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Weak trade picture adds pressure to get Japan’s ‘Abenomics’ in motion

Japan's Prime Minister Shinzo Abe attends a lower house plenary session at the parliament in Tokyo, Feb. 5, 2013.

ISSEI KATO/REUTERS

Japan's latest trade numbers are even gloomier than many forecasters expected, ratcheting up pressure on Prime Minister Shinzo Abe to get his vaunted "Abenomics" revival strategy in motion.

Japan posted a record trade deficit in January of almost ¥1.63 trillion (unadjusted), the biggest monthly gap since statisticians began publishing such numbers in 1981 and the 23rd consecutive decline.

What's worse, the country now faces a current account deficit (also unadjusted) for the third month in a row, something that has never happened before.

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Mr. Abe's government blames an overvalued currency for the yawning trade and current account gaps, the sluggish economy and just about every other ill now plaguing the critically ailing economic giant. But it is not the yen that is driving Japanese to spend more on imports or to dramatically reduce savings.

"For the current account to be in deficit, a nation has to be consuming more than it is making," Carl Weinberg, chief economist with High Frequency Economics, said in a research note.

"This is Japan's problem: To restore balance to its current account transactions, it has to rope in excess spending by the public sector and save more overall."

But Abenomics calls for a huge hike in public spending and more aggressive action by the Bank of Japan to end the curse of deflation, drive the yen further lower and boost real growth to a slim 1 per cent - 3 per cent nominal.

That would be an impressive turnaround for an economy that has contracted, on average, a nominal 0.7 per cent for the past decade and a half.

So far, Mr. Abe's tough talk – there hasn't been much action yet - has succeeded mainly in reviving equity prices and boosting the profit outlook for major auto and other exporters.

Both are desirable from a Japanese viewpoint. But a weaker yen drives up the cost of imports, particularly for exchange-rate-sensitive oil and other resources, as the January trade deficit underscores.

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Led by oil products and liquefied natural gas, import prices shot up 8.4 per cent from the December level. Overall, imports rose 7.3 per cent year over year, far above the estimate of 2.1 per cent among economists.

Exports climbed 6.4 per cent, reversing a decline of 5.8 per cent in December. The key auto sector delivered a 2.1-per-cent export gain over the previous January, after plunging 6.6 per cent in December.

Shipments to the critical U.S. market (which absorbs more than 30 per cent of Japanese auto exports) climbed 10.5 per cent, after falling the previous two months. Vehicle exports to some neighbouring Asian countries also climbed for the first time since last June.

But auto exports to China, which remains embroiled in a row with Japan over control of some tiny islands in the East Asian Sea, plummeted 60.4 per cent year over year, after a 52.8-per-cent drop in December. Which shows the limited impact of a cheaper currency in a market where politics still trumps economics.

The trend is not entirely negative, though. On a seasonally adjusted basis, the trade deficit narrowed for a second consecutive month and has improved by about one-third since the yen began weakening in the fall.

Still, Japan watchers expect no magic elixir from the Abe government.

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"We maintain our view that Japan will not pull out of its trade deficit until at least" the 2015 fiscal year, said Barclays Japan economists Kyohei Morita and Yuichiro Nagai.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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