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Here's why Japan's trade deficit will persist in 2013
February figures hit a new record high of JPY 1.1trn.
According to DBS, on trade balance, the impact of a weak yen is far less positive. Trade deficit hit a new record high of JPY 1.1trn (sa) in February due to strong import growth of 12.0% YoY.
Here's more:
As trade balance started with a deficit position, the JPY-denominated trade deficit was amplified as a result of JPY depreciation, with the increase in import costs outweighing the increase in export earnings.
Going forward, a recovery in export volumes and slowdown in import volumes should help to improve trade balance. That said, adjustment of import volumes would be only slow and modest, taking into account the price inelasticity of energy import demand (30% of Japan’s total imports).
As such, we expect trade deficit to persist through the rest of this year.
The positive impact of JPY depreciation on export earnings is already in sight. Although export value reported a -2.8% YoY decline in February, this was in large due to seasonal factors. Exports to China fell most sharply (-15.8%) last month, indicating the Chinese New Year effects were at play.
In fact, the translation effects of JPY depreciation have already kicked in. We calculate that the USD-denominated export value fell more sharply by -18.0% YoY in February. If without the weakening ofthe yen, export earningsin local currency terms would have also plunged by a similar magnitude.
From the growth perspective, what matters more isthe impact ofJPY depreciation on export volumes. In principle, a weaker yen should boost the volumes
of exports, asJapanese exporters could lowerthe USD-denominated export prices and lift theirinternational marketshares.
This adjustment progress takes time. Real exportsindex registered +2.2% MoM sa in January,the first positive growth over eight consecutive months. More notable signs of a recovery in real exports are expected to be seen from 2Q onwards.
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