Japan trade deficit shows weak yen is weighing on economy

Japan’s imports rebounded in April as the weak yen boosted their value, pushing the nation’s trade balance into deficit and highlighting the increasing economic burden stemming from the currency’s plunge. 

Imports gained 8.3% from a year ago, the Finance Ministry reported Wednesday, compared with the consensus estimate of an 8.9% increase. The trade balance registered a ¥462.5 billion ($3 billion) deficit, flipping from a ¥387 billion surplus.

Exports advanced 8.3%, compared with the consensus of an 11% increase. 

Exports were boosted by shipments of cars, as the sector recovered from a certification scandal that disrupted factory operations at Daihatsu Motor Co., a Toyota subsidiary, for most of the first quarter. Exports of semiconductor manufacturing equipment and electronic components including chips also advanced. Imports got a boost from crude and aircraft.

The trade deficit, a negative factor for gross domestic product, reflects the growing economic pain associated with Japan’s beleagured currency. While the weak yen has helped boost earnings for exporters such as Toyota Motor Corp., it has also driven up costs of imports of everything from fuel and food to raw materials needed for manufacturing.

“My main scenario is that things will go in the right direction as cost-push inflation cools and consumption recovers with the impact of wage hikes,” said Taro Saito, an economist at NLI Research Institute. “But my risk scenario is that a weaker yen will worsen ongoing cost-push inflation and damage consumption.”

With Japan’s currency trading around a 34-year low versus the dollar, a majority of Japanese firms in a survey reported it’s becoming more of a problem as it pressures them to pass on rising costs of raw materials to customers via price hikes. Some have looked for the Bank of Japan to respond, as the wide interest gap versus the US is a key factor driving the trend. Governor Kazuo Ueda warned against excessive yen weakness earlier in May.

Strong demand in overseas markets, especially in the US, carries mixed ramifications for Japan. It may help the economy return to growth in the current quarter thanks to robust exports. It also underscores the strength of the US economy. By region, exports to the US and China rose 8.8% and 9.6%, respectively, while those to Europe fell 2%. 

What Bloomberg Economics Says...

“Japan’s stronger April exports are a good sign that second-quarter GDP will rebound from a drop the prior quarter that was largely due to weak outbound shipments. An acceleration in auto exports helped drive last month’s faster overall gains.”

— Taro Kimura, economist

Strength in the US economy has prompted economists to push back their expectations for rate cuts by the Federal Reserve. The dollar has benefited as a result. 

The yen averaged 151.66 to the dollar in April, almost 15% weaker than a year ago, the Finance Ministry said. Recent sharp moves in the yen after it fell beyond 160 per dollar in late April suggest that ministry authorities intervened in the foreign exchange market to support it.

The weak yen has become a focal point not only for trade, but also for the economy and policymaking. It revives concerns over cost-push inflation, which weighs on consumption, as the Bank of Japan waits and sees if high wage growth would help consumers shrug off rising living costs with resurgent spending, which could kindle demand-led inflation.

The world’s fourth-largest economy contracted in the three months through March with consumers and companies cutting spending. It’s largely projected to rebound in the quarter through June, although there are some concerns over the potential for stagflation, wherein prices rise even as growth sputters.