Japanese manufacturers seem to be in an expansive mood. Industrial production expanded by 0.5% month on month in December, bringing the cumulative expansion in the last 5 months to 4.0%. The expansion in the output is supported by a similar rise in exports during the same period.
While expansion in exports and industrial output is a welcome news for the Japanese economy, the timing may not be ideal. Japan’s Prime Minister Shinzo Abe is scheduled to meet President Trump on February 10 and the subject of trade imbalance between Japan and US is bound to come up. Perhaps, Prime Minister Abe would have preferred to have seen a weaker performance of Japanese exporters to help fend off the accusation that Japan was unduly benefiting from exporting to the world.
Indeed, Japan no longer possesses the export prowess it once did. Japan’s real exports have been mostly stagnant in the last 10 years. Nearly 10 years after the Lehman shock, Japan’s real export is yet to exceed the pre-Lehman shock peak. Japan’s trade surplus used to be as big as close to 4% of GDP in mid 1980s, but in 2016, it is mere 0.8%.
Having said that, while Japan’s position as a global export powerhouse has declined, Japan is still one of the largest trade partner with whom the U.S. has a large trade deficit. Between January to November 2016, U.S. recorded 62 billion USD trade deficits with Japan, the second largest after 319 billion USD worth of deficits with China.
Japan has another weak point when it comes to fending off accusation that it is grabbing undue share of global demands. In the past few years, the Japanese government has been guiding yen lower, primarily implicitly through aggressive easing in its monetary policy, but sometime explicitly through verbal interventions uttered by policy makers. As a result, Japanese yen is trading at a level close to its lowest level in 40 years after adjusting for the inflation.
In our view, Japan’s position is the weakest when it comes to defending the current weak level of yen. Japanese policy makers, including its central bankers, should do their utmost to avoid being perceived as manipulating the exchange rates to achieve their policy objectives.