Japan trade deficit narrows sharply from record as imports slow

Japan’s trade deficit narrowed sharply in February from the previous month’s record shortfall, as the impact of the lunar new year in China reversed, slowing imports and encouraging exports.

The trade gap shrank to 897.7 billion yen ($6.8 billion) from 3.5 trillion yen in January, the finance ministry reported Thursday, coming in below analyst forecasts. Imports rose 8.3% from a year ago, decelerating from the previous month on a slowdown in energy shipments. Exports climbed 6.5% as cars pushed up gains. 

The reversal of impacts from January’s lunar new year holidays meant that China was a lead cause behind the narrowing of Japan’s trade deficit last month. But a jump in exports to the rest of the world also signaled a more solid recovery for the world’s third-largest economy, after it narrowly avoided a recession at the end of last year.

“China’s PMI showed a recovery of production activity after the reversal of its Zero Covid policy, likely boosting Japanese exports to China,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “The Japanese economy is expected to continue its gradual recovery, with progress in the ‘with-covid’ lifestyle, rebounding inbound demand, and easing supply restrictions.”

Thursday’s trade report showed exports to the US were up 14.9% from the previous year, while those to Europe gained 18.6%, both gaining pace from the previous month. Shipments to China fell 10.9%, slowing from February’s 17.1% decline.

Still, February saw the 19th consecutive month of trade deficit, highlighting Japan’s long struggle to recover from the impact of Covid amid a weaker yen and higher oil prices. 

Economists also warn of multiple downside risks ahead, including uncertainty over the impact from global interest rates hikes as central banks continue to fight inflation around the world.

The outlook is further clouded by the collapse of Silicon Valley Bank and a full-blown crisis brewing at Credit Suisse Group AG, with some of the world’s biggest banks racing to shield their finances from the potential fallout.