Japan's trade deficit widest level since Covid shock

Chris Scicluna
Emily Nicol

Japanese export growth flattered by timing of Lunar New Year with trade deficit widest since 1st Covid shock; but net trade offering support to GDP growth in Q1
After a weak start to the year, at face value Japan’s goods trade report suggested an improved export performance in February. In particular, the value of exports was up 19.1%Y/Y, the most in three months, to mark an acceleration of almost 10ppts from January. Meanwhile, import growth remained vigorous, moderating less than 6ppts to be up 34.0%Y/Y. By type of good, the pickup appeared broad-based, with the value of exports of general machinery rising almost 20%Y/Y, electrical machinery shipments up 16%Y/Y, and iron and steel shipments up more than 45%Y/Y. The value of exports of motor vehicles – still most acutely impacted by supply-chain challenges – rose a little more than 8%Y/Y. On the other side of the ledger, reflecting global price pressures, the value of mineral fuel imports leapt 79%Y/Y, with petrol imports up more than 93%Y/Y and LNG imports up more than 65%Y/Y.

By destination, export growth was strongest to other Asian economies, up 25.1%Y/Y, with the value of shipments to China up a similar 25.8%Y/Y. In contrast, exports to the US were up 16.0%Y/Y with those to Western Europe up just 6.1%Y/Y. While exports to Russia – principally cars and machinery – were up more than 30%Y/Y, they accounted for little more than 1% of the total. The value of imports from Russia – more than 70% of which comprise LNG, petroleum and coal – more than doubled (up 107%Y/Y), but accounted for just 2.6% of the total.

The strength of shipments to Asia gave a clue as to the cause of the pickup in Japan’s annual export growth rate last month – flattering base effects related to the timing of the Lunar New Year holidays in 2021. Indeed, on a seasonally adjusted basis, the value of exports actually fell 0.5%M/M last month while imports rose for a seventh successive month and by a firm 2.7%M/M. As a result, the seasonally adjusted trade deficit increased by more than ¥250bn to ¥1.03trn, the highest since the initial Covid-19 shock in April 2020, and bar that observation the largest shortfall since June 2014. Nevertheless, those figures were also significantly impacted by price shifts, adjusting for which – according to the BoJ’s estimates – export volumes rose 3.8%M/M while import volumes rose a softer 1.9%M/M. As a result, on average over the first two months of Q1, export volumes were trending 3.8% above the Q4 level while imports were up 3.2% on a similar basis, suggesting the possibility of a positive contribution to GDP growth from net trade in the current quarter.

Japanese manufacturers a touch happier with current conditions, but services downbeat, and firms temper optimism about the near-term outlook
According to the latest Reuters Tankan survey conducted between 2-11 March (i.e. well after Russia’s invasion of Ukraine) – which gave an indication as to what to expect from the BoJ’s quarterly Tankan out on 1 April – and perhaps surprisingly given recent developments in energy and commodity markets, confidence among Japanese manufacturers improved this month for the first time since December.

That improvement was admittedly modest, with the respective survey index ticking up 2pts to 8, and thus remaining well below the average of 20 between last April and January. And it largely reflected a less downbeat assessment of auto manufacturers (the respective index rose 15pts to -14) as supply constraints appeared a touch less severe. But while on balance still upbeat about the outlook, manufacturers were the least optimistic about prospects for the coming three months since February last year. And given the persistent of pandemic restrictions as well as concerns about high inflation, sentiment among services firms became negative for the first time since October (the respective survey index fell 4pts to -1). But with pandemic restrictions likely to expire next week, services were still on balance optimistic about the outlook for the coming three months, although the degree of optimism was tempered somewhat by concerns about inflation (the respective expectations index also fell 4pts, to a six-month low of 10).

Fed rate lift-off to come today, attention also on updated economic and dot plot forecasts; US retail sales represent the day’s most notable new data
After Chair Powell’s testimony before Congress last week, there should be little doubt that today will bring lift-off for the Fed Funds Rate. And given his stated preference, we expect to see a large majority (if not all FOMC voting members) in favour of a conventional 25bps hike in the target range to 0.25-0.50%. Of significant interest will be the Fed’s updated economic forecasts, not least to what extent Russia’s invasion of Ukraine will impact its near-term growth and inflation outlook. And with money markets currently pricing in another six rate hikes after today before the end of the year, the dot plots will also be closely watched, with the median rate forecast and the full range likely to have shifted notably higher (in December, the median FOMC member was forecasting just three hikes this year). The FOMC might also provide further insight into discussions for future balance sheet reduction, although Powell previously noted that a detailed plan would not be finalized until a subsequent meeting.

In terms of economic data, today’s February retail sales will be of most note in the US. After a surge in spending at the start of the year and a drop in vehicle sales last month, retail sales are expected to be more subdued in February, with Daiwa America’s Mike Moran forecasting a rise of 0.4%M/M, which will principally reflect price effects, following growth of 3.8%M/M in January.

French retail sales up in February but trend is slightly down; final Italian inflation data could well bring upwards revisions
A quiet day for European economic data kicked off with the Bank of France’s retail sales report for February. Following a drop of 1.8%M/M in January, sales failed fully to make up the shortfall, rising 1.3%M/M last month with moderate growth in manufactured items and food. On a 3M/3M basis, sales were down 0.4% with a softening trend in food and non-food items alike. Looking ahead, the morning brings final Italian consumer price inflation numbers for February. The preliminary release saw the headline HICP rate jump a larger-than-expected 1.1ppts to 6.2%Y/Y. The core inflation measure rose 0.4ppt to 1.9%Y/Y. Since the flash estimates were published, we have had upwards revisions to the figures from France and Spain, and we would also not be surprised to see an upwards revision from Italy today.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.