Japan's Weak Export Performance Explained

Japan, one of the world’s trading giants, has seen remarkably slow growth in exports during the past two years, despite a 35% depreciation in the yen. For the IMF, there are compelling reasons why and these speak to structural changes in the world economy that have changed the nature of the game.

For starters, the IMF’s recent World Economic Outlook puts Japan’s weak trade record in stark perspective. According to their estimates, exports have been 20% lower than expected. For an economy that exported US$715.1 billion in 2013, that’s a huge miss, indicating US$143 billion in unbooked trade.

Japan: Export Growth: Predicted vs. Actual

Source: IMF World Economic Outlook, October 2015

In the IMF’s analysis, the following three factors explain Japan’s sluggish performance:

  • The weaker yen hasn’t made exports cheaper. Producers have had to raise prices of their export products, largely because the price of imported inputs has increased as the yen weakened. This has dampened expected trade growth because Japan-based exporters are more dependent on imported goods than ever before.

  • Japanese producers export more from overseas production bases, and less from Japan itself. Japan’s corporate sector have been one of the biggest investors in the region during the past 20 years. As such, much manufacturing capacity owned by Japanese businesses has shifted overseas, meaning their increasing trade shows up in neighbouring countries’ trade figures rather than in Japan’s.

Corporate Japan: Overseas Investment

Source: IMF World Economic Outlook, October 2015

  • Japan’s export sector has changed. Japanese producers fewer finished products than in previous years and, instead, it supplies more at the beginning of production chains, with particular emphasis on research and design, rather than assembly and finishing. As such, the shift in focus means less finished tradeables going through the national accounts.

With these points in mind, its understandable why Japan has underperformed against expectations in recent years. With long-term structural changes impacting Japan’s trade capacity, it puts even more emphasis on boosting domestic demand as a source of economic growth, an area where, recently, Japan doesn’t have such a good record as wage and retail sales still remain sluggish, despite the best efforts of the Abenomics policy program.

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