April 20, 2016, 19:30 JST

Expanding exports to EU not enough to change the tide

Japanese exports managed to expand modestly in real terms in March 2016. The export volume index rose by 1.9% month on month, after a seasonal adjustment. By regions, exports to EU expanded robustly in March, while exports to US and China remained stagnant.

The robust growth in exports to EU in the last few months is encouraging, but it alone will not be enough to change the generally stagnant export trend. Exports to US and China together account for roughly 40% of Japan’s total export. They have remained stagnant for the last few years and the sharp depreciation of yen has done surprisingly little to Japan’s trade volume.

On the import side, low commodity prices and the appreciation in yen are helping Japan to keep reducing its import bill. In yen terms, imports have shrunk from the recent peak of 7.8 trillion yen in March 2014 to 5.6 trillion yen in March 2016. The shrinkage has come mostly in fossil fuel imports that shrunk from 2.8 trillion yen in March 2014 to 0.7 trillion yen in March 2016.

As a result, Japan is enjoying a trade surplus again. At 0.28 trillion yen, the size of the surplus is still modest though. A moderate rise in commodity price could easily bring the balance back to zero.

The global economy may be succeeding to avert a hard landing scenario in 2016. However, the ongoing appreciation in yen is certain to hurt the profitability of Japanese manufacturers. In our view, the economic path to growth and reflation is closing off quickly before our eyes and Japanese policy makers seem powerless to fight back the setting sun.