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Japan: Recession-Bound As Exports Slow?

by: Edward Hugh July 24, 2008    

Edward Hugh

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As exports slow, is Japan recession-bound? This is an interesting question, and my immediate response is yes, recession looks almost inevitable in Japan with exports folding the way they are in an economy where domestic consumption is unable to sustain growth.

Japan's exports fell year on year for the first time in more than four years in June (although they had been down month on month in both May and April, and ironically they were up in June over May) Exports decreased 1.7 percent in June 2007, according to the Finance Ministry this morning. The drop was the first since November 2003. (Click charts to enlarge.)


Exports to the U.S. were down by 15.4 percent year on year, and this was the 10th monthly drop and the biggest since November 2003. Shipments to Europe were down 11.2 percent, the second straight decline. Exports to China have been, more or less, holding up, and were up 5.1% on the year, although this is still down from a 12.2% rate of increase in May. Exports to Asia in general rose 1.5 percent, the slowest pace in two years.


Central banks across Asia have been raising interest rates to combat inflation, slowing economic growth and weakening demand for Japanese goods. Policy makers in the Philippines, Thailand and Indonesia all raised borrowing costs this month. It is quite possible that the Reserve Bank of India will increase rates again next week.

Exports to Vietnam rose at an annual 28.9%, down from its February peak of 88% (y-o-y), to India they were down to 19.3% from 40.1% in February, Brzil was down to 20.7% from 38.6% in February. Only exports to Indonesia (at 26.6% y-o-y) and Russia, at 39.4% (y-o-y) are really holding up, and these are, of course, oil exporters.


Imports, on the other hand, climbed 16.2 percent to a record because of the surging oil costs. That caused the trade surplus to shrink 89 percent to 138.6 billion yen ($1.3 billion). This will obviously have a negative impact on GDP growth.

My feeling is that with exports now falling y-o-y (they have already been falling m-o-m), and domestic consumption congenitally weak, there is really now no way Japan can avoid recession (and my guess is that we are seeing the same thing in Germany).

The mechanics that did it are easy enough to identify. First there was the slowdown in the US, which Japan compensated for by growth in Europe as the dollar went down and the Euro went up, then there was the slowdown in Europe which was compensated for by growth in emerging markets in the CEE, while Japan leveraged growth in other parts of Asia. Then came inflation, monetary tightening and a decline in risk appetite, so now even the emerging markets are slowing. So down we all go, I guess.

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This article has 4 comments:

  •  
    Jul 24 11:44 AM
    I agree that Japan is going into a recession, but I expect the recession to be not too deep given that Japanese companies don't have excess labor nor inventories.
    Reply
  •  
    Jul 24 04:00 PM
    and won't they eventually just switch to China as an export haven?
    Reply
  •  
    Jul 26 02:03 AM
    I think they have a few things working against them.

    - they dont actually have anything raw material of their own, everything they build (value added service) is based on their ability to manage long term price contracts with the raw material suppliers. These supplier are not exactly in the mood these days to be swayed by the traditional carrot of 10 year contracts, fixed pricing.
    - their largest exports: cars, electronics are not exactly must haves in a normal average household in the world
    - their own dependence on oil is still fairly high and despite their big trading company contracts with the oil companies they are quite likely going to face a pass through effect, where they will eventually have to pass on the cost of oil to the end user.
    - the long term we love africa because they have the capacity to be our kitchen garden will take at least 10 years to build out. Kitchen garden, untapped menrokusai resource / metal farm.... same thing ! They are all about exploitation also ...
    - On the domestic front there is very little principal protection available, standard investments like real estate, stocks, venture businesses are all basically touch-me-nots for the next few quarters.
    - carry trades that can keep some slight interest income at hand are tricky to manage and leverage can put ur principal at risk.
    - the govt credibility has taken a huge hit because now basically everyone acknowledges that there maybe no pension to be had, the medical social system is underfunded, and like everywhere else in the world politicians are politicians ...
    - The average salary has not kept up with the increases in the rest of the world in terms of wage growth ... Its actually amazing how much purchasing power has vanished in this country VS how much has build up in china and india in the same last decade.
    - And to top it all there is this sense of xenophobia for global investors which has finally hit the streets, (after doing the dinner circuit in the diplomatic circles), and there is now a general aversion by global investors to grow their japan books. There is a general alignment by all major investment books to get ready for the fire sales that will probably start soon ... Auto parts makers, machinery manufacturers, of course developers and fudosans, lots of failing restaurants / chains, etc.

    There are a lot of things going against them i am afraid and as much as i love the zero volatility living that they create for their people, this time i fear that they have backed themselves into a corner. Of course there is no doomsday type event in the making, all i`m saying is that with an aging and shrinking workforce maybe this is the start of the slide downhill.
    Reply
  •  
    Jul 26 10:02 PM
    Great comments Tubki. Are you short Japan? Own EWV?

    Japan has a pretty strategic location next to the Fast-growing Dragon. Don't you think they can sell, sell sell their higher-value products to China's rising middle class?

    Reply
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