Japan’s June Trade Surplus up 53.4%

July 26, 2007
By Ken Worsley

According to preliminary data released by the Ministry of Finance yesterday, Japan’s trade surplus surged ahead 53.4% in June compared against June 2006. During that period, exports were up 16.2% and imports increased by 10.7%. By region, the middle east saw the greatest percentage increase, up by 55.8% to 239.2 billion yen. Japan, however, still holds a trade deficit in the region, primarily due to oil imports from Saudi Arabia and the United Arab Emirates.

Exports to Asia, however, led the boom, surging 16.2% to 3.542 trillion yen in June. Exports to Vietnam and India, nations which have been heavily visited by Ministry of Foreign Affairs officials, especially over the past year and a half, saw the greatest gains in terms of percentage, at 34.8% and 39.4%, respectively. Earlier in July, Truong Vinh Trong, the Deputy Prime Minister of Vietnam, had lunch with Foreign Minister Taro Aso, where the two discussed the necessity of judicial reform for Vietnam’s economic development and continued integration into the world economy. And last October, when Nguyen Tan Dung, the Prime Minister of Vietnam, met in Tokyo with Prime Minister Shinzo Abe, the two leaders agreed to begin negotiations on a Japan-Vietnam Economic Partnership Agreement, which began in January and are still ongoing.

Economic relations with India were ramped up during the Koizumi administration, with then Foreign Minister Yoriko Kawaguchi making two trips to that nation during her short tenure in Kasumigaseki. Since Shinzo Abe has come to power, discussions between the two nations have continued, with Abe asserting that Japanese firms need to establish greater presence in India.

Thus, we expect to see continued growth in Japan’s economic partnerships with these two nations.

Getting back to the report on trade: On Wednesday, the Foreign Ministry also announced that January-June 2007 figures showed a 59.3 percent increase versus the same period last year. Again, this is in yen-valued terms. Over this period, exports jumped 12.8% to 40.36 trillion yen while imports climbed 8.2% to 35.23 trillion yen. For the second consecutive half-year period, Japan’s total trade with China exceeded that with the US. Also notable was that trade surpluses with both China and the US declined over this six-month period.

So, why the massive growth in value of the trade surplus? I had been set to write a bit about the yen’s weakness and how that has affected (distorted?) the results, but Edward Hugh has already put together an admirably written post on this. Regarding the June statistics, Mr Hugh points out that:

…[W]hile exports climbed 16.2%, imports gained only 10.7% which was significantly below market expectations. The weaker import reading reflects both the weakness in the yen (and hence the relative cost of imported products) and ongoing weakness in domestic demand.

Well said. Those expecting to import to Japan need to be careful at this stage. With the market drying up (and a possible consumption tax hike on the horizon), it will take carefully niched, well marketed products to really stand out. Protectionist forces, of course, may rear their ugly head and it make take some more creative, outside the box thinking for importers to establish a foothold in this market.

With that out of the way, Mr Hugh gets on to the meat:

It is also worth bearing in mind that export volumes, which don’t take into account price and currency fluctuations, rose only 6.1% y-o-y in June, and thus that a significant part of the increase in the surplus comes not from increased output, but from the increased yen value of sales prices in other currencies.

6.1% is really nothing to sneeze at, but I agree with the use of the word “only” and I probably would have used it myself. The point here is very relevant: as exports make up a greater and greater part of Japan’s GDP, the value risk increases, especially when they may not be any more serious downward pressure on the yen (sure, we will have that last push down (all the way to 125?), but I’m looking at the next five years), especially if interest rates actually do rise next month, and double especially if they are risen twice before the end of 2007.

So, what is the hedge against this risk? You’ll have to read Mr Hugh’s post for that…

Filed Under Economic Reports, Exchange Rates