Japan's trade surplus either widened a bit in July or narrowed noticeably, depending on how you look at it. The reported balance from the raw data diminished to ¥671 million from ¥851 million in July 2006. However, the seasonally adjusted balance inched outward to ¥823 million from ¥822 million. This compares with a seasonally adjusted balance of ¥766 million a year ago. Both exports and imports rose 0.5% in July from June. Exports were up 11.7% from the year-ago amount and imports, a substantial 16.9%.

Some observers highlighted the deterioration, noting that it was more than forecasters expected and might foretell more slowing of the Japanese economy. There was already some surprise in Q2 GDP, which saw quarter-to-quarter growth decrease to just a 0.5% annual rate from 3.2% in Q1. However, from this perspective of the ongoing trend in seasonally adjusted data, the recent string of trade figures looks fairly favorable (see first graph).

The feature of this report that caught our attention came when we started to look at petroleum imports. With prices up so sharply, these imports were up 14% from a year ago. But wait! total imports were up 16.9%. Other things must have increased considerably more than oil. Indeed. Iron ore 35%; iron and steel products, 55.7%; nonferrous ore, 59.6%; nonferrous alloys, 27.8%, chemicals, 23.8%; electrical machinery, 17.1%. Commodity prices have struck here, apparently, sticking resource-starved Japan with accelerating import costs; in some cases, such as copper, world markets have already eased, but Japan is still paying higher more, possibly for materials that were ordered some time ago. We show here another example, imports of iron and steel products with the Nikkei domestic commodity price index for steel products.

Will these facts help the Bank of Japan in its rate setting decision, due overnight tonight? They would present a two-handed argument for a rate change: high-cost imports weighing on the economy, but the accompanying prospect of a more notable resumption of inflation. We'd guess -- without any credential as a forecaster of Japanese monetary policy -- that developments in world markets, more than these dual pressures within the Japanese economy itself, would stop the BoJ from raising a rate this week.