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Economy in Brief

Japan's Trade Surplus Withers to Deficit
by Robert Brusca  July 21, 2021

Japan's surging imports overwhelmed strong exports in June driving Japan's trade surplus to a deficit situation, its second deficit in 11 months and its first significant smudge of red ink in the period.

Motor vehicle exports continue to blast out strong rates of growth, but these are steadily and sharply diminished. Meanwhile, imports of motor vehicles into Japan have run at growth rates that range between hot and hotter from three-months to six-months to 12-months. Computer chip shortages are having an impact on trade in autos. In June auto exports outperform auto imports but not by enough to put export growth stronger than import growth overall.

The yen has been in a period of depreciation. It is lower broadly as well as against the dollar by about 1% on the month. Over 12 months, six months and three months. its drop is at a lower double-digit pace in broad terms but is a smaller decline vs. dollar for the most part.

Japan is hosting the Olympic games that are just beginning, but it is still under lockdown and the games will progress without spectators and therefore with little stimulus for the economy. Hosting the Game will wind up being an economic loss.

Nominal trade flow trends show steadily diminishing growth for exports from 12-months to six-months to three-months. For imports, growth comes closer to accelerating consistently as three-month growth is much stronger than 12-month growth, but it does step back from its pace over six months.

Price trends drive some of these nominal developments. Export prices rise at a 10% pace over 12 months then advance to a 20% pace over three months and six months. Import prices, strongly influenced by world oil prices, gain 28% over 12 months then rise at much faster annualized rates over six months and three months, but they do slow their pace from six-months to three-months. The pattern for prices is also the pattern for nominal import expansion.

Export and import volume (real exports and real imports) growth was a more of a matched set in June with both gaining just about 1% on the month. However, the sequential growth rates for exports are weakening falling from 32% over 12 months to under a 1% annualized rate over both six-months and three-months. In contrast, import real growth rates demonstrate ongoing very mild acceleration with growth in a 4.5% to 6% environment from 12-months to six-months to three-months.

Japan's two most import trade partners, China and the U.S., continue to grow well and provide the basis for optimism on Japanese exports. On the import side, oil prices have made a substantial recovery from their Covid-period lows and the group known as OPEC-Plus has a new production agreement to try to stabilize and support oil prices. The oil cartel is always an enigma because there is an incentive among members to cheat (to sell more oil at current prices beyond their agreed quota). And when they do this the excess supply of oil does its work causing global oil prices to weaken, prompting more OPEC meetings and new agreements and so on. The Saudis are the strong partner and the dominate producer in OPEC, but OPEC still depends on its many members to stick to their quotas if the cartel's pricing is to hold. Some members are in more dire need of oil revenues than others. Of course, it is easier to keep cartel pricing together when demand is picking up and that is expected to be the case as global recovery from this recession continues to evolve.

Japan's economy is still not firing on all cylinders. Year-on-year retail sales growth is still impressive, but those sales have dropped month-to-month by one percent or more in May and in April. Employment gains are up by less than one-half of one percent over 12 months as of May and employment has fallen March-May. Japan's services sector is still struggling. Manufacturing is signaling growth and expansion, but that is not the job sector. Japan's economy watchers index continues to struggle. With this background, it is hard to see how real import growth is going to hold up. However, because the outlook for growth in Japan's main export markets is solid, the outlook for Japan's exports is still bright.

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