Economy in Brief: August 2022

Japan's trade deficit widened in July rising to ¥2.1 trillion from ¥1.95 trillion in June. Goods exports rose by 2.1% in July; goods imports rose by 3.5%. Imports continue to outpace exports over various horizons from 12-months and over shorter periods.

Growth rates show imports at an increase of 51% over 12 months, rising at a 59.9% annual rate over six months and at a 66.2% annual rate over three months. By comparison, exports are up at a 21.2% annual rate over 12 months, a 28% annual rate over six months and at a 40.4% annual rate over three months.

Imports are rising strongly on the back of rising energy prices but also on the back of a weakening yen that increases the import bill. Of course, that increase also includes energy prices because not only are the dollar prices for energy high but when translated into yen at the weaker yen exchange rate the cost of energy rises again.

Ironically, exports are doing better; the export growth rate is 21% over six months moving up to a 40% annual rate over three months. The weaker yen will provide a great opportunity to increase Japanese exports in nominal terms. When the yen weakens, against the dollar, it causes the dollar price of Japanese exports to fall and that should increase exports. At the same time, Japanese exporters can take some of that decline of the yen into a price increase and actually raise their yen prices while lowering their dollar prices and getting a double kick in export value. This, in fact, might be starting to happen but because import prices are so strong you still don't see it in the trade balance.

This is not unusual because of something known as the J-curve phenomenon. The J-curve phenomenon refers to the fact that when a currency changes its value the price effects go through first while the volume effects occur later. In this case when the yen gets weaker, import prices in Japan will go up quickly. In time, Japanese consumers may decide that goods are more expensive, and they may buy fewer of them. That will cause import volumes to recede blunting the impact on import value from the price rise. On the export side, the weaker yen should encourage foreigners to purchase more Japanese products, but that volume effect takes some time and in the meantime there is a bigger increase in import value than in export value that widens the trade deficit which gets worse before it gets better.

The table shows that over 12 months the yen is averaging ¥119.6 against the dollar, whereas over three months it's at ¥133.2. In July it has slipped further to ¥136.7. Over 12 months – point-to-point – the yen has fallen by 24% against the dollar whereas over three months it's falling at a 37% annual rate, a slightly faster pace. The broad yen index that figures the yen value against Japan's most important trade partners, broadly shows the yen is weaker over 12 months, at a -16.9% annual rate. Over three months it's falling at about the same pace, at a -17% annual rate.

The price data showed that export prices are rising by 19% over 12 months and at a 20% pace over three months. Import prices are up 47.9% over 12 months and at a 57.6% annual rate over three months. Import prices are really killing Japanese imports and the trade balance.

The overview table shows that the current situation in the eyes of the ZEW experts strengthened in August in the U.S. and the U.K. but weakened in Germany. Expectations for the U.S. firmed, but expectations for Germany weakened. Inflation expectations for the U.S. weakened, but they strengthened for Germany and the euro area. Short-rate expectations strengthened for both the euro area and for the U.S. Long-term rate expectations rose for both Germany and the U.S. ZEW experts, looking at currently weak stock market indices, saw them strengthening in the euro area, Germany, and the U.S. They look for the dollar to continue to strengthen versus the euro. That's the summary of the month-to-month changes in this month’s survey.

Economic conditions and expectations The ZEW experts see the economic situation as weak in the euro area, Germany, and the U.S. All these jurisdictions have economic situations that rank below their 40th percentile marking them as weaker than their respective medians (since the median occurs at the 50th percentile). Economic expectations for Germany are this week or weaker 1.4% of the time- very rarely. In the U.S., economic expectations are this weak or weaker less than 10% of the time- also rarely.