Japan’s trade deficit narrowed more than expected in December in a sign that the impact from the weak yen and high energy costs has begun to soften.
(Bloomberg) — Japan’s trade deficit narrowed more than expected in December in a sign that the impact from the weak yen and high energy costs has begun to soften.
The trade gap shrank to 1.45 trillion yen ($11.3 billion), falling below two trillion yen for the first time in five months, the finance ministry reported Thursday. Imports rose 20.6% from a year ago, slowing its pace of gains more than economists forecast, while exports increased 11.5%.
The import bump contribution from crude oil and liquid natural gas shrank in December compared with the year-on-year gain in November. While exports for Europe held up, shipments to China dropped for the first time in seven months after a slide in car shipments.
The narrowing of the deficit indicates that the prolonged impact from the weak yen and high commodity prices is starting to ease, a factor that should reduce the drag of overall trade on the economy as Japan’s import bill rises at a slower pace. Still, with a global slowdown likely to deepen, weakening exports mean the balance is likely to continue in the red for some time.
The smaller trade gap is definitely positive, said Hideki Matsumura, chief economist at Japan Research Institute. “An increase in the trade deficit means there’s a higher outflow of income to foreign countries. If the deficit narrows, income remains in Japan, which is positive for both households and firms.”
The yen remained stronger than 140 per dollar in December, markedly gaining from its low in October, and helping lower import costs. Oil prices have also been steadily declining, another positive factor for Japan, which mostly relies on energy shipments from abroad.
Falling import prices could also slow accelerating price growth in Japan, after Tokyo’s core inflation reached 4% in December for the first time in four decades. Bank of Japan Governor Haruhiko Kuroda has argued that much of Japan’s inflation is still largely imported and therefore not sustainable.
The December data rounded off a record year of deficits, reflecting how much the weaker yen and high commodity costs weighed on the economy last year.
What Bloomberg Economics Says…
“We expect the trade deficit to widen slightly in January. The yen’s recent gains and lower oil prices should further temper the cost of imports, but weakening external demand should hit exports even more.”
— Yuki Masujima, economist
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While the import picture may look better going forward with the yen off its lows, the global economic slowdown is set to weigh on Japan’s exports going ahead. The December figures showed the second straight month-on-month fall in the value of shipments, an early sign of weaker global demand.
The World Bank slashed its growth forecasts for 2023 this month for most countries and regions, after central banks raised interest rates at a much faster pace than expected.
China’s virus situation will also continue to impact Japan’s exports. The world’s second-largest economy finally dropped its Covid Zero policy in December, temporarily offering a more optimistic outlook.
However the abrupt change of course immediately led to a sharp resurgence in infections, causing disruption and uncertainty within China and abroad.
The trade report showed exports to the US and Europe rose 16.9% and 27% from a year ago respectively. Shipments to China decreased 6.2%, dragged down by falling car and car part shipments.
“The global slowdown has meant export growth has particularly slowed in tech-related goods, including chips and manufacturing equipment,” said JRI’s Matsumura.
“Japan hasn’t had a wave of post-pandemic trade expansion. The world economy may enter an adjustment phase, but Japan may not be so severely affected” as it wasn’t following the global export growth trend in the first place, he said.
(Adds more details from the report, economist comments)
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