Why Japan's Lousy July Trade Data Really Matters

I remain head-down compiling my quarterly global review. One of the conclusions I'm unearthing is that we need to start focussing on Japan again, because although it is making 'all the right moves' the chances of things going very wrong are rising rapidly. In the midst of these rather gloomy speculations, Japan's July trade data landed, showing exports down 8.1% yoy, and a trade deficit of Y517bn. If it passed you by, you missed something big, for truly, this was some of the most shocking data of the year. It was shocking in and of itself, and more shocking because of what it tells us about Japan's changing fundamentals. Let me count the ways. . . .

1. The slump in exports was really bad: the fall of 5.8% mom was fully 1.2 standard deviations below seasonalised trends, and came after three previous months' of sub-trend sequentials. In fact, it was the worst sequential performance since disaster-struck March 2011. It was also far worse than had been suggested by the 20-days export data, which had suggested a fall of 1.2% mom and 3.6% yoy.

2. The yoy comparisons are also alarming, because right now Japan should be gaining market share year-on-year not losing it, if only in recovery from the because of the negative hit imposed by the disasters of last year. In fact, though, Japan's share of NE Asian exports slumped to just 21.3% in the three months to July, down from 22% in the same crisis-hit period of last year.

3. The collapse in exports means the size of Japan's trade deficit is also shocking: Y517.4bn on the month, and Y5.1trillion in the 12 months to July. The long-term context strongly suggests this is not a blip, but rather the extension of a major long-term trend :
   
   
   
   
   

4. Crucially, this is happening at a time when, on a fundamental basis, Japan is getting everything right. My quarterly survey of fundamental ratios shows rates of return on capital rising, real labour productivity rising, and even Japan's terms of trade rising momentarily (up 1.2% yoy in July). Bank balance sheets also show that modest deleveraging is underway again. In these circumstances one simply doesn't expect a trade-balance blow-out, unless imports are being sucked in to finance a subsequent explosion in exports. Is that likely?

5. By extension, the disappearance of Japan's trade surplus means that Japan's private sector savings surplus is declining, sharply, even in these most favourable circumstances. By 2Q it had shrunk to just 3.3% of GDP, down from 5.9% in 2011 and 10.2% in 2010. July's trade data suggests it is still shrinking in 3Q. Since the shrinkage isn't plausibly cyclical, we can suspect there are structural forces driving it. And, of course, in Japan there's the most powerful structural force in the world offering to do the job – Japan's aging demographics.

6. But Japan's private sector savings surplus is what buys the JGBs Japan's government needs to finance itself. So how are the public finances progressing? Debt is 227% of GPD, and rising.   

All this points to an obvious conclusion - one so obvious, I leave it to you to puzzle out. But maybe a clue would not be out of order: