Japan Trade Deficit Grows

The world’s third largest economy, Japan, has published a fresh record trade deficit for the year ended 31st March 2013. A trade deficit simply means that the value of a nation’s imports outweighs its exports, leaving a negative trade balance. Japan’s trade deficit with the rest of the world has climbed to $83.4 billion. As a leading exporting nation, Japan has long been used to a balance of trade surplus. It has now endured a sequence of 9 months of negative trade balances.

Since the earthquake and tsunami of March 2011, Japan has taken almost all of its nuclear power generation capacity off-line; initially for safety checks, but it has remained off-line for political reasons (i.e. strong public objections). Japan still needs electrical power, so the shortfall is being made up by burning fossil fuels to generate it. These fossil fuels need to be imported and paid for in US Dollars which is straining the trade balance. This side of the equation is exacerbated by the fact that the value of the Yen is falling – it has declined by 20% against the Dollar since November – making these imports dearer.

A falling Yen means that Japanese exports are becoming increasingly competitive in importing markets, but analysts believe it will take some time before the benefits of this are seen. Japan has embarked on a series of bold stimulus measures which are designed to stimulate domestic demand and return modest inflation to the economy. These measures have weakened the Yen as a consequence and boosted the value of the stock market in Japan. Japan has suffered from deflation for many years. Deflation produces a drag on domestic demand because consumers delay purchases for as long as possible, knowing that the goods will be cheaper in the future when they finally make the purchase. The Bank of Japan has a target inflation figure of 2%.