It has been a big week for Japanese economic data, with the release of GDP and industrial production numbers on Monday, followed by trade figures on Thursday and manufacturing data on Friday. There are two things that all of these releases share; that the market’s expectations were way off and that the exports sector is the saving grace for Japan’s economic recovery. A point which was reiterated on Tuesday with the release of the BoJ’s meeting minutes which included an upwards revision to the bank’s export outlook.
BoJ Governor Kuroda has been methodical in his quest to support Japan’s economy through extreme monetary easing and, consequently, a lower exchange rate. This combination of events has made Japanese exports much more attractive, thereby supporting demand for Japan’s goods. This isn’t news to anyone, but it’s startling how much Japan’s economic recovery, or attempted economic recovery depending on which side of the fence you sit on, is reliant on exports.
In fact, Japan’s emergence from a technical recession is partly due to the strong performance of the export sector. As we explained on Monday, net overseas demand for Japanese goods tacked on 0.2% to growth last quarter, helping to compensate for soft consumer sentiment and corporate spending.
Other economic data is suggesting that exports will continue to be a key contributor to growth. Exports surged an impressive 17% y/y in January, but this couldn’t prevent Japan’s 31st consecutive monthly trade deficit (January trade balance -1,177.5bn – exp. -1,681.3bn). Meanwhile, manufacturing sentiment softened this month according to a Manufacturing PMI survey conducted by Markit (actual 51.5; expected 52.5; prior 52.2), but new orders for international markets increased at the fastest rate since October 2014.
Japan’s reliance on exports is dangerous
Given this overwhelming evidence of Japan’s reliance on export growth, it’s not hard to understand why the BoJ has been pushing so hard for a lower exchange rate. This is slowly changing as the drawbacks of a much weaker yen have begun to emerge, namely lacklustre consumer spending resulting from higher import costs. In any event, the dangers of an even weaker yen and the threat of a global downturn in demand threaten Japan’s reliance on exports. This deepens the need for stronger and persistent wage growth in Japan – without this activity at the ground level is likely to remain subdued.