In Abe-yance

Why trade still holds the key to Japan’s growth  |  The decision by the Bank of Japan to boost the Japanese economy by around $712bn at the end of October was Quantitative Easing (QE) on such as scale that it took markets by surprise. It signals the determination of Japan’s policy makers to “do whatever it takes” to boost Japan’s sluggish economy, to increase the value of the Yen against the US Dollar and to prevent latent deflationary pressures from taking hold yet again. Boosting the Yen will import some inflation while it is hoped the QE will halt the contraction of Japan’s economy of 7.1% seen in Q2 this year.

Shinzo Abe is now faced with a decision: does he raise the sales tax introduced in April 2014 from 8% to 10%? That there should even be a question around this is remarkable.

As Figure 1 shows, Japan’s imports were not impacted immediately by the sales tax and in fact rose between April 2014 and September 2014. However, we are forecasting a marked drop in imports from October, which, even with a brief spike in March 2015, will still represent a negative trend to the end of Q1. There is little sense in damaging what is at best a fragile recovery and this policy should be put on hold for the time being.




Figure 1  |  Monthly value of Japanese imports (USDbn) versus JPY-USD spot, June 2001-September 2014
Source  |  DeltaMetrics 2014, Bloomberg (currency data)


Japan’s imports since April alongside a marked depreciation in the value of the Yen point to one of the persistent paradoxes of Abenomics: why has trade failed to pull Japan out of its economic torpor?

Delta Economics is of the view that, since the Fukushima disaster in 2011, Japan’s policy makers have had relatively little influence over trade through manipulation of the Yen’s value. This is quite clear from Figure 2, which shows Japanese Terms of Trade in relation to the value of the Yen against the US Dollar.



Figure 2  |  Japan’s terms of trade (value of exports in terms of value of imports) in relation to Yen per USD Last Price Monthly, June 2001-September 2014
Source  |  Delta Economics analysis


The depreciation in the Yen against the Dollar pre-dates Abenomics by six months and, despite a mild pick-up in the terms of trade between July 2012 and April 2013, the impact of the currency depreciation since has been, perversely, for the terms of trade to deteriorate further. In other words, export values have not increased relative to import values, which might have been the result of an expected boost to exports from a currency devaluation.

This has less to do with fact that the relationship between the currency and trade has broken down (the so-called J-curve effect) and more to do with the fact that Japan’s dependency on energy imports has increased in the wake of the Fukushima disaster. Japan’s terms of trade deteriorated by nearly 9% between the disaster in March 2011 and the real start of currency depreciation in July 2012; over the same period, energy imports rose by nearly 14% (Figure 3).



Figure 3  |  Monthly value of Japanese imports (total and energy), June 2001- June 2015
Source  |  DeltaMetrics 2014


The figure shows two things: first, Japanese imports generally have fallen in value since the immediate post-crisis recovery and, in real terms will only be at the value they were immediately pre-crisis by June 2015. Insofar as Japan’s imports reflect its demand, this is a sharp reminder of the fact that the economy is still sluggish. Second, although energy imports in 2014 represent nearly 37% of Japan’s imports compared to just under 30% at the end of 2010, the fact that growth is also forecast to be sluggish into Q2 2015 suggests that industrial as well as consumer demand is likely to remain flat for some time.



Figure 4  |  Japanese trade – full of paradoxes
Source  |  DeltaMetrics 2014


Japan’s demand is likely to improve slightly in 2015 as witnessed by the mild pick up in imports that we are predicting for 2015. Exports, which have been sluggish globally as well as in Japan, will pick up. Electronics exports, for example, may well recover from the contraction in growth of 3% this year to flat or slightly negative growth in 2015. Similarly we are predicting a slight slow-down in the contraction of automotive exports in 2015.

The fact that flagship sectors, like cars and electronics are likely to see negative trade growth even into next year may suggest that Japan’s economy itself is no longer competitive. However, this is too simplistic. In an era of global supply chains, it is a mistake to suggest that the decline in exports represent the declining competitiveness of a whole country: global corporations locate globally to take advantage of competitive strengths elsewhere and Japan’s companies do this as much as their German, American or South Korean counterparts.

In a sense, then, it is imports that are of more interest because they illustrate some of the underlying patterns of demand within an economy. Japan’s policy makers have had their foot on the economic accelerator and brake at the same time, arguably since the Fukushima crisis rather than the beginning of Abenomics. Deliberate currency depreciation and fiscal stimulus alongside a sales tax has done little to boost exports or stimulate domestic demand. And because of the greater energy component of imports, falling oil prices now mean that Japan will be as prone to the disinflationary pressures seen in Europe and Asia. There is little that further currency depreciation can do to prevent this and while falling energy prices may help, if every country has falling energy prices, then it does little to boost comparative advantage.

Similarly, increasing the sales tax by a further 2% now may not have much of an effect on an already fragile start into 2015 that Delta Economics sees. It could well have a further negative effect in Q2 2015 and this is something to be avoided at all costs.