The new salvation religion being preached in Japan to a hardened and cynical bunch who’ve lived through one of the worst bubbles and busts in recent history is this: prodigious money-printing by the Bank of Japan would devalue the yen, among other things, causing exports to skyrocket and imports to shrink. The resulting trade surplus would save Japan. But the opposite is happening – and it’s happening fast!
So there was a thimble of good news: exports jumped 12.2% in July from a year ago, the Ministry of Finance reported on Monday. Alas, they were valued in weakened yen. In terms of volume, exports rose only 1.8%. So, Abenomics has accomplished almost nothing in terms of cranking up the real economy via exports.
But it paid a huge price. Imports surged 19.6%, driving the trade deficit to ¥1.024 trillion ($10.5 billion), the thirteenth month in a row of trade deficits, the longest such spell since the 14-month spell in 1979-1980 (to be broken this month). It was almost double the trade deficit of July 2012. And in July 2011, Japan had a surplus of ¥72.5 billion. By that time, the shutdown of Japan’s nuclear reactors had already started. In July 2010, before the reactor shutdowns, Japan had a surplus of ¥784.6 billion. And in July 2007, a surplus of ¥1.25 trillion! That was the old Japan, the export nation.
It was the worst July trade deficit ever, and the third largest overall, after the deficits of ¥1.6 trillion in January 2013 and ¥1.5 trillion in January 2012.
For the first seven months, the trade deficit hit a record of ¥5.8 trillion up 74.5% from the same period in 2012, and up 625% from 2011. During that period in 2010, Japan had a surplus of ¥4.1 trillion!
Japan is venturing into new territory. July was the worst July ever. June was the worst June ever, May the worst May ever…. The deterioration has been steep and unrelenting. There hasn’t even been a statistical squiggle yet. And nothing suggests that there is a turning point near the horizon. Just ominous clouds.
The chart, going back to 2011, shows how the trade deficit in each month of 2013 deteriorated from the equivalent month in 2012; and how those months had deteriorated from their equivalent months in 2011.
China is Japan’s largest trading partner. Nearly a quarter of Japan’s exports go there, and nearly a quarter of its imports come from there. They might hiss at each other and hate each other and rattle with their sabers as they stumble over island issues, historic massacres, or shrine visits, but economically they’re joined at the hip.
Trade with China is notoriously murky. Over a third of Japan’s exports to China are transshipped through Hong Kong, while imports from China are not. So we have to add China and Hong Kong together. Combined exports rose 11.4% to ¥1.414 trillion, but combined imports jumped 18.5% to ¥1.499 trillion, for a trade deficit of ¥85.8 billion.
In July 2012, Japan booked a surplus of ¥2.6 billion with China and Hong Kong, and in July 2007, a surplus of ¥178 billion. Until recently, Japan was one of the few major countries to have had trade surpluses with China. This is what’s happening to Japan: exports to China and Hong Kong in 2013 were down 4.5% from 2007, while imports were up 15.1%.
It has nothing to do with oil and LNG, or the heat wave, but with Japan Inc.’s strategy to outsource production to China. Wages are cheaper, sure, but they’re rising. No, the primary reason is to be closer to customers in the largest market on earth. And devaluing the yen won’t change that equation.
Trade with “North America” – defined as the US and Canada – looked brighter. Exports soared 17.5% to ¥1,172 billion, imports rose 18.5%, from a low base, to ¥718.8 billion, and the perennial trade surplus widened 15.9%. For the month, the US was by hair the largest export destination, ahead of China.
In Western Europe, the opposite happened. Exports jumped 14.4% to ¥585 billion, but imports jumped 15.1% to ¥736, and the trade deficit widened 17%. Blame imports of French and Italian luxury goods and German cars to satisfy the tony tastes of the beneficiaries of Abenomics and the recipients of the newly printed yen.
The import debacle unfolding in Japan has been ascribed to fossil fuel imports, following the shutdown of Japan’s nuclear power plants. So, imports of Mineral Fuels jumped 20.7% in July. Petroleum, the largest subcategory, soared 30.2% to ¥1.09 trillion and LNG rose 16.9% to ¥621 billion. A heat wave buried Japan under a layer of insufferable swelter; air conditioners were cranked up, and powerplants burned through the fuels at record pace.
But all categories painted a dismal picture. Imports of food rose 16.2%, of raw materials 24.2%, and of chemicals 14.4%. Imports of Manufactured Goods jumped 18.6% to ¥563.7, of Machinery (including computers) 24.2% to ¥547.9 billion, and of Electrical Machinery 13.3% to ¥839.8 billion. Its largest subcategory, Semiconductors, soared 40.5% as the industry, one of the erstwhile industrial crown jewels, is shutting down in Japan.
Transportation equipment skyrocketed 30.8%. The category “Others” rose 21.6%, with scientific and optical instruments up 9.8%, clothing up 29.2%, and furniture up 33.3%.
There wasn’t a scintilla of good news on the import side of the ledger. It’s a tabulation of the deindustrialization of Japan. It has been going on for years, but slowly. The earthquake in 2011 pushed Japan Inc., and now Abenomics incentivizes Japan Inc., to move production overseas – and then import the products.
When Japanese companies produce overseas, their revenues and profits from that production are translated into yen on their financial reports. A weaker yen means that sales and profits from overseas have a phenomenal impact on the bottom line. On paper. Some of the most illustrious members of Japan Inc. have seen their profits double – without much actual improvement in their business. That’s where Abenomics is excellent: paper profits for Japan Inc. For the rest, it’s a religion that requires a huge leap of faith.
You don’t seem to “think Abenomics is working,” a reader wrote, followed by tough questions and a comparison to Kyle Bass, who has been betting on a “full-blown Japan crisis.” It got me thinking. I’m attached to Japan. What started in 1996 has turned into a complex relationship. But now that Abenomics is the religion of salvation, I’m even more worried. Read…. Why I’m Deeply Worried About Japan – And Why Betting On The Collapse Of JGBs Is A Horrible Idea.
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.