July Trade Data Dampens Optimism About Global Trade

In July, the seasonally corrected trade balance worsened to JPY 944 billion. In particular, the decline in exports – 4.8% in volume -- disappointed. Exports to Europe have clearly picked up, but those to Asia and the US have become less dynamic. This may dampen optimism about the strength of global trade in supporting Japanese activity.

In July, the trade deficit widened to JPY 1,024 billion, largely due to seasonal factors. The seasonally corrected trade balance also worsened to JPY 944 billion, due to rising imports and falling exports (in value terms). This was much worse than expected by the financial markets.

■ In particular, the decline in exports – 4.8% in volume -- disappointed. As a result, the three-month rate of change, an indicator for the trend, decelerated to 1.7%. This is probably still faster than world trade growth, implying that Japanese exporters are still gaining market share thanks to the depreciation of the yen. Between mid-November and the end of July, the yen had lost about 18% of its value vis-à-vis the US dollar. This has also allowed exporters to improve profit margins. In July, export prices were 14% higher from a year earlier.

■ Exports to the European Union have clearly revived in recent months. In July, their value was 16.6% higher from a year earlier. In June, the year-on-year change was only 8.6%. This chimes with the pick up in activity in Q2 in Europe. The year-on-year change in the value of exports to Asia and the US also improved, but this might be largely explained by higher export prices. This may dampen optimism about the strength of global trade in supporting Japanese activity going forwards.

■ The import volume also declined in July, albeit to a lesser extent than exports. A large component of imports is energy-related, in particular oil and LNG, following the halting of all but two of the nuclear reactors. The government is aiming at re-starting more nuclear power stations, but this should be finely balanced against security issues. This certainly will improve the trade balance .

■ Today’s data show clearly that Japan’s exporters are profiting from the weaker yen, provoked by the expansionary fiscal and monetary policies. The government hopes that the improved profitability among exporters will result in employment growth and higher pay increases, which would revive the domestic economy.

BY Raymond VAN DER PUTTEN

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