June 18, 2014, 11.00 JST

Surprisingly weak imports in May suggests a deteriorating economy

International trade activities in May were weak with both exports and imports shrinking from April. After seasonal adjustment, exports fell by 1.2% month on month (MoM), and imports by 1.3% from May. Trade deficits in May was 0.86 trillion yen after seasonal adjustment, a slight improvement from 0.88 trillion yen in April. Year on year change of exports and imports were also in the negative, exports declining by 2.7% year on year (YoY), imports declining by 3.6% YoY.

While the news of stagnating exports is nothing new, the decline in imports in May was quite surprising. Imports had already fallen by 9.9% MoM between March and April, and most economists including us were expecting a modest expansion in imports in May. The continued decline of imports in May suggests that the weakening in the economic activities in Japan may have continued into May. Japanese policy makers have been maintaining an optimistic view that the VAT hike in April will only have a transitory negative effect. The weak imports figure from May suggest otherwise. The immediate concern is the results of industrial production data to be released on June 30th. As the chart above shows, there is a strong correlation between imports growth and industrial production growth. If industrial production continue to decline in May, as today's import data suggests, it will undermine the notion that the negative shock from VAT hike would be temporary.  

For more details on custom cleared trade data, please click here.