Japan's Shifting Trade Surplus

The big headline today is the increase in Japan's trade surplus, but the important news behind the headline is the shifting composition of Japan's exports. According to the Financial Times:

Japan’s exports rose 15.1 per cent to a record high for May, but brisk imports and sluggish shipments to the US meant the trade surplus rose a slower-than-expected 9.3 per cent from a year earlier.

Exports rose to Y6,565bn, the 42nd consecutive monthly increase, according to preliminary finance ministry figures released on Thursday. But imports rose an even faster 15.5 per cent, to reach a record Y6,176bn. Economists say the heftier import bill largely reflects higher prices resulting from a weaker yen rather than stronger demand.

Examining the data more closely we find that exports to the US in value terms rose by only 0.4% (m-0-m), following a fall in April. As a result Japan’s surplus with the US fell 13%, the second month of decline. It is also worth noting that these exports are being propped up to some extent by the weaker yen, and it seems demand from the U.S. may remain slow in the coming months. Shipments to the U.S. measured by volume fell 13.2% in May, little changed from the 13.1% drop in April.


On the other hand exports to the rest of Asia and Europe seem to be booming. The trade surplus with the rest of Asia widened 22.6% to Y534bn in May. The trade deficit with China also shrank slightly to Y210bn on the back of a 25% surge in exports. At the same time exports to the European Union surged 17.9%, the fastest pace since August 2006, to 971.1 billion yen.

It is important to note that net exports - the difference between exports and imports - were the biggest contributor to GDP growth in the first quarter, helping Japan's economy expand at an annual 3.3%. This dependence is likely to continue going forward and it still remains to be seen what the real longer term impact of slower export growth to the US is going to be.