Japan’s Surprise Trade Surplus Comes With Caveats for Growth

Date: Thursday, July 21, 2023
Source: Bloomberg

Japan’s balance of trade unexpectedly swung to its first surplus since July 2021, an outcome that should help ease pressure on the economy’s recovery, though risks remain for the growth outlook.

The trade surplus came to 43 billion yen ($308 million) in June, the finance ministry said Thursday. Analysts had forecast a 46.7 billion yen deficit. The value of exports rose 1.5%, led by shipments of cars and construction machinery. Imports slipped 12.9%, dragged down by sharp drops in the value of fuel shipments into Japan.

The report carries mixed messages for the economy. On one hand the surplus is a positive sign for Japanese businesses as they continue to recover from the impact of the Covid pandemic. Confidence among the nation’s firms improved across the board in the Bank of Japan’s latest quarterly Tankan report released earlier this month, supporting the central bank’s view that the nation’s economy is gradually recovering.

At the same time, the report highlighted vulnerabilities in the state of demand around the world and pointed to risks for Japan’s growth prospects.

“If you look at the details, it’s not necessarily a bright situation,” said Kohei Okazaki, senior economist at Nomura Securities Co. “On a single month basis, there’s a slight recovery, but exports to the US aren’t clearly in an upward trend.”

Exports to the US and Europe rose 11.7% and 15%, respectively, while exports to China fell by 11%, the most since January, as the world’s second largest economy continues to sputter, casting a cloud on the prospects for global growth. The pace of China’s economic expansion trailed expectations in the second quarter due in part to a slowdown in consumer spending, data earlier this week showed.

Exports of production gear for chips fell 17.7% from a year ago, with shipments of chip components to China sliding 12.8%. Japan is set to implement its new export curbs, which officials say are not targeting any specific nation. Shipments of chip-making equipment to the US plunged 36.9%.

The yen was 6.8% weaker on average in June compared with a year earlier, a factor that inflates the value of imports. But energy prices fell at an even faster clip, reducing the value of imported fuel. That drop signals that commodity-driven inflation is easing in line with the BOJ’s view.

The report will give the BOJ fresh data reflecting the state of external demand when officials gather to discuss policy settings next week.

“Exports actually fell in terms of volume, which means exports won’t necessarily be a boost for GDP,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Imports are falling on the back of dropping oil prices, but it’s hard to imagine that the global economy will gain momentum in the near future.”

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