Remember my earlier comment on monetary easing in Japan and the possible impact on the Japanese trade balance:
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.
Today we got data that seems to support my view that monetary easing in Japan is likely to widen the trade deficit. This is from AP:
Japan’s trade deficit rose nearly 10 percent in May to 993.9 billion yen (nearly $10.5 billion) as rising costs for imports due to the cheaper yen matched a rebound in exports, the Ministry of Finance reported Wednesday.
Exports rose 10.1 percent in May over a year earlier to 5.77 trillion yen ($60.7 billion) while imports also surged 10 percent, to 6.76 trillion yen ($71.1 billion), the ministry said. Japan’s trade deficit in May 2012 was 907.93 billion yen.
Hence, just looking at the trend in the trade deficit – it is widening – it would be tempting to declare victory on my hypothesis that the “Kuroda boom” mostly will be about domestic demand. However, I must admit that a lot of the reason for the increase in imports is higher energy imports. So while I do think my view is correct I don’t think that trade data in itself provides a lot support for this view.
HT Yichuan Wang
Mikio Kumada (@Mikio_Kumada)
/ June 19, 2013Absolutely agree. It is a mystery to why so many people focus on the minor export story. Gross exports of Japan have never been much higher than 10% of GDP, and net exports are now at 0%-2% of GDP, strutrucrally.
Japan is the world’s least export-dependent economy after the US. And it is only perhaps intellectual laziness, stereotyping, or lack of interest in Japan that makes people and politicians focus on exports. Japan always was a domestically oriented economy.
What Abenomics will do, however, is strongly boost the current account surplus that to surging income from overseas assets, because Japan’s net foreign assets are at about 60% of GDP.
Lars Christensen
/ June 19, 2013Mikio,
Very good point on the lack of openness of the Japanese economy. This is of course also why I argue that the of course on the yen in the discussion about monetary easing in Japan is somewhat misguided.
Mikio Kumada (@Mikio_Kumada)
/ June 19, 2013You can already see that in the data: the trade deficit is rising but that’s outweighed by the increase in the current account surplus.
That also puts upward pressure on the yen, which must be countered by massive BOJ quant easing, though that alone may not suffice, as direct FX interventions (a decision by the MOF, which is in charge of currency policy) are perhaps more efficient.
The problem is that the G7 and many in the G20 are opposed to FX intervention and Japan has committed itself to limiting interventions to “domestic instruments”. So they have to do it “indirectly”, which takes more time.
Mark Moon
/ June 19, 2013Lars – Great work being on top of this!