Japan: It’s domestic demand, stupid

I have been reading the reports on the Japanese trade data for April, which have been published this morning. The reporting is extremely telling about how most journalists (and economists!) fail to understand what is going on in Japan (the markets understand perfectly well – Nikkei is nicely up this morning).

In nearly all the reports on the data there is a 90% focus on the fact that exports grew slower than expected (3.8% y/y) and that the Japanese trade deficit remains in place. The slightly “disappointing” numbers is then in most news stories used to speculate that Bank of Japan’s monetary easing is not working – or rather the weaker yen has failed to boost exports as much as expected. On the other hand there is nearly no focus on the import data, which grew by nearly 10% y/y.

It is really the strong import growth, which is the interesting story here. As I earlier have argued the monetary easing in Japan is likely to boost domestic demand rather than net exports. This is from my latest post on BoJ:

While I strongly believe that the policies being undertaken by the Bank of Japan at the moment is likely to significantly boost Japanese nominal GDP growth – and likely also real GDP in the near-term – I doubt that the main contribution to growth will come from exports. Instead I believe that we are likely to see is a boost to domestic demand and that will be the main driver of growth. Yes, we are likely to see an improvement in Japanese export growth, but it is not really the most important channel for how monetary easing works….

…When the Bank of Japan is easing monetary policy it is likely to have a much bigger positive impact on domestic demand than on Japanese exports. In fact I would not be surprised if the Japanese trade balance will worsen as a consequence of Kuroda’s heroic efforts to get Japan out of the deflationary trap.

And this of course is exactly what we are now seeing in the data. Export growth continues to accelerate, but import growth accelerates even faster and the trade data is worsening. That is very good news – monetary policy is boosting domestic demand. Mr. Kuroda please keep up the good work.

Leave a comment


  1. Yes! and you can throw the notion of “currency wars” in the dustbin at the same time.

    • Indeed – currency war is an non-economic concept for people without knowledge of monetary theory

      • Nice post, this is great to see. Import volumes rose in 13Q1 according the GDP report too, and the nominal figures were quite incredible, +35% qoq SAAR for both nominal imports and exports.

  2. Also interesting on “disappointing” export growth:
    Exports to the European Union fell 3.5 percent from a year earlier, dropping for a 19th month, while those to the U.S. jumped 15 percent. Shipments to China rose 0.3 percent, indicating that demand may be stabilising after past declines.

    Exports rose to countries where monetary policy is easier (USA) and falling to countries where money is tight (EU). That EU surplus is doing them good…yeah right …lol

  3. Chun

     /  May 22, 2013

    Lars, does this show Mundell’s model is wrong? I remember Mundell argued in his 1963 article that expansionary monetary policy under flexible exchange rate system improves trade balance, not domestic consumption or investment, because expected fall in return on domestic assets increases net capital outflow and prevents interest rate from falling while domestic currency is depreciating and net export is increasing. Does Mundell’s argument have some shortcomings?

  4. cthorm

     /  May 22, 2013

    The imports breakdown reveals some interesting details. Overall its a sign of growing domestic demand, but not quite as positive as I’d like.

    These are the top import categories contributing to the change:

    Other (i.e. chiefly clothing and accessories): 9.1%
    Liquified Natural Gas (LNG): 17.9%
    Electrical machinery (chiefly semiconductors): 16.6%
    Manufactured goods: 15.1%

    Unfortunately a big chunk of the increased domestic demand is being spent on higher energy costs. Dropping nuclear energy is extremely expensive…

  5. James in London

     /  May 22, 2013


    Don’t worry. There is so much natural gas about to hit world markets, from US, Australia, East Africa, etc, that the high price in Japan vs US and elsewhere will very soon shrink (downwards). Clean(‘ish), cheap, energy from NatGas is really just around the corner.

    • cthorm

       /  May 22, 2013


      I’m also bullish on NatGas, but mostly for the US. While there is shale gas practically everywhere, from what I’ve read the main constraint now is drilling expertise. If that’s the case the cost of US-produced gas will continue to be lower for some time. Japan is also working on extracting methane from the seafloor, but its unclear how soon that will reach commercial scale. In the long run though, nuclear power is vastly preferable in terms of cost, safety, and supply. It’s too bad that Japan is backing away, rather than replacing 60 year old plants with better designs.

      • James in London

         /  May 28, 2013

        It’s hard to see how nuclear is “vastly preferable” to gas in terms of cost, when the subsidy required to build a new nuclear plant in the UK is a government guarantee that the energy can be sold to the market at twice the market rate for the next 30-60 years. That doesn’t sound very sensible to me. Safety vs gas is also debatable, and not “vastly preferable”. And even supply is debatable given the sources of uranium vs gas.

  6. claus christjansen

     /  May 25, 2013

    So easing of monetary policy should increase domestic spending. If this is equivalent of the japanese consumer decreasing savings should it then in the end take down the current account surplus? What is the dynamic according to a monetarist framework?

  1. Let me say it again – it’s domestic demand (in Japan), stupid | The Market Monetarist
  2. The Kuroda boom remains all about domestic demand | The Market Monetarist

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