Japan: Tug-of-war between positive exports and higher energy prices – Nomura

In view of the analysts at Nomura, Japanese economic momentum is strengthening as the BOJ upgraded its assessment on the economy yesterday, while highlighting that exports have been on an increasing trend.

Key Quotes

“In fact, Japanese industrial production and real exports have been recovering since mid-last year. Japan’s manufacturing PMI has recovered too, with the latest reading pointing to an ongoing rise in exports. The improved Asian export cycle will also likely support Japanese exports for the time being.”

“Stronger export volumes have been boosting Japan’s trade balance since mid-last year. In contrast, import volumes have been roughly flat over the past 12 months. As a result, the trade balance has improved in real terms since last summer.”

“In nominal terms though, Japan’s trade balance has been roughly flat, as prices of imports and exports are working negatively for it. This is primary owing to the recovery in energy prices in JPY terms. Nominal mineral fuel imports recovered to JPY17.9trn (annualized) in March, while they reached just JPY9.4trn in April 2016. The estimated contribution from price changes (terms-of-trade changes) to the trade balance has deteriorated by JPY5.3trn between February 2016 and March 2017, offsetting much of the positive impact from real exports during the period (+JPY6.3trn).”

“The latest US Treasury FX report advocated that Japan needs to use all policy levers including accommodative monetary policy to support domestic demand growth, as weak domestic activity is contributing to Japan’s trade imbalances. In fact, as the oil price recovery has stalled recently, with no recovery in imports and domestic demand Japanese external balance could start widening again, as real exports will increase further. The positive exports data and higher energy prices have been offsetting each other, but the momentum of real imports will be important for Japan’s external balance (and hence trade policy discussions) going forward.”