Japan's trade deficit pegged to hit JPY 1.2-1.3t in November

Structural factors seen as possible culprits.

According to DBS, the external trade data for November will be released tomorrow morning.

Trade deficit has widened to JPY 1070bn in the first 20 days of November, compared to JPY 722bn during the same period of 2012. For the full month, chances are high that trade deficit has reached JPY 1.2-1.3trn.

Here's more:

In the seasonally adjusted terms, trade balance is expected to post a large deficit of JPY 1.1trn for the third consecutive month in November, and the current account balance should also stay in deficit for the third successive month.

The positive effects of yen depreciation on external trade have been smaller than expected so far. This is partly due to the structural factors – the weakness in core competitiveness of Japan’s exports, the rigidity in demand for energy imports.

From the cyclical perspective, export demand has also remained soft due to the slow recovery in the global economy, while domestic import demand has expanded strongly due to the front-loading effects ahead of next April’s consumption tax hike.

As such, unless the global economy improves significantly, the trade and current account balance should remain sluggish till 2Q next year when tax hike is implemented and domestic demand begins to deteriorate.

Given that the benefits of yen depreciation on exports have been limited, the rise in imported inflation has been apparent, and the trade deficit problem remains unsolved, the Bank of Japan should refrain from another round of aggressive policy easing to weaken the yen.

No policy change is expected at the BOJ meeting this Friday. While the central bank would still face the pressures to ease next year in order to fulfill the commitment to the 2% inflation target, the possibility of big policy surprises is not high.

Note that the Fed’s policy move will impact the yen and this would be beyond the control of the BOJ. Initially, a QE reduction by the Fed could result in a firmer yen due to a fall in global risk appetite. The eventual impact of the Fed’s tapering on the yen will be negative however, as risk appetite recovers, the US-Japan yield spreads widen and carry trades come back.