Japan's trade balance looks set to remain under pressure this year, following the release of trade data for January, adding weight to a more bearish outlook for the country's economy.
In January, the same forces applied. Imports rose 9.8 per cent from a year earlier, while exports fell 9.3 per cent, resulting in a record monthly deficit of ¥1,480-billion ($18.6-billion), according to the Finance Ministry.
Analysts noted that Japanese trade is usually weak in January, which has fewer business days. When seasonally adjusted, the monthly deficit still hit a record ¥613-billion but was only marginally wider than the deficits in November (¥542-billion) or December (¥569-billion).
"It is a deterioration, but a headline of a 'record-high' deficit may be slightly misleading," said Kiichi Murashima, chief economist at Citi in Tokyo.
The new year holiday in China, which this year fell in January rather than February, also affected the year-on-year comparison. Japan's exports to China fell by a fifth while imports increased by 8 per cent, meaning the trade deficit with China almost doubled to ¥588-billion. China is easily Japan's biggest export market, accounting for 21 per cent of total shipments in January.
The import data underlined Japan's rising dependence on imports of coal and liquefied natural gas to substitute for nuclear plants idled after the Fukushima crisis. Mineral fuel imports increased 24 per cent year-on-year, accounting for three-quarters of the overall rise in imports (in value terms).
Japan's persistent monthly trade deficits since last year's earthquake have awakened concerns over the erosion of its current account surplus, and thus the ability of the country to support the world's biggest gross debt burden. Last year the current account managed to stay in the black despite the country's first trade deficit in 31 years, thanks to resilient returns on the country's huge stock of investments abroad. Last year, net interest and dividend income was ¥14-trillion, the third-highest figure on record, up from ¥11.7-trillion in 2010.
But fears are mounting that rising energy costs may drag the current account into deficit in the near future. A 30-per-cent rise in the cost of mineral fuels this calendar year, for example, could push up the cost of imports by about ¥8.5-trillion. That could almost wipe out the current account surplus for 2012, forecast at about ¥9-trillion.. Last year the surplus was ¥9.7-trillion,, down 44 per cent on the previous year.
Such a development would have huge implications for bond and foreign exchange markets, as Japan would become a net capital importer. Japan's budget deficit –equivalent to 9 per cent of gross domestic product last year and among the world's largest by that measure – would have to be financed by foreigners.
On Monday, Standard & Poor's maintained its double A minus credit rating for Japan, saying it expected that continued current account surpluses would "further enhance Japan's net external asset position for at least the next few years." However, it kept the sovereign on negative outlook, warning that it would consider lowering ratings if the "government's debt trajectory… begins to erode the nation's external position."
Analysts will be studying the next few months' trade figures closely, looking for evidence of a genuine recovery from the unusually severe sequence of supply-chain problems last year.
"We need at least half a year of data to see what is happening on the export side," said Masamichi Adachi, economist at JPMorgan in Tokyo. "As long as China and Europe maintain some growth, Japan's overall current account surplus may not be in any real danger."