Japan's trade trends continue to weaken as its deficit rose again in June and as the trend for the deficit continues to worsen from 12-months to six-months to three-months. Twelve-months ago, the trade position was in surplus. That's now a thing of the past.
The trends clearly showed that imports are stuck at a very high growth level well above that for exports; exports are trendless and fluctuating in much lower range of growth. Imports fluctuate in a higher range of growth and show some signs of accelerating.
Not surprisingly, during this period the yen has been weakening and weakening sharply; the yen is off by 21.7% over 12 months, it's falling at a 38.5% annual rate over six months and at a 62.9% annual rate over three months. A weaker yen makes imports more expensive at home and exports cheaper abroad. More expensive imports should cause consumers to buy fewer of them while cheaper exports should increase Japan's export penetration. On balance, the weaker yen should work to correct Japan's widening trade deficit. That, of course, is in theory.
In practice, the weak yen creates some problems for Japan. One is that the weaker yen makes oil imports even more expensive. In the short run, it's hard for consumers to substitute away from an energy source. To the extent that the weak yen causes the yen price of oil to rise sharply, the Japanese trade balance expressed in yen terms will widen for some time. Eventually consumers may find a way to cope with higher energy prices… to use more insulation, to buy more fuel-efficient cars, and so on. In time there is a price elasticity for energy products and energy consumption can be reduced. In Japan, however, there is a move afoot to recommission shuttered nuclear power plants. In the wake of Japan's nuclear disaster, they were all being decommissioned. But now in the face of global warming and high global energy prices, Japan is extending the commission on some plants that had been scheduled to be closed and making plans to open others. This could help to reduce its energy bill.
We can see the impact of the currency shifts on Japan prices as import prices are up by 46.2% over 12 months, up at a 58.8% pace over six months, and up at a 110.7% annual rate over three months. The weaker yen is pushing import prices up strongly. However, export prices also show substantial life, rising 18.8% over 12 months, at a 28.1% pace over six months and at a 40.1% pace over three months. The weakening yen allows Japanese exporters to raise their yen price and still to cut their export price in foreign currency terms. This is another way that a weakening currency helps to right the trade balance. Exports get a double boost because prices in the export market fall in foreign currency terms and through the effect of price elasticities that should cause the volumes purchased to rise more sharply. At the same time the yen prices are rising and so this can have a very positive effect on export prices and on export values.
Because prices move in advance of volumes, there is something called A ‘J-curve’ that reflects the fact that after a currency falls the trade balance often gets worse before it gets better sketching out a pattern of the letter ‘J’ lying face down. This mostly because of imports have prices rising before consumer react to buy fewer imports so total import value rises after a currency depreciates – note the rapid increase in Japan import values.
So far, the impact on real flows isn't discernible; exports are still weak across all horizons, down by 0.4% over 12 months, down by 3.5% at an annual rate over six months and down at a 2.1% annualized pace over three months. Real imports fall by 2.3% over 12 months, rise at a 5.7% annualized rate over six months but then fall at a 5.4% annual rate over three months. The impact of the currency rate change has yet to set in on trade flows.
