KUWAIT — Japan posted its fourth consecutive monthly trade deficit, stoking fears that it is headed for a recession, the KuwaitChina Investment Company (KCIC) said Sunday in a report. Export numbers improved slightly, although they still remain in contraction. Exports declined by 6.5 percent year-on-year (YoY) in October from 10.3 percent in the previous month. Exports fell in 18 out of the last 21 months, due to the slowing global demand (exports to the EU contracted for 13 consecutive months), and the appreciation of the yen, which gained 7.3 percent between March and September due to its role as a safe-haven asset. In addition, territorial tensions between China and Japan resulted in boycotts that hurt Japan's exports. In spite of the recent softening of the currency, which depreciated, almost 3 percent in November, exports kept contracting. Imports also fell by 1.6 percent YoY, driven by the weakening domestic sector, as highlighted by the lower growth in retail sales (0.4 percent YoY in September). However, upward pressure on import growth is likely to come from Japan's strong dependence on energy imports following the shutdown of 54 nuclear reactors after last year's Fukushima disaster. The trade balance is the difference in value between a country's total exports and imports. When a country is in a trade deficit, then it is a net importer: its imports are outweighing its exports in value. Over 10 years up to 2010, half of Japan's real GDP growth was accounted for by net exports. The trade balance itself is a component of the current account balance. The current account balance records the purchase and sale of goods and services and is comprised of the trade balance, net income from abroad (repatriated profits, dividends, interest payments) and net current transfers (remittances, pensions, grants, international aid). Japan has been running a current account surplus for decades. However, if the trade deficit persists, then the fate of the current account surplus will depend on foreign income from abroad. Japan's trade balance is also relevant as a leading indicator of the global economy. Case in point, Goldman Sachs highlighted a 90 percent correlation between its Global Leading Indicator (GLI) and Japan's trade balance, with a three month lead. In other words, a deteriorating trade balance in Japan could be indicative of a further decline in global momentum in the medium term. Weak trade figures have pulled third-quarter GDP figures into contraction at -3.5 percent (annualized) from 0.7 percent (annualized) in the second quarter. As a result, Japan is teetering on the edge of a recession. Japan's trade balance is expected to remain in deficit until the end of 2012, especially as export growth will be weak and energy imports rigid. On Nov. 21, the yen hit a seven-month low against the dollar on growing expectations that the Bank of Japan will take more aggressive policy action under the new government next month, giving the economy a much needed boost. Just three weeks before elections, Shinzo Abe, most likely to be the next prime minister of Japan and the current leader of the main opposition, the Liberal Democratic Party (LDP), has promised to push for the central bank to undergo more drastic measures. In order to lift the economy out of deflation, he is calling for a 2 percent inflation target, up from the current 1 percent. Meanwhile, the Bank of Japan (BOJ) opted to hold fire until the elections. “We expect a more aggressive expansion of its monetary policy soon.” the report said. — SG
