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FXPRIMUS Market Brief of the Week: Japan's Widening Trade Deficit Fueled the Expectation on a More Aggressive Easing

SINGAPORE, SINGAPORE -- (Marketwired) -- 04/23/14 -- In FXPRIMUS' Market Brief of The Week for 21 April, the brokerage firm's Senior Economist, Jimmy Zhu, looks at how Japan's Widening Trade Deficit Fueled the Expectation on a More Aggressive Easing.

Economic Insights

Japan March exports only rose by 1.8%, as Yen had been outperformed

Japan's Ministry of Finance reported today that the trade deficit for March came in at 1.45 trillion Yen. The figure is higher than the 1.08 trillion Yen median estimate of 28 economists surveyed by Bloomberg.


The cause of the huge deficit was two-fold:
  1) Exports rose just by 1.8 percent in March
  2) Imports surged by 18.1 percent in March

This was Japan's weakest export growth in a year. However, the bigger concern was Japan's ballooning imports. There were two main reasons which led to the bigger than expected import figure. Firstly, the weak Yen. The Yen dropped 19 % against the dollar since December 2012 as import values boosted significantly. This caused a surge in energy costs amidst several nuclear shutdowns within the country.

Secondly, the sales tax. On 1st April, Prime Minister Shinzo Abe raised the sales tax from 5 % to 8 %, the first increase in 17 years. The days leading up to the sales tax had caused a spending spree that boosted demands for foreign goods. Nationwide departmental store sales reported a 25.4 % jump in March from the previous year - the biggest gain since 1991.

Compared to March last year, the deficit had widened even further - to the tune of 366.9 billion Yen. All this is not good news for Abe. Ever since he came into power, he was intensely focused on weakening the Yen, both to fight deflation and boost export sales.

However, results have not shown marked improvement. In fact, the Yen's 19 % drop against the USD since December 2012 has failed to spark exports, and has contributed to 21 straight monthly deficits by boosting import values - the longest slide in comparable data back to 1979.

The bad news doesn't end there. Japan's consumer confidence fell in March for a fourth straight month to 37.5, down from 45.7 in May last year. Sliding consumer confidence indicates domestic demand might have weakened, while slowing export growth suggests external demand may fail to provide much support for an economy set to contract this quarter.

This is perhaps the most telling indicator of where Japan's economy is heading: the government cut its view of the economy in April, the first lowering of its assessment since November 2012. A lower evaluation of imports was one factor cited by a government official for the downgrade.

This begs the question - how optimistic can we be on Japan's future if even the government lowers its own economic assessment?


Top News This Week

Canada: Core Retail Sales m/m. Wednesday, 23rd April, 8.30pm.
I expect figures to come in at 0.6% (previous figure was 1.0%).

New Zealand: Official Cash Rate. Thursday, 24th April, 5am.
I expect figures to come in at 3% (previous figure was 2.75%).

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