Monday, February 20, 2012

Energy imports will pressure Japan's trade deficit

The yen has finally started to weaken and Japan's exporters will now get the break they've been looking for. The yen strength during the second half of 2011 was driven entirely by the Eurozone crisis, with the currency being viewed as a "safe haven".  Japan's exporters were effectively at the mercy of the Eurozone politicians, as the yen strength made it harder to export into "dollar-based" nations such as the US and China. The euro weakness also made it particularly difficult to compete with Germany. And now, without having to intervene, the yen weakened as a result of the Greek/Eurozone accord.

Japan has been struggling with a trade deficit that is now approaching the levels from the period immediately following the Earthquake/Tsunami crisis of early 2011. Except the deficit of the second half of 2011 was driven by the strong yen caused by another crisis - this time in Europe. And now as that crisis supposedly abates and yen weakens, Japan's export based economy should be getting some relief, right? Not exactly.

Japan's trade balance

This weakening of the yen will create other problems for Japan. Reliance on nuclear power for so many years has backfired recently as the aging and damaged nuclear power facilities become decommissioned. With zero domestic oil production, Japan now must import far more fuel to meet its energy needs. The weakening yen, while keeping exporters happy, will make energy increasingly more expensive at home. At the same time oil prices are climbing as the Iran tensions escalate.

Brent crude oil

Given the deflationary environment, a currency weakness would normally be viewed as a positive for Japan. But the risk of rapidly rising import prices, particularly energy, puts the nation in a bind and may not necessarily improve the trade deficit going forward. In fact a sudden oil price shock could prove as damaging to Japan's growth as the the strong yen.

Japan GDP growth
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