“Export or Die” is a phrase at which Americans will smirk, but it is not a joke in Japan. Japan has
few of the natural resources needed by a modern economy, and is deficient in food production. These it must import. To pay for imports it must export. It is a matter of survival, a fact of life viscerally understood in Japan.
It is this fact that makes so worrying recent trends. According to MOF figures released October 22, for the month of September Japan’s exports plunged by 10.3% compared with a year before. It was the fourth consecutive month of decline. In the same month, imports increased by 4.1% YoY. For the month, the trade fell into deficit of JPY 559 billion (USD 7 billion), the third consecutive month of deficit and the largest amount ever for the month.
The trade deficit for the first FY half was JPY 3.2 trillion (USD 41 billion), the largest deficit ever for a half year. Overall exports were down 2% while imports were up 2.6%.
Looking at causes, we can see that the situation is likely to get worse. Not surprisingly given the crisis over the Senkaku/Diaoyu island territorial dispute, the most severe deterioration was seen in trade with China, still Japan’s biggest trading partner. Exports to China in September fell 14.1% YoY. The damage was most evident in autos, down 44.5%, and power equipment, down 48.7%. In August auto exports had declined by 13.2% YoY. September thus saw a worsening of the trend, but anti-Japanese demonstrations and sentiment in China were building slowly before mid-month. The full impact of anti-Japanese actions in China, and reactions from Japanese companies, will only be reflected in October trade figures. Japan’s trade deficit with China in September, at JPY 329 billion (USD 4.2 billion) was the largest ever. For the half year the deficit was JPY 1.5 trillion, up 78.6% YoY.
While exports to the U.S. were firm on vehicle shipments, they were down to Europe.
In the meantime, Japan’s import needs have continued to increased, most notably—because of both the volume and upward trend—energy. Having shut down almost all nuclear plants, Japan is importing more oil (up 26% YoY September) and LNG (up 11.4%) and converting plants to burn these fuels.
Economists will argue that what matters for Japan is not the trade account, but the current account, which includes Japan’s earnings from overseas investments and operations. The current account is in surplus, but at some point a falling trade balance could send the current account into deficit, creating huge dangers and risk of macro financial market disruption.
Persistent and worsening trade deficits reflect what may be considered temporary or cyclical factors: weak demand in key external markets, China, the U.S., and Europe; Japan-China tensions; and the strong yen. They also evidence structural changes—particularly progressive “hollowing out” and relocation abroad of some Japan’s manufacturing base, accelerating under the pressure of a high yen and increased energy costs—as well as a new, post Fukushima level of dependence on foreign energy imports.
Can anything be done to reverse or, at least, slow these pernicious trends? One step would be to quickly conclude new market-opening and tariff and non-tariff barrier lowering trade agreements like the Trans Pacific Partnership (TPP), the Japan-China-Korea Free Trade Agreement, the Asean + 6 (“Regional Comprehensive Economic Partnership”–RCEP) agreement, and the Japan-EU TFA, all currently planned or at some stage of negotiation.
The October 21 Nihon Keizai Shimbun carries an analysis of Japan’s progress in advancing these agreements. The U.S.-led TPP, which includes also Peru, Chile, Canada, Mexico, Australia, New Zealand, Singapore, Malaysia, Vietnam, and Brunei, has little support in Japan outside the Keidanren and is in fact opposed by both the ruling Democratic Party of Japan (despite PM Noda’s personal sympathy for it ) and the opposition Liberal Democratic Party. Given Noda’s currently tenuous hold on power amid pressure to call a general election, there is no chance that he will risk further party defections by formally committing Japan to enter the TPP talks.
As for the Japan-China-Korea FTA talks, plans were to officially announce a start of negotiations at the November 18-20 East Asian Summit. With Japan now close to crossing swords with both Korea and China in territorial disputes, a meeting of national leaders—the normal venue for such announcements—looks impossible. The “announcement” may simply become distribution at the meeting of a document stating that the talks will start, an unprecedentedly low-key launch.
For a number of reasons, not least that it would keep the talks an “Asian” affair (seemingly a strategic goal of China), the Asean +6 (RCEP) talks seem most likely to gain momentum and to produce substantial intermediate and long term results. The talks would bring together the non-Asean “six”—Japan, China, Korea, Australia, New Zealand, and India—plus the Asean “ten”—Singapore, Philippines, Thailand, Indonesia, Malaysia, Myanmar, Vietnam, Brunei, Laos, and Cambodia. These countries August reached agreement in principal at the Asean Summit in to seek a free trade agreement. A formal announcement of a schedule is expected at next month’s East Asian Summit.
Both cyclical and structural trends in trade are worrying for Japan. These make more urgent the need to aggressively seek barrier-lowering trade agreements. Of these, the “all Asian” Asean+6 talks may offer the best prospects for success.