The Flame-Out Of Abenomics, in One Crucial Chart

Abenomics, the new economic religion of Japan, has kept some of its promises: It created inflation while wages stagnated, thus whittling down real incomes, further squeezed by the broad consumption tax hike. It devalued the yen by 25%, thus vaporizing a quarter of the wealth of the Japanese without having to tell them directly. And to make up for the tax increase on consumers, Abenomics elegantly cut taxes for Japan Inc. Grudging respect is due Prime Minister Shinzo Abe for these noble accomplishments.

In other areas, his record is spotty. One of the goals of his policies was to fire up exports by making them cheaper overseas and reduce imports by making them more expensive to consumers and businesses at home. It would crank up Japan’s manufacturing sector and lead to a trade surplus that would inflate GDP, make Abe a hero, and save Japan.

Exports and trade surpluses have been vital to the Japanese economy. And reconstituting them has been a cornerstone of Abenomics. But that plan has gone to heck.

Not step by step, gradually over time, but in monthly leaps, whose size surprised even Abenomics-cynics like me. And the Ministry of Finance rubbed it in today when it published the trade statistics for June.

Exports, instead of soaring due to the watered-down yen, dropped 2.0% from a year ago to ¥5.94 trillion. Imports, instead of dropping due to consumers being squeezed by higher prices and stagnating incomes, soared 8.4% to ¥6.761 trillion. The resulting goods trade deficit jumped to ¥822.2 billion.

It was the worst trade deficit for any June ever. It was over four times as bad as last year’s “worst June deficit ever.” In June 2012, Japan still had a surplus. Historically, June is one of the better months for Japanese trade. But that surplus in June 2012 was Japan’s last. What followed were 24 months of relentlessly deteriorating trade deficits. The worst series in Japan’s recorded history (far ahead of the second-worst, the 14-month period in 1979-1980).

For the first six months this year, compared to the same period last year, the trade deficit soared 57%!

Here is what the flaming success of Abenomics looks like, boiled down to one chart:


The debacle was spread across the board, starting with its largest trading partner, both in terms of exports and imports, China. Since about one-third of Japan’s exports to China get transshipped through Hong Kong, I combine them. So exports to China and Hong Kong edged up 1.6%. But imports from them jumped 10.6%. And the trade surplus in 2013 of ¥57 billion turned into a trade deficit of ¥63 billion. That’s a deterioration of ¥120 billion. Even exports to the US, its second largest trade partner, declined 2.7%, while imports from the US rose 6.8%.

The export declines were spread across the largest categories: transportation equipment (cars, trucks, etc., which account for nearly a quarter of all exports) dropped -0.6%; machinery (about a fifth of all exports) -0.4%; electrical machinery (semiconductors, audio-video equipment, batteries, etc.) -5.1%; manufactured goods (steel products, etc.) -0.2%.

And imports rose across the largest categories. Mineral fuels (petroleum, LNG, coal, etc.), which make up nearly one-third of all imports, rose 8.3%.

I can already hear the voices that blame the imports of LNG and coal required to feed the fossil-fuel power plants that have replaced the capacity of the shut-down nuclear reactors. But wait. Imports of LNG and coal combined totaled ¥749 billion. If Japan hadn’t imported any LNG or coal – which is impossible even with all nuclear power plants running at full tilt – it would still have had a trade deficit of ¥73 billion.

The problem lies in a strategic shift undertaken by Japan Inc. – offshoring – to take advantage of cheap labor in China and elsewhere, though it lagged behind the US in that respect. Japan Inc. accelerated that shift after the 3/11 earthquake and tsunami, when supply chains in Japan collapsed. And when Abenomics came along, they redoubled their efforts at offshoring: the devaluation of the yen allows them to translate revenues and profits from foreign operations into weaker yen, thereby performing paper miracles on their financial statements. And promises of additional devaluations make that incentive to offshore even juicier.

Some of the offshore production is then imported. So imports of the largest categories all rose: electrical machinery up 7.7%, machinery up 14.2%, and manufactured goods up 14.0%. Japanese companies used to excel in these categories. While some have gotten clobbered by international competitors, others still excel at designing and making these products. They just don’t manufacture them in Japan anymore.

Given the incentives that Abenomics gives Japan Inc. to invest and produce overseas, rather than in Japan, these dynamics are unlikely to change direction. And the ballooning trade deficits will become an albatross around the economy’s neck. But don’t expect consumers to jump in enthusiastically and help out. They’re squeezed by stagnating incomes accompanied by inflation and a consumption tax hike – what I call “inflation without compensation.” It knocked their purchasing power overall down by 3.6% for all items, including services, year over year, and by 5.6% for goods. And they’re unlikely to pull Japan out of its post-tax-hike funk anytime soon.

Companies are now grappling with it, after the surge of consumer and corporate spending before the tax hike. And a terrible corporate hangover has set in. Read…..  Japan Inc.’s Worst Quarterly Outlook Since The 2011 Earthquake

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  9 comments for “The Flame-Out Of Abenomics, in One Crucial Chart

  1. matt says:

    Wait until you see the inflation numbers that just came out tonight Wolf! worse in over 20 years!

    • Wolf Richter says:

      I just updated them (including the link). They didn’t change much from a month ago, but what a slammer year over year! 5.6% for goods! Service providers seem to be eating much of the 3 percentage point consumption tax hike, rather than passing it on to consumers. I should write a post about that :-]

      • Mike in Tokyo Rogers says:

        But wait until we spend trillions of tax monies on the Olympics for hotel, office buildings, stadiums, etc.. (that no one will use after 2021). That’ll fix everything! You’ll see….

        As for me, my total per capita alcohol consumption has increased three-fold all the while I lowered my costs by drinking cheaper shit.

  2. HD says:

    Who was it that said some years ago: “Japan is a bug in search of a windshield”? We are looking at a country that is dying economically, in real time now. The trade deficits have become nothing short of appalling. And this is Japan we’re talking about, not some third rate economic basket case.

    I have this same sensation of dread mixed with a dose of fascination when looking at Venezuela. This is the country with the largest proven oil reserves in the world, if I recall correctly, yet it is imploding as we speak, with almost laughable shortages in basic necessities.

    I sure hope this is not what’s in store for the rest of us. But I’m not optimistic.

  3. Adam says:

    No matter what happens, Japan won’t be as bad off as many think. If you think that you can look at Venezuela and Japan in the same way, you’d be mistaken. Because in Japan there’s 1) the Japanese people themselves (their resilience, intelligence and low crime rate) and 2) the infrastructure that’s in place as of now. (None of this exists in Venezuela.) Yeah, a “collapse” in Japan will result in economic hardship. If the Yen goes “back” to 265 yen to the dollar, 6 months after that the Yen will be at 255 yen to the dollar and it will keep going up. It’s very politically correct I guess not to factor in the “people” themselves in countries, but the Japanese people, whatever happens, will never be down for very long.

    • Wolf Richter says:

      Well said, Adam. There won’t be chaos. I’m sure of that. I’m married to a Japanese, and I hang out with Japanese all the time, and what they really hate is chaos. Everything is going to happen in an orderly manner.

      Their national debt can no longer be resolved by paying it back in the traditional sense. They’ll have to default on it, one way or the other. The problem is that this debt is part of the wealth of the Japanese institutions and individuals that hold it (it’s 95% Japanese owned). And this “wealth” will then be devalued. Everyone knows that. And they’re all hoping that it can be pushed out as far as possible for as long as possible and be made as slowly as possible.

      Problem with that is that they’re piling on new debt at an incredibly fast rate. And there is no real effort underway to fix the current issue. So by pushing it out, they continue to make the problem much bigger.

    • HD says:

      As far as Japan goes, you’re correct on both counts: they have an impressive infrastructure and they are a remarkably resilient and highly educated people. But still – as an outsider with, I’ll admit, only a superficial insight in their national traits – I have mixed feelings about the Japanese, because at times their resilience seems to morph into plain societal docility. And in spite of their intelligence, they allow their rapidly growing national debt to go off the rails, which obviously can only lead to terrible hardship. What is it they expect: that this problem will be resolved without too many bumps along the road or are they simply stoically bracing themselves for the inevitable impact? Either way, it’s a very passive, fatalistic way of dealing with the situation. Mind you, we’re hardly any better in this regard: in the West normalcy bias seems to reign supreme. Another thing I do not understand about the Japanese: their demographic projections are pretty scary, and that’s also a problem they hardly seem to be tackling.

      And you’re right of course, there’s no comparison possible between Japan and Venezuela, but that wasn’t my intention either.

      • Abenomics says:

        Yes it seems the Japanese feel that because of their huge reserves they won’t be effected. This combined with a huge dose of ‘shoganai’ – there’s nothing you can do, so why bother. There is still a lot of blind faith in leadership bordering on apathy. During the Fukushima crisis the ambivalence in the populace was astounding, the Japanese can make the Brits look like Yanks with their stoicism. I was showing people here the wind and worst case fallout projections and nobody cared. This is a blessing and a curse. I’m afraid we will plunge full speed over the abyss and people will finally take notice when it’s much too late. There still is a lot of cash in the futons and Abe is hell bent on getting it out by any means.

  4. B Wilds says:

    Japan continues to slide towards an economic abyss with each passing day. The writing is on the wall. Japan is facing a wall of debt that can only be addressed by printing more money and debasing their currency. This means paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan’s public debt, which stands at around 230% of its GDP and is the highest in the industrialized world.

    The moment the Japaneses stock market fails to rise enough to offset inflation this will turn into a tsunami of money fleeing Japan and constitute the end of the line for those left holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.

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