Japan’s trade surplus rose to 680 billion yen boosted by high exports. Exports to China jumped significantly by 28% year on year. (March 22nd)
On the surface, Japan is having the best of its times. Corporate profits are at a record high and the unemployment rate is at its 22 year low. However, we think Japan is on borrowed time. Japan owes its current prosperity to an unsustainable monetary policy. In our view, the BoJ is likely to reach its limit before the end of 2018.Read more..
The rising energy prices are starting to affect the trade balance of Japan. In January 2017, the trade surplus of Japan fell to 156 billion yen, equivalent to mere 0.3% of GDP in an annualized term. January 2017 also marks as the month Japan started to import LNG from the United States. As a result, energy imports from US more than doubled from a year ago. The news must be a godsend for the Shinzo Abe administration as it struggles to contain a potential trade war with US.Read more..
The Trump administration is stepping up its accusation that Japan is manipulating its currency to its advantage. Unlike other accusations, this one is in fact on the mark. Weakening yen was a campaign promise of Shinzo Abe when he became Japan's Prime Minister in 2012. It is also a common knowledge among economists that the exchange rate is the main transmission mechanism through which the quantitative easing of the BoJ affects the economy. Lined up alongside Chinese yuan and Euro, the Japanese yen is the most vulnerable as it is indeed significantly undervalued. The threat to attack the currency policy of Japan should prove to be a great bargaining chip for U.S. to extract concessions from Japan.Read more..
Japanese manufacturers seem to be in an expansive mood. In the last 5 months of 2016, Japan's industrial production and its exports rose by 4.0% and 3.9% respectively. The news could be a mixed blessing for the Japan though. With Prime Minister Abe due to meet President Trump on February 10, Japan does not want to give further ammunition to the accusation that Japan may be unduly benefiting from its trade with the U.S. In our view, Japan's position is at its weakest when it comes to defending the current weak level of yen. Japan's monetary policy has been implicitly targeting exchange rates in the last few years.Read more..
Corporate profits in Japan seem to be staging an unexpected comeback. The BoJ Tankan business condition DI for large manufacturers showed a first improvement in the last 6 quarters. Smaller sized companies, both manufacturers and non-manufacturers, also showed improvements in their business condition in December. These results strongly indicate that corporate profits in Japan may have renewed its peak in the current quarter. Corporate managers seems cautious through. Despite the likely record profits, they still decided to cut capital investments in FY2016 and they expect business conditions to worsen in the coming quarter. We tend to sympathize with their cautious view. Demands may have recovered somewhat in the second half of 2016 and yen did depreciate rapidly, but there is nothing hard to grasp on to have confidence in its sustainability. After nearly 4 years, Abenomics has very little to show in terms of structural reforms. We continue to think that the growth in the Japanese economy lack robustness and the potential reward for taking risks seem limited.Read more..