Japan trade deficit hits record on soaring commodities, weak yen

TOKYO (BLOOMBERG) – Japan’s trade deficit hit a record high in July as the impact of soaring commodities and the yen’s 24-year low added to the headwinds for the nation’s economic recovery.

The trade deficit widened to 2.13 trillion yen (S$21.9 billion) on a seasonally adjusted basis, the Finance Ministry reported on Wednesday (Aug 17), extending the sequence of shortfalls to a 14th month. The trade balance has been in the red for the longest continuous streak since 2015.

Imports gained 47.2 per cent from a year ago, led by continued year-on-year gains in energy prices, while exports increased 19 per cent, boosted by growing shipments of autos and chip-making equipment. Both figures beat forecasts.

The record deficit bodes ill for Japan’s economic recovery as higher import bills especially for energy and food can cool domestic activity. While exports continued to recover, they also face slowdown concerns in the nation’s key trading partners such as the United States and Europe, where governments are actively tamping down demand to contain rampant inflation.

“Energy remains a dominant factor behind import gains, which is not necessarily good for growth,” said Mr Koya Miyamae, an economist at SMBC Nikko Securities. “Oil prices have been calming down somewhat, but energy costs can hit the brakes on economic activity if they keep rising.”

The yen’s drop to a 24-year low versus the US dollar in July made imports more expensive while making exports cheaper. The trade data showed the average exchange rate was 136.05 yen to the dollar, 23.1 per cent weaker than a year ago. The yen has rebounded recently as US inflation showed signs of peaking, limiting demand for the dollar.

Due to its reliance on energy and food from overseas, Japan has seen import costs soar amid the war in Ukraine and supply snarls tied to China’s coronavirus lockdowns. Oil prices fell in July from the previous month as global economic slowdown worries offset supply concerns, but the outlook remains uncertain. Imports and exports in July both extended record highs in value while staying relatively unchanged by volume, highlighting the impact of inflation, especially on energy prices.

The report showed exports to the US rose 13.8 per cent and those to Europe increased 31.6 per cent. Shipments to China climbed 12.8 per cent, the biggest gain since February.

“The end of China’s Covid-19 lockdowns has driven up exports – that is the biggest factor,” said Mr Miyamae. “The recovery pace in exports is not strong enough to recoup all the losses, but it is going in the right direction.”

Separately, core machine orders, a leading indicator of capital investment, gained 0.9 per cent in June from May, the Cabinet Office reported on Wednesday. Economists had forecast a 1 per cent rise. From a year ago, it increased 6.5 per cent.

Japan’s economy regained its pre-pandemic size in the second quarter as a rebound in consumer spending drove gains. Still, given the uncertainties in the outlook, the government plans to ramp up its support for the economy.

Prime Minister Fumio Kishida has ordered additional measures to ease the impact of inflation, after polls showed his approval rating declined following his Cabinet overhaul.

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