Japan logs record trade deficit on soaring imports

Source: Dukascopy Bank SA
"Japan is paying the price for the transformation of its energy policy. This trend in Japan's trade balance will continue for a while, eroding the strength of the economy little by little." 
- Naohiro Niimura, a partner at Market Risk Advisory Co. 

There are more and more concerns now the world's third largest economy will be dragged into another recession by the April's consumption tax hike that will weigh on domestic demand. It was expected that Japan will post a bunch of stronger-than-expected fundamental data before April, as consumers and companies should be willing to spend more before they will be charged more for the same goods and services. Nevertheless, the recent data surprised markets to the downside. 

On Thursday the official report from the Ministry of Finance showed that Japan's trade deficit soared to 2.79 trillion yen in January from 1.3 trillion a month earlier, posting its 19th consecutive monthly trade gap and making  it the largest in the nation's history. The pace of growth in exports decelerated to 9.5% from 15.3%, while imports ballooned 25% from 24.7% in December, surpassing market's projections. In theory, a weaker Yen should make Japan's exporters more competitive globally, lifting their profits and employment. In reality, however, a significant depreciation of domestic currency provoked a surge in imports prices, as Japan is highly dependent on imported energy. Moreover, the effect of the lower Yen has been partially undercut by a longer-term trend of huge manufacturers  their production overseas in order to become closer to their target audience and avoid risks of currency fluctuation. 

© Dukascopy Bank SA

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