Japan GDP in Record Drop As Trade Collapses

Japan is being led lower by its trade dependence as much as any large developed country. Exports are lower at a 70% annual rate Q/Q and by 37% Yr/Yr. Imports meanwhile are dropping at a lesser but still outsized 47% annual rate in Q1 and are off by nearly 15% Yr/Yr.

Japan’s import to GDP ratio has fallen by 6.2% Yr/Yr less than in the US where that ratio has fallen by a huge 14%. But exports are a much larger part of Japan’s economy, so the drop has hurt it more. Import-to-GDP ratios have fallen sharply among the large developed economies in general.

Japan’s GDP drop at 15.2% Q/Q saar outstrips Germany’s drop of 14.4% and its Yr/Yr decline of 9.1% exceeds Germany’s 6.9%. It is no coincidence that these large set backs -- the largest among G-7 countries by a long shot -- befall two of the most highly efficient global economies that also are highly dependent on trade.

Trade tends to be a highly income elastic GDP component. Export and import growth rates are pro-cyclical. In good times trade dependence will help to pump-up GDP growth, but in bad times – recessions - it will drag it down as it is now. In the US, since it is a trade deficit county, the trade setback actually boosts GDP. What we are seeing in Japan is the mirror image of that relationship.

In Japan domestic demand is down by less than GDP itself. But housing and business capital formation are each down at a more rapid pace than GDP. Japan will need world trade to recover before it can mend its economy. Its economic structure means that some of its required fixing it out of its control.