You saw it coming: Japan’s trade deficit yawned to an unheard-of ¥6.93 trillion ($77 billion) in 2012. That’s up 170% from ¥2.56 trillion in 2011, which, itself, was only the second time the country had run a trade deficit since 1980 (the Wall Street Journal has a great chart here, though it’s paywalled). The trade deficit for December came in at ¥641.5 billion, worse than expected (paywall).
An early warning of this came in Japan’s recent announcement of a surprisingly awful current-account deficit for November. And, of course, the usual suspects—anemic euro-zone demand, China’s anti-Japan boycotts, the strong yen and Japan’s foreign energy reliance—continue to drive the deficit. But which has had the most impact?
Is the yen still too strong? Prime Minister Shinzo Abe has been calling for a weaker yen to help boost exports, and at first glance the data suggest that might not be helping. In December, the yen lost a little more than 5% against the dollar, yet the contraction of exports that month sped up—5.8% year-on-year, as against November’s 4.1%. But the yen’s fall had started in mid-November, around the time then-candidate Shinzo Abe first began speechifying about his scattershot stimulus plans. So it’s probably too early to say what the real relationship between the yen and export competitiveness is.
Is feeble European demand the culprit? It’s certainly been very feeble. Japan’s exports to the EU fell 14.7% year-on-year, with Western Europe as a whole down 18.0%. The outlook here isn’t good, given that a lot of that drag came from Japan’s typical biggest buyers, Germany and the UK—both of which have grim growth outlooks for 2013.
What about fighting with your biggest trading partner over some rocks? The kerfuffle over the Senkaku/Diaoyu Islands contributed to a ¥1-trillion hole in Japan’s total exports to China in 2012, compared with 2011. Tensions continue to escalate, suggesting that the effects of the unofficial boycott could linger. Otherwise, China’s general economic slowdown, which began in 2011, might perpetuate the slump in import of Japanese cars and electronics that drove 2012’s decline.
The most worrisome by far—and the reason that a diluted yen might not fix Japan’s trade deficit—is Japan’s energy dependence. Mineral fuels make up just over a third of the value of Japan’s imports, and while imports grew 3.8% year-on-year in 2012, fuel imports grew 10.4%. If the yen weakens further and as Japan’s nuclear zeal fades in the wake of the Fukushima meltdown in 2011, the cost of Japan’s reliance on foreign energy will only intensify.
Causes for optimism—yes, there are a few—include the US and Southeast Asia. Yanks couldn’t get enough of Japanese autos in 2012, a trend that should be further buoyed by a US recovery. If that trend continues, the US may even eclipse China as Japan’s biggest export destination. Meanwhile, ASEAN is coming in just behind the US, as Indonesia, Thailand and Vietnam in particular are increasingly turning Japanese in their buying habits.