Japan's Exports Boom But Inflation Refuses To Follow The Script

Japanese exports boomed in November 2017, rising +16.2% versus a year earlier and beating consensus expectations of +14.7%. It was the fifth straight month of double-digit growth and the strongest since August. Last month, growth of +14.0% had undershot expectations of +15.7%. Imports in November grew slightly less than expected at +17.2% versus the consensus of +18.0%.

The trade surplus of 113.4 billion yen ($1 billion) contrasted with expectation of a 40 billion yen ($0.4 billion) deficit. According to Bloomberg, "Japan’s exports grew for a 12th straight month in November, topping economists’ expectations, as external demand continued to fuel the nation’s longest stretch of economic growth since the 1990s."

A yearlong recovery in exports has kicked Japan into higher gear, fueling record profits and rising capital spending during the longest economic expansion since the mid-1990s. Confidence among the nation’s large manufacturers has reached the highest level in a decade, while sentiment is rising even among smaller companies. The wage growth needed to drive a self-sustaining recovery remains elusive, though, even as the labor shortage intensifies, prompting the government to plan to offer tax benefits to encourage higher pay.


"We can expect exports will remain strong enough to lead Japan’s economy, with solid demand from U.S. and China," said Norio Miyagawa, a senior economist at Mizuho Securities Co., who cited global demand for semiconductors and IT-related goods. "Without any sign of weakening in exports, Japan’s economy will probably keep recovering gradually," Miyagawa said. "The BOJ must be gaining confidence in the economy with today’s export data."

The value of exports to Japan’s largest trading partner, China, surged by 25.1% In November to a record 1.38 trillion yen ($12.24 billion). Strong growth was reported in equipment to manufacture liquid crystal displays (LCD). Exports to Asia as a whole, which account for more than half of Japan’s total, also notched up a monthly record of 3.89 trillion ($34.5 billion), 20.4% higher than November 2016. The growth in exports to the US also rebounded, rising 13.0% versus 7.1% in October, while exports to the EU rose 13.3%. Hardly what a trade deficit-obsessed president Trump wants to see.

The media was quick to link the strong performance from Japan’s export sector to a positive outlook for global growth as we head into 2018. Reuters explains:

Economists expect brisk Asia-bound shipments of electronics and solid capital investment in advanced economies will underpin Japan’s export performance in coming months. “The global economic outlook by IMF and OECD suggests the world economy will remain resilient for the time being, which will provide favourable export conditions,” said Takeshi Minami, chief economist at Norinchukin Research Institute. That upbeat outlook was highlighted in the BOJ’s tankan survey on business sentiment last week, which showed big manufacturers’ optimism hit an 11-year high.

While Bloomberg commented “The November data confirm the strength of global demand after signs of softening in October, said Atsushi Takeda, an economist at Itochu Corp. in Tokyo. "The general trend hasn’t shifted a great deal from last month, but the positive aspects are clearer with this month’s data,” he said.

Meanwhile, with Japan enjoying its second-longest run of post-war growth, a very tight labour market and business confidence at its highest level for more than a decade, more commentators are questioning the gap between economic performance and lacklustre inflation. Indeed, the publication of today’s trade data coincided with the latest BOJ quarterly “tankan” survey on corporate inflation expectations. The survey showed Japan Inc. expects consumer prices to rise by 0.8% a year from now (not 0.7%, not 0.9%).

Disappointingly, this is only 0.1% higher than the 0.7% from the last survey three months ago. The expectations for three years out and five years out at 1.1% were unchanged from the last survey and obviously fall well short of the Bank of Japan’s 2% target.

The lack of headway on raising inflation expectations puts Governor Haruhiko Kuroda in a tricky position ahead of Thursday’s BoJ meeting. Last month, he highlighted the “reversal rate”, i.e. maintaining negative interest rates and “crisis-mode stimulus” for two long could have negative consequences by damages the Japanese banking system. On 4 December, he seemed to back down again, making it clear that the reversal rate is not happening right now.

Marc Ostwald, global strategist at ADM ISI in London expects that Kuroda will offer little more than “very gentle hints” of removing stimulus at this week’s meeting: "On the central bank front, the BoJ rounds off this month's gamut of G7 policy meetings, and is unsurprisingly expected to keep its key rate at -0.1% and its 10-yr JGB yield target at 0%, and is not expected to change its other QQE parameters. It may however offer further very gentle hints that it is to starting to consider an exit plan."