March 2013 Japanese Trade Update

One of the primary tools in Japanese Prime Minister Shinzo Abe’s Abenomics policies is an attempt to weaken the yen, thereby increasing Japanese exporters’ competitiveness. Theoretically. (Click here for more on the folly of confronting Japan’s structural economic issues with monetary policy.) If successful, the weaker yen should drive increased export activity.

Some might point to March’s slightly better-than-expected export data (+1.1% y/y vs. consensus estimates of +0.4%) as evidence of Abenomics’ efficacy. Yet we’d suggest a more careful read of the data shows the weaker yen has had little positive effect thus far.

While the headline export figures indicate some marginal improvement, digging deeper into the data yields a different picture. Of course, export value improvements are important, as it may indicate improving profitability from exporters due to a weaker currency. With all the volatility in the yen lately, it’s also important to monitor export volumes—the units shipped abroad—which fell -9.8% y/y in March.

Of course, year-over-year data can gloss over very recent changes, and a look at March’s monthly figures can be equally off target due to sheer data variability. This is especially true for Asian monthly data at the beginning of the year because of the Lunar New Year holiday, which can greatly affect economic data. To account for this, I looked at the cumulative trade volume for Q1 2013 and compared this to Q1 2012. This showed an even larger -10.8% trade volume decline. (Export value is up 1% by this same quarterly year-over-year comparison). Hence, the value improvements seemingly don’t tell the full story of Japan’s exports. While six months of yen weakness likely improved profitability as stronger currencies are exchanged for more yen back home, it hasn’t been much of a tailwind to export volumes to this point.

Exhibit 1: Year-Over-Year Japanese Export Volume vs. Export Value

Source: Japan Ministry of Finance.

Arguably, it may still be too early to see export volume improvements from a weak yen. But assuming that’s the case, it’s worth noting the weak yen has already significantly impacted imported fuel prices. This creates a domestic economic headwind from rising energy costs, despite an incremental decline in imported fuel volume over the last year. (Exhibit 2)

Exhibit 2: A Weak Yen Increases Energy Import Costs

Source: Japan Ministry of Finance.

At this juncture, it’s hard to argue weakening the yen has produced material fundamental improvements. Maybe that’s coming, but in my view, Japan’s primary need isn’t a weaker currency. It’s broader, structural reform, which will be much more politically difficult to actually accomplish.