In Holiday Mode, Japan Stands Out

Even if Australia, New Zealand, Hong Kong and Europe were not on holiday today, developments in Japan might still have dominated.

First Japan reported a record large trade deficit. The JPY1.446 trillion deficit was about 40% larger than economists had expected. It reflects a slump in exports. They are up 1.8% year-over-year. In February, they had risen 9.8% above a year ago levels,and the consensus was for a 6.5% increase. Even this overstates the strength in Japanese exports. In volume terms, exports are only up 0.6% year-over-year. The decline in the yen boosts the value of exports by 10.8%.

Imports were up more than expected. The 18.1% increase from a year ago, is twice the rise in February and above the 16.2% consensus forecast. Imports were up 2.4% in volume terms and 17.3% in value terms.

For the fiscal year that just ended, Japan recorded a JPY13.75 trillion deficit. It is third consecutive annual shortfall. Japan's swing from a trade surplus country to a deficit is one of the important shifts in the world economy in recent years. The yen has declined almost 20% over those three years. There is some hope that the re-starting of a few nuclear plants in the coming months, which would reduce the imported energy. Some officials expect 3-5 nuclear plants could get the go ahead, but this may have only a marginal effect on trade as it represents 10% or less of its capacity.

The other important story that has emerged is a Chinese court ordered the seizure of a Japanese ship used to transport Australian iron ore to China as compensation related to the loss of two ships that had been leased by a Chinese company to Japan in 1937. This case has been slowly making its way through the Chinese courts. A maritime court ruled in December 2007 that the Mitsui Group should pay JPY2.9 bln in compensation. The complaint was first files in 1988. Mitsui appealed, and the appeal was rejected.

While Abe is seen in part as an economic reformer, he is also a strong nationalist and has done very little to mend fences in the region. A dispute over textbook claims and official visits to a war shrine, that honors war criminals and others (two cabinet officials visited this month and Abe sent an offering) antagonize an already tense situation.

It is not just China that is annoyed, but South Korea, as well. This suggests the challenge facing US President Obama on this week's trip to Asia. He cannot endorse Japan's territorial claims without jeopardizing the relationship with South Korea. The US has treaty obligations with both.

There is a third development in Japan to note. Local press reports that the government is considering easing restrictions on consumer lending. Although Japanese shares slipped marginally (Nikkei -0.03% and the Topix -0.2%), consumer lenders were a bright spot advancing 7-11%. The press reports suggest that the government may lift the ceiling on interest rates to 29.2% from 20%.

Lastly, there is some hope that Obama's visit to Japan will help jump-start the stalled trade talks. Reports out today suggest that US wants Japan to set annual target for auto imports from the US. The US, says the unsourced reports, would postpone eliminating tariffs on imports of Japanese autos if Japan fails to achieve the target. Japan has refused to set the auto targets, which could be vulnerable to challenges at the WTO.

The dollar rose to its best level against the yen since April 8. It has stalled near JPY102.70, which corresponds to a retracement objective of the slide since April 4 push above JPY104. The next retracement target is just above JPY103.

Against the other major currencies the dollar is narrowly mixed. It has drifted lower against the euro and sterling and is flat against the dollar bloc. Outside of the Leading Economic Indicator (expected to rise 0.7%, which would be the largest rise in last November), the North American economic calendar is light.