Tuesday, April 11, 2023

Japan, A Record Trade Deficit In 2022 Added To Its Woes

Japan reported a record annual trade deficit in 2022. It marked Japan's second straight year of red ink and surpassed the 2014 record of 12.8 trillion yen. This is only one of many problems facing the island nation. The deficit came in at 19.97 trillion yen ($155.9 billion) as imports soared and the yen weakened. Some of this was due to higher costs as the price of natural resources spiked following Russia's invasion of Ukraine. 

Japan Is Heavily Indebted
In the early 1990s after decades of rapid growth, what had become a "Bubble Economy" marked by massive overvaluations, Japan hit a wall. Its economic bubble burst and Japan has never fully recovered. Japan is proof that low-interest rates and easy monetary policy do not guarantee prosperity. These policies do increase the probability a government will overspend and drive up its debt. Today a deeply indebted Japan is facing both rising inflation and a stagnant economy. 

Outgoing Bank of Japan Governor Haruhiko Kuroda became governor in 2013 and led the BOJ into uncharted territory with aggressive buying of government bonds and other assets to support the economy. Kuroda guided the powerful monetary easing experiment that was a key pillar of the "Abenomics" economy-boosting program. This policy under then-Prime Minister Shinzo Abe weakened the yen and boosted stocks while sending the government deeper and deeper into debt.

The utmost priority for Kuroda was to achieve a departure from deflation and attain a 2 % inflation target.  Some may argue that just as Kuroda departs as Japan's longest-serving BOJ chief conditions are gradually falling into place for the price hike goal he desired accompanied by wage growth. The problem is that as his tenure ends, Japan's potential growth rate is around zero percent and its gap from the economy's actual output indicates demand remains weaker than supply. With its yen having been weakened, this is a bit of a slap in the face for the Japanese people. 

Kuroda's predecessor Masaaki Shirakawa, a skeptic of the 2% target has called the BOJ's decade-long monetary policy a "great monetary experiment" and noted that  it has only produced a "modest" impact on growth and reversing deflation. Part of the problem is that companies making solid profits have invested in other countries where the potential for growth was greater. This eroded the economic results the BOJ had hoped for. It also lessened the need to increase wages which would spur forth more consumption.

I contend things would have been even more difficult for Japan over the last few decades had it not tied itself to China's meteoric rise. Its close proximity to China allowed it to develop many profitable relationships that created a tailwind for the Japanese economy. Unfortunately, much of that tailwind is gone and the failure of many Chinese companies may soon have a negative effect on Japan's future earnings. 

If Year After Year Trade Deficits Are In Its Future Japan's Problems Will Escalate

Looking toward the future, Japan is at a crossroads. Japan's economy is built on exporting finished goods and has prospered from trade. If year-after-year trade deficits are in its future Japan's problems will rapidly escalate. Resource-poor Japan is dependent on creating a positive trade surplus to fund caring for its aging population.

The new head of the BOJ is an academic by the name of Kazuo Ueda. It is difficult to predict what policies he might adopt. Underlining the fact the current bout of inflation is being driven by surging costs rather than strong demand creates a problem he will have to deal with. This reinforces the view that the bank's options are limited and that monetary easing will be in place for a while. 

What next? only time will tell. For a good overview of Japan and its economy view this video; https://www.youtube.com/watch?v=YY_ePpT0fLY  It should be noted that around 19 min into this video the comparison of China and Japan is both made and difficult to deny.


(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

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