Japan: Exports, Imports and Inflation

October 22, 2013

Japan’s Abenomics enters into another round of debate this week as export data was released showing stronger exports overall, but it also reveals widening trade surplus despite the recent actions of the Bank of Japan (BoJ) and the government. So what is next for the ailing economy?

In September, Japan’s exports rose 11.5% compared to last year, while imports rose 16.5%. This led to a very wide trade deficit of 932.1bn Yen. This has been seen as a slight improvement compared to the past month of August which recorded a deficit of 962.8bn Yen.

Export volumes were lifted by heavy machinery and industrial exports, the mainstay of Japan’s export economy. However, electronics were much weaker than last month. This growth has been in line with what was forecast, what was not expected was the jump in imports, as trading partners who hungered Japan’s exports quickly became importers to Japan.

Import volumes lifted heavily; this was led in part by growth in electronic and semiconductor components as well as telecom devices. However, fuel imports still make up 1/3rd of the actual imports, putting more pressure on the economy of Japan.

So what can we make of this data? As trade balance data shows us, Japan’s jump for inflation by heavily devaluing the Yen has painful consequences, with their reliance on nuclear power weaker than in the past and the country relying on fuel imports.

Contributing further to this pain is the rush for inflation, as fuel imports are the main benefactor causing inflation to actually happen in Japan in line with food imports as well. So with inflation data being heavily reliant on imports, one wonders how Japan can actively manage inflation and cause it to happen, when it has been led solely in part to a dropping Yen.

The next step after this is realised, is further action by the markets and by policy makers from Japan. It is likely to help ease the requirement of increasing wages to help workers. In an economy whereby policy makers are to induce further aggressive heavy stimulus, extra liquidity in the marketplace will help firms absorb lifting wages, as their own costs of goods increase. Either way, the BoJ will be forced to act by markets and a weaker Yen may be required further to help keep inflation going.

While export and imports might certainly have increased, the value of imports still outweigh exports and will lead to problems for the Japanese economy. These problems are likely to carry on for some time. Further weakening of the Yen via heavy stimulus looks to be the next step to keep the dream of inflation alive in Japan.

Written by Alex Gurr, Currency Analyst from Blackwell Global.

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