Japan: Negative Trade Balance, Gloomy Future?

Last Wednesday, Japan‘s Ministry of Finance announced that the country suffered a huge trade deficit during 2011. The difference between imports and exports was a staggering 2.49 trillion yen, completely opposite the average yearly trade surplus for the past decade of 7.7 trillion yen.

The large amount of fossil fuel imports was to blame as the government scrambled to fulfill the energy needs of its people. Imports of raw materials for the country’s rebuilding efforts also played a significant part in the deficit.

To be fair, the deficit wasn’t unexpected, especially since 2011 was a year of natural disasters, falling global demand, and a strengthening yen. Nevertheless, there are still some important questions that have popped up that need to be answered.

Is Japan’s reign over exports finally over? Will Japan’s trade balance continue to be in the negative territory? Is this a foreshadowing of gloomy things to come for Japan?

At this point in time, I pretty much expect that Japan’s trade balance will continue to be in the negative. I’m not going to lie; Japan’s economic outlook looks pretty gloomy.

The thing is, n addition to the increasing imports of energy, exports are also falling. The drop of exports to Europe, for instance, was very pronounced. Due to Europe’s debt problems, demand in the region decreased by a whopping 13.1% in December after it had already declined 11.2% the month before.

This resulted in a painful 2011 for Japanese companies. Just to give you an example, Toyota Motors Incorporated, one of the largest car manufacturers in the world, lost its number one spot in car sales that it has held for four straight years. Sales were reduced by 6%.

It doesn’t help that the yen has been extremely strong too. Compared to the previous year, the yen has appreciated by 9.2% versus the U.S. dollar. Remember, when a nation wants to import items from Japan, it must first convert its money to the yen. The stronger the yen gets, the more expensive it is for them to purchase goods from Japan. This hurts the overall competitiveness of Japan’s products.

There are also rumors going around that Japanese firms are starting to move their production facilities abroad (Korea comes into mind first). Wages and welfare costs in Japan are relatively high compared to other nations, causing the profitability of Japanese firms to deteriorate.

I think we’re starting to see traders realize this and move their money out of the yen. Usually, I’d put up a USD/JPY chart here, but given persistent threat of currency intervention, I decided to look at EUR/JPY instead.

EUR/JPY Daily Chart

As you can see, the yen has lost 6 days out of the last 8. With the pair surging past the 100.00 major psychological level, it might be in the middle of the reversal. For the late buyers out there, watch the 100.00 level carefully! We could see another test of 100.00 before the pair truly rallies.