Two Misunderstandings about Japanese Trade

Japan reported April trade figures earlier today. Given the decline in the yen and the positive contribution of exports to Q1 GDP, it is a closely watched report. However, there are two profound misunderstandings that distort how the media and some other observers comprehend the data. 

First, the decline in the yen does not automatically translate into lower prices for foreign purchasers of Japanese goods. Second, Japan is not nearly as reliant on exports as many suggest. It services foreign demand primarily, though not exclusively of course, on building and selling locally. These foreign sales still bolster Japanese corporate earnings. 

There have been a number of reports that have cited Japan's dependency on exports and even the Financial Times recently noted one of the similarities between Japan and Switzerland was the heavy reliance on exports.  Despite the numerous repetitions, this is simply not factually true.  

The most recent comparable data from the World Bank is for 2011.  Japan exported 15% of its GDP and the US 14%.   Switzerland exported 51% of GDP and Germany 50%.  China exported 31% of GDP in 2011. 

This is not a new development and has persisted for some time.  Consider that in 2000, Japan exported 11% of GDP.  The same as the US.  Switzerland exported 45% of GDP and Germany 33%.  China exported 23% of its GDP in 2000.  

The Ministry of Finance data shows that some time in the late 1990s,  the sales by foreign owned subsidiaries of Japanese companies surpassed exports.  Consider that Toyota sold about 2 mln vehicles in North America last year and a little more than 70% were made there.  This compares with a 55% local production of the 2.21 mln vehicles sold in 2008.  Nissan aims to produce 85% of the vehicles it sells in North America by 2015 from 69% now.   Consider Panasonic.  It has 189 production facilities abroad compared with 117 plants five years ago. 

The yen has declined by 21% against the dollar since the election was called the middle of last November.  It was clear from the start that Abe was going to lead the LDP to victory.    This does not mean that the price of Japanese goods have fallen.  The price of money adjusts considerably faster than the price of goods, producing what economists call the J-curve.  

A weaker yen does not automatically translate into higher exports.  Japan's exports to the US have risen 14.8% from a year ago.  However, exports to China, where the yen has declined nearly 24% since mid-Nov '12 are up a mere 0.3%.   Japan's exports to the euro area are off 3.5% from a year ago, even though the yen has declined 23% against the euro.    

Note too that even for exports into the US, many costs are incurred locally.  These costs include transportation, marketing and storage.  These costs could amount to as much as the cost of the good itself. 

A weaker yen still helps Japanese businesses, but not necessarily through increased sales volumes.  Rather, the shift in foreign exchange prices means that the foreign currency revenue earned through foreign sales translates into more yen.  Some estimates suggest that currency translation could be worth $2000 a vehicle.  This is a key factor boosting earnings and earnings expectations for Japanese companies.  

Observers often see what they want.  In a survey of major new wires and papers, with few exceptions, the reporters cited unadjusted trade figures that showed that April deficit (~JPY880 bln) was much larger than the March deficit (~JPY362.5 bln).  Abenomics is not working, they want to conclude.  One reporter even argued that a weaker yen is needed, though an increasing number of Japanese businesses are content with it to stay around current levels.  As Japan has moved production facilities offshore, imports cost more in a depreciating yen environment. 

It is customary to look at the trade figures on a seasonally adjusted basis when comparing data to the previous month.  The seasonally adjusted trade deficit stood near JPY764.5 bln in April, down from a revised (lower) March deficit of almost JPY919.9 bln, which is the smallest in three months.   On a year-over-year basis, Japan's exports have risen 3.8% and are back to pre-Lehman levels.  Imports are up 9.4% from a year ago, reflecting not only the dependency on foreign fuel but also food, clothing and other supplies.