The good news is that Japanese exports rose 6.4 percent in January 2013 compared to January 2012. The bad news is that imports rose even faster, leading to a surge in the trade deficit.
The numbers from the Japanese Ministry of Finance speak for themselves. Exports up 6.4 percent over a year earlier. Imports rose even faster, however, adding 7.3 percent compared to January 2012. Since imports were higher overall to begin with the trade deficit widened 10 percent to 1.7 trillion Japanese Yen ($18.2 billion).
Some of the details of the report suggest that Japan is getting back on track. Other aspects, however, confirm that the cheap Yen policy the Japanese Government and the Bank of Japan are pursuing have a price.
Exports Broadly Recover
The rise in exports shows that Japan is regaining some of the clout it once had as an economic powerhouse. Exports to the United States are up 10.9 percent and even exports to China rose 3 percent compared to a year earlier.
Shipments to China had been declining since May of 2012. A territorial dispute involving small pacific islands thought to be resource rich stirred anti Japanese sentiment on the mainland and hurt trade relations.
Exports to the European Union were still declining by 4.5 percent which observers attribute to the European debt crisis.
The rebound in exports can have many reasons, but most analysts agree that a cheaper Yen has something to do with it. In the period from January 2012 to January 2013, the Yen has depreciated against the currency of most of its trading partners, including China and South Korea. A weaker currency cheapens products when priced in foreign currency, which helps to gain a competitive advantage.
“There is a belief and expectation if you can weaken the Yen sufficiently you can reestablish Japanese nominal growth by increasing export competitiveness,” says Richard Howard of Hayman Capital in an interview. The chief strategist of the hedge fund Hayman Capital thinks that Japan is catching up to other countries in cheapening its currency to spur export growth.
“The Japanese [absorbed] an enormous amount of the world currency debasement and exported deflation over the last five years,” he says. This lead to a stronger Yen and hurt Japanese companies.
John Paulson, principal and founder of the Hedge Fund Paulson & Co. agrees: “In order to maintain sales, [the Japanese industrials] had to cut prices. They were getting killed with the strong yen,” he said in a New York speech in January.
Rising Imports the Price to Pay
While the low Yen gives exports a boost, it also makes imports more expensive. Japan itself does not have a lot of resources and needs to import most of the basic materials it needs for production.
Consequently, as the Yen weakens, the Yen amount of imported goods rises, even if the actual volume of the commodity stays the same. In January’s trade report, the value of imported soy beans jumped 19.2 percent and liquefied petroleum gas went up 28.6 percent.
This leads to increased costs for companies and consumers and not all of them benefit from increased exports. If the trend continues, the outlook for Japanese industry is bleak, thinks Richard Howard.
“What you see is you have this hollowing out of the industrial base and then a currency response, but the currency response doesn’t succeed in bringing back the industrial capacity. We think that it is unlikely that you'll see an enormous amount of the Japanese industry return. What has been offshored and exported is unlikely to return to Japan immediately just because you have seen a devaluation of the currency.”
