May 21,2014,10.00 JST

The weakened economic activities shrunk the trade deficit in April

Japan’s seasonally adjusted trade deficit improved significantly in April, shrinking from 1.6 trillion yen in March to 0.8 trillion yen in April. The improvement was caused by a reduction in imports, rather than by an expansion in exports though. Imports fell by 10% month on month between March to April, causing the deficit to shrink. The decline in imports in April is likely to be a reflection of how economic activities in Japan weakened in April with the VAT hike. 

On the other hand, exports remained virtually flat in April, eking out 0.6% month on month growth. By region, exports to Europe seems to be doing slightly better, although not by much. In terms of year of year growth of exports volume, exports to EU led the pack by expanding 4.8% year on year in April, while exports to US and to Asia sagged behind by -1.5% YoY and -1.1% YoY respectively. 

While the trade deficit did shrink in April, it is still notable that Japan has a trade deficit even with a reduced economic activities. Japan's deficit now seems very structural. 

Why is Japan suffering from trade deficits? In our view, there are two principal reasons. The first is the under-capacity in Japan. 5 years after the economic recovery started in the aftermath of the Lehman shock, private capital investment in Japan is still below the level in 2007. The Tohoku earthquake in 2011 also compounded the under-capacity problem. It seems that the manufacturers in Japan is gradually abandoning the idea of exporting from Japan. The second is the surge in domestic demand since 2013. The robust domestic demand fueled by consumption and public investment are overwhelming the production capacity in Japan, necessitating imports from overseas. If Japan is to keep its growth, Japan needs to start to invest in its domestic capital. Otherwise, any additional surge in demand will only lead to larger imports, not to an increase in domestic income. 

For more details on the statistics, please click here.