Japan's first annual trade deficit for 31 years reflects an astonishing combination of misfortunes. But some of them will not go away quickly. With its huge debt and continuing deflationary pressure, Japan is poorly placed to deal with a strong yen in a weak world.
That Japan was unlucky in 2011 cannot be doubted. Import spending rose by 12 per cent because Japan had to increase mineral fuel imports by 25 per cent—to 32 per cent of total imports—to cope with the loss of nuclear energy generation following the earthquake and tsunami. The nuclear cuts won't be reversed soon, so the energy import bill will stay high.
Natural disasters were also bad for exports, which fell by 2.7 per cent. Supply chains were interrupted. Floods in Thailand, an important offshore centre, were another setback. But more important on the export front were forces that may persist: weakness in the global economy, and strength in the Japanese yen.
The yen has risen by 12 per cent against the dollar in the past two years. That helps explain the 1.4 per cent fall in Japan's exports to China in yen terms in 2011 and a 3.4 per cent drop in exports to the United States. Exports to western Europe rose by 1.9 per cent, with those to Germany and the UK were up by over 5 per cent.
A likely euro zone recession and the euro's recent weakening will make Japan's exports still harder to sell. Japan's export hopes should be brighter in the United States where the consumer is long overdue a revival. But no boom can be expected. The yen and Japan's products remain expensive. A trade deficit might weaken the yen a little but perhaps not much because Japan's huge foreign assets mean the broader current account remains in surplus.
An economy that continues to flirt with deflation as government debt soars past 200 per cent of GDP needs all the dynamism it can get. Japan's GDP is likely to have contracted in the fourth quarter in part because trade did so poorly. The loss in exports means Japan must strive harder to revitalise itself from within.
