Yen-Based Japan Exports Are Cut Nearly In Half

In a stunning blow to a reeling economy Japan reports that its exports are lower in January compared to one year ago by 45% - nearly halving of the flow. There are several components to this drop. One is the yen that has risen; that will translate foreign currency-based Japan exports into a smaller value in terms of yen. The yen rose to 90.12/$ in January compared to its level of 101.91/$ a year ago, a yen rise of 16%. Another aspect of the drop in value is that yen-based export prices have fallen Year over year. Japan export prices fell by 13.5% Year over year. These two factors make up a good deal of the 45% drop in the yen value of Japan’s exports. But not all of Japan’s exports are in dollar terms. Japan’s largest trade partner in fact is China; its second largest partner is the US. Moreover, the drop in the current value of yen trade flows is not simply an ‘index number’ problem. It does reflect real stress that flows back to Japan when export dollar sales buy fewer yen, especially if Japan’s costs are expressed in yen- as most surely are despite outsourcing.

Japan’s imports are down by nearly 30% Year-over-year, another significant number. The rise in the yen plays a role there by first taking a fixed import bill expressed in foreign currency and making it smaller when translated into a stronger yen, just as for exports. But eventually the stronger yen and weaker FX value of competing currencies should lead to an increase in Japan’s import volumes and cause yen VALUE flows to rise or at least to mitigate their drop (depending on the size of the import price elasticities). Let’s look at this concept of ‘elasticity:’ If Japan import price elasticities are less than ‘minus one’ Japan’s import values will eventually rise further as Japan buys more of the cheaper import and that offsets the fact that each import is worth fewer yen by increasing the volume of its purchases. That is what the concept of elasticity measures. A price elasticity of less than ‘minus one’ means that a one percent drop in yen prices (say forced by a yen appreciation) will lead to more than a one percent increase in the volume of goods imported. Yen import prices are falling already (mostly lower oil prices). But the progression of events that lead to a boost in import volumes takes time. Plus don’t hold your breath waiting for this impact since Japan’s own recession is contracting imports, a factor that will swamp and elasticity effect from prices. For the moment, yen-based import prices are down by nearly 25% Yr/Yr accentuating any VOLUME drop in Japan’s imports on observed import VALUE. Of course, to the extent that Japan invoices its imports in yen the result of the yen’s rise would me blunted, since a yen import is a yen import regardless of the dollar, euro or yuan exchange rate.

On balance these trade flows for Japan paint a very distressed picture of Japan’s economy. Japan has joined Germany and others in being a voice in favor of maintaining ‘free trade.’ Just today the WTO has issued another call for nations to uphold their free trade agreements. The ‘buy America’ clause in the US stimulus bill is one development that is cited again and again in these sorts of communiqués. The US insists that its provision is fully consistent with its free trade agreements.

We can see that with the world economy shutting down, like some out of control Windows command that is turning off your computer while you are trying to work, that chaos is being spread. Export dependent nations are being crushed by the global economies since manufactured goods exports have high relatively high income elasticities. That means when times are good and global incomes are growing exports shoot ahead strongly but it also means that export volumes contract sharply in a downturn. Japan is being battered in part by the impact of US auto sales dropping from over 15mu to just about 10mu. There is nothing anticompetitive about that: it’s just recession. That is a drop of 33% and it will cause the Yr/Yr drop in yen exports to be registered at about 46% if Japan holds its share in this contracting market. Of course cutting back on shipments to the US to trim inventories plus taking lower prices into account could further exaggerate the flow’s ultimate decline. In the event, Japan’s exports of autos in yen terms to the world have fallen by 66% since January of one year ago.