Japan swings to trade deficit

Global demand worries raised as exports slump on Europe, China

12:28 August 22, 2012

Tokyo: Japan’s exports slumped the most in six months in July as sales to a debt-ridden Europe and a sluggish China dropped, adding to concerns over global demand after a string of dire trade figures from Asia’s export engines.

The 8.1 per cent annual fall was far deeper than economists’ median forecast of a 2.9 per cent drop. A 25.1 per cent plunge in exports to the European Union, the biggest such drop since October 2009, saw Japan post a record trade deficit with the region.

The data increased the risk that overseas demand for Japanese goods may not recover before strength in domestic spending, which has been underpinned by the reconstruction after last year’s earthquake, begins to fade.

That could stall what is an otherwise fragile recovery in the world’s third-biggest economy.

“Europe’s debt crisis is the first factor to pull down exports, and the pace of decline is striking. This is comparable to the post-Lehman situation,” said Masayuki Kichikawa, chief Japan economist at Bank Of America Merrill Lynch in Tokyo.

“We hoped domestic demand in China would support Japan’s economy, but the story is different.”

The Japan trade figures extend a flurry of data from Asia that has shown much weaker than expected exports from some of the world’s biggest trading hubs.

Exports from Taiwan, a key part of the global technology supply chain, fell for a fifth straight month in July. South Korea, home to major carmakers, computer chip and flat-screen producers, recorded its sharpest fall in exports in July in nearly three years.

China’s exports rose just 1 per cent in July, undershooting expectations by a big margin.

The strength in Japan’s domestic demand is seen petering out toward the end of this year, and policymakers had been counting on exports to big markets like China to make up for the slack and keep the economy on a recovery course.

The signs are not promising though.

Exports to the EU tumbled by 25.1 per cent in July from a year earlier. This was the biggest decline since October 2009, when they fell 29.0 per cent due to the US financial crisis, highlighting the struggle European economies are facing.

Exports to China, Japan’s largest trading partner, fell 11.9 per cent from a year earlier, the biggest decline in five months, due to lower shipments of semiconductors, electronics and car parts.

That gels with China data that has shown economic growth struggling to pick up after six straight quarters of decline despite two rate cuts and reductions in banks’ required reserves.

The value of Japan’s exports to Europe is about half the size of what it exports to China, but the plunge in shipments to Europe and a slower-than-expected recovery in China hurt overall exports.

In another discouraging sign, Japan’s exports growth to the United States slowed in July for the third consecutive month, rising 4.7 per cent from a year earlier.

Reflecting the sharp decline in overall exports, the Ministry of Finance figures showed Japan swung to a larger-than-expected deficit of 517.4 billion yen (Dh23.8 billion).

Data from South Korea and Taiwan suggested little let up in the exports pressure.

In the first 20 days of August, South Korea’s exports fell 12.4 per cent from a year earlier, leaving a $4.5 billion (Dh16.5 billion) trade deficit for the period.

Orders for Taiwan’s exports, a forward indicator of demand, slumped 4.4 per cent in July over the previous year, far more than expected.

Economists have reduced their expectations for Japan’s growth in the September and December quarters, but they still forecast it will outpace most other G7 countries by expanding 2.2 per cent in the fiscal year to March, a poll showed on August 17.

The Bank of Japan is becoming less convinced about its forecast the economy will resume a recovery toward early next year. But it hopes to stand pat on monetary policy for as long as possible to save its limited further options, after having expanded monetary stimulus in February and April.