than consensus expectations. While exports increased by 6.9% YOY, supported by strong demand for cars and iron-steel, imports were driven up by 6.2% led by LNG and communications equipment. On a volume basis, exports and imports rose 2.8% YOY and 3.0% YOY respectively. Over the month, UK exports to Japan were up 2.8% to 58bn Yen (£336mil).
Comment
Compared to H1 in 2010, (a year before the March 2011 nuclear incidents), fuel imports in the latest H1 period were up 4.4 trillion Yen (£26bn) at a time when the price of oil was much higher (around $80 a barrel back in 2010). The demand for fuel due to nuclear shutdowns has mainly driven Japan’s trade balance into its worst ever trade deficit. This will continue as very few nuclear restarts are expected in the foreseeable future.
However, many commentators do not see this mounting trade deficit meaningfully harming Japan’s economy and financial markets for at least the short-to-medium term period. Japan has the world’s largest net foreign assets of 325 trillion Yen (about 65% of GDP) and its outward foreign direct investment is still expanding despite the weaker Yen. Thus, income earned overseas (about 15 trillion Yen [£87bn] in 2013) more than offsets this record trade deficit, resulting in a continuous external surplus (i.e. current account surplus).
Some warn that a sustainable current account deficit (or market perception thereof) might become a trigger for a sharp rise in Japan’s market interest rates, as Japan would need to be more dependent upon foreign capital for its debt issuance. In turn this would make the Government efforts for fiscal consolidation much harder. But this remains hypothetical for now.
Disclaimer
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