Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots - CPI is not deflating as fast as it was... and 'some' inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation - on the basis, we assume, that if they don't mention it, it never happened. The result post a nothing-burger of 'more uncertainty' from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.
Japan's trade balance...
Goldman On the Unexpectedly large trade deficit:
Larger-than-expected trade deficit in April: The April trade deficit came in larger than the market consensus (¥621.1 bn) at ¥879.9 bn prompted mainly by continued yen depreciation and a resulting rise in import prices. There was a particularly prominent rise in the value of mineral fuel imports (LNG, etc.), and the overall value of imports was up 9.4% yoy in April, the largest April figure on record. At the same time, overall export value was up 3.8% yoy in April (+1.1% in March), showing acceleration and a second straight month of positive growth. Export volume was still negative in April (-5.3% yoy vs. -9.8% in March), but the degree of decline is shrinking.
Export to the US and Asia recovering, Europe remains sluggish: Export value to the US was up by a substantial 14.8% yoy in April (+7.0% in March), and exports to Asia also showed signs of recovery at +4.3% yoy (+0.3% in March). Exports to China showed the first positive year-on-year growth in three months, albeit small at +0.3% (-2.5% in March). By contrast, exports to Europe remained sluggish at -3.5% yoy in April (-4.7% in March).
Outlook—More trade deficits ahead, but we expect mild improvement in line with J curve: We expect the trade balance to remain in the red in the near term, but we see a gradual improvement over time in line with the J curve. We still see little boost to export volumes from the weaker yen but expect it to gradually become more evident around summer.
JGBs react to BoJ...
Full BoJ Statement:
Statement on Monetary Policy
1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting:
The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.
2. With regard to the asset purchases, the Bank will continue with the following guidelines:
a) The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 50 trillion yen, and that the average remaining maturity of the Bank's JGB purchases will be about seven years.
b) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of about 1 trillion yen and about 30 billion yen respectively.
c) As for CP and corporate bonds, the Bank will continue with those asset purchases until their amounts outstanding reach 2.2 trillion yen and 3.2 trillion yen respectively by end-2013; thereafter, it will maintain those amounts outstanding.
3. Japan's economy has started picking up. Exports have stopped decreasing as overseas economies have been moving out of the deceleration phase that had continued since last year and are gradually heading toward a pick-up. Business fixed investment continues to show resilience in nonmanufacturing and appears to have stopped weakening on the whole. Public investment has continued to increase, and housing investment has generally been picking up. Private consumption has seen increased resilience, assisted by the improvement in consumer sentiment. Reflecting these developments in demand both at home and abroad, industrial production has stopped decreasing and signs of picking up have become increasingly evident. Meanwhile, financial conditions are accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) has been negative, due to the reversal of the previous year's movements in energy-related and durable consumer goods. Some indicators suggest a rise in inflation expectations.
4. With regard to the outlook, Japan's economy is expected to return to a moderate recovery path, mainly against the background that domestic demand remains resilient due to the effects of monetary easing as well as various economic measures, and that growth rates of overseas economies gradually pick up. The year-on-year rate of change in the CPI is expected to register smaller declines for the time being, and thereafter is likely to gradually turn positive.
5. Regarding risks, there remains a high degree of uncertainty concerning Japan's economy, including the prospects for the European debt problem and the growth momentum of the U.S. economy as well as the emerging and commodity-exporting economies.
6. The Bank will continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate?'
Such conduct of monetary policy will support the positive movements in economic activity and financial markets, contribute to a rise in inflation expectations, and lead Japan's economy to overcome deflation that has lasted for nearly 15 years.