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Thursday, February 23, 2006

On The Japanese Trade Deficit

I'm trying to think about the implications of the economic fundamentals driving Japan's 'sustainable recovery'. What we know is that as the population ages the labour market is tightening. This is pushing up wages but not productivity. There is a consequential 'bounce' in domestic consumption. But what happpens next?

Well my native economic wits tell me that the relative prices of Japanese imports and exports should be affected. This is a complex question since Japanese conglomerates have a well-known 'two tier' pricing system, with the cost pressure normally being felt more internally than externally. So Japanese exports don't necessarily immediately lose competitiveness. Of course the Yen-Dollar rate also has something to do with this.

But in the internal market the price of imported goods should become relatively lower vis-a-vis domestic products. So I started thinking about the trade balance. And Lo & behold:

"Japan recorded its biggest trade shortfall in nearly a quarter of a century and its first in five years, as the normal January slowdown in exports and a rising oil bill combined to reverse a Y914bn surplus in December into a Y349bn deficit."

Well so far so good, this is what theory would seem to predict. Of course there are any number of one-off issue in play:

Economists said the latest number was not a cause for concern since exports normally fell in January because of the long new year’s holiday in Japan, which caused a slowdown in production and shipments.

but then there is this:

Higher imports partly reflected rising domestic demand, as well as the surge in oil prices....Hiroshi Shiraishi, economist at Lehman Brothers, said that, as domestic demand picked up, it was natural — and positive — that the economy would become less dependent on exports. “Going forward, we don’t expect net exports to provide a big boost to gross domestic product,”

Oh, oh.

In the fourth quarter, which showed annualised gross domestic product growth of 5.5 per cent in real terms, domestic demand outpaced net exports as a contributing factor, underlying the self-sustaining nature of Japan’s recovery.

Mr Shiraishi said the volume of imports had picked up 7 per cent in January as Japanese demand for foreign products increased. In yen terms, imports rose 27 per cent to Y5,360bn, spurred by a 67 per cent rise in the oil bill over the previous January.

Morgan Stanley's Takehiro Sato tries to be re-assuring:

"Takehiro Sato, economist at Morgan Stanley, said it was unwise to read too much into one month’s numbers. Weak exports to Asia probably owned to special factors, particularly the Chinese new year, part of which fell in January this year, he said."

He may be right, but then when theory and empirics coincide in this way there is food not for worry, but for thought. Maybe what we are all about to do is an exercise in ordinary language philosophy: checking out what the word 'sustainable' actual means in the day-to-day context.