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Economy in Brief

by Robert Brusca Japan’s Trade Trends Tell the Story as its Current Account Surplus Rises July 11, 2007

Since November, when the pace of growth of Japan’s imports fell below that for exports, Japan’s current account surplus has jumped, springing itself out of an established down trend.

During the period from early 2005 onward the yen switched from a period of extended strength to one of weakness. In the period of rising yen strength both exports and imports were booming but then exports began to slow and even when they recovered somewhat imports overtook them driving the current account surplus steadily lower. From early 2004 through November 2006 import growth exceeded export growth. The yen’s appreciation slowed and then turned to depreciation from 2005 onward. From May to November 2005 the yen’s value shifted sharply lower as domestic conditions in Japan slowed. By November 2006 the yen had been sharply lower on Y/Y intervals for an extended period and trade flows were responding to that stimulus. Exports once again exceeded imports by late 2006, pushing the surplus sharply higher as both export and import trends turned lower. Export growth rates were still at their lowest in over a year; import growth rates were, however, at their lowest in over two-and one-half years. Currently Japan's export and import growth rates are in a period of volatility but they reasonably seem to be building a base to embark on another period of improved growth.

During this period oil prices have flared and Japan’s terms of trade has deteriorated as import prices consistently outstripped export prices. Japan like many nations has taken a hit to its standard of living and to its deteriorated terms of trade.

Japan’s exchange rate during the period has had substantial impact on developing current account patterns. The yen’s value has been a good proxy for strength in Japan’s domestic economy. When the economy gets strong the yen rises. When it weakens the yen weakens and provides a net export buffer to growth, as a weaker yen promotes exports and deters imports. Japan is now in a period when it is still weak as its rising surplus and weak yen tell you. The time-series story tells us that the yen is not weak so much because of the surplus, but rather that the yen is weak because the domestic economy is weak and that contacts imports and, in turn, boosts the surplus.

Japan Current Account Trends
  May-07 Apr-07 Mar-07 3-Mo 6-Mo 12-Mo 12 Mo Prev
Current Account in $, Mln $ 18,435 $ 19,164 $ 20,390 $ 19,330 $ 16,852 $ 15,681 $ 13,861
In Yen, 100 Mln
Overall Balance 22,264 22,792 23,909 22,988 20,068 18,495 15,873
Balance on Goods 9,634 11,076 11,891 10,867 10,053 9,053 7,724
Exports Goods % saar 4.624% -0.016% 0.652% 4.718% 10.855% 13.147% 32.655%
Imports Goods %, saar 8.356% 1.560% -8.069% 19.985% 23.146% 13.272% 32.072%
Services Balance (2,060) (2,342) (1,811) (2,071) (2,077) (1,950) (1,844)
Prices in %, SAAR
Export Prices 3.125% 1.149% -1.602% 5.705% 6.752% 7.929% 12.037%
Import Prices 4.653% 2.564% -0.637% 9.260% 15.704% 12.547% 30.026%
Memo: Yen/$ 120.77 118.93 117.26 118.99 119.21 117.89 114.48
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