Japan’s Trade Deficit Widens

Japan has enjoyed many years of trade surpluses with the rest of the world as one of the planet’s leading exporting nations. However, Japan needs to import much of the raw materials it needs and, as the Yen falls, the cost of imports rise. Japan is currently running a trade deficit (meaning that the value of goods and materials that it imports out-values the revenues from its exports) with the rest of the world. The deficit has almost doubled over the past year with the cost of imports rising by 19.6%. The deficit for July came in at $10.5 billion.

Despite a recent resurgence against the Dollar for technical reasons, the Yen has fallen in value by about a quarter since November of last year. On the one hand, this gives Japanese exports a competitive advantage in importing markets (over recent exchange rates), but on the other, it drives up the costs of raw materials and other imports. Despite recent weakness of the Yen, Japan’s economy has slowed from an annualised GDP rate of 4.1% in Q1 to a rate of 2.6% in the second quarter.

The government of Shinzo Abe has made restoration of growth a key policy; equally, they want to put an end to the cycle of deflation which has bedevilled the Japanese economy for many years. The Bank of Japan wants to see inflation increase to a target level of 2%. As a consequence, Japan is unlikely to be deflected from its current economic policies which are likely to cause the Yen to weaken further against other major currencies.

There is evidence that a weaker Yen is helping to boost Japanese exports, from the Ministry of Finance. Shipments from Japan rose by 12.2% year-on-year in July and exports to China were up by 9.5% in July 2013 compared to their 2012 level. Exports to the USA were also significantly higher in July, rising by 18.5% over the previous year’s level.