Japan today posted a larger than expected trade deficit causing the Yen to fall .3%. The trade deficit was caused by a larger than anticipated import growth of 18% for the month of March compared to a lower than expected 1.8% growth in imports. Unfortunately, the growth in imports was drastically different from its 6.5% prediction. As we have learned in class, a depreciating yen should increase the demand for exports. Japan right now is facing too many outside issues with their goal to decrease their trade deficit. Unfortunately, the issues don’t just stem from domestic issues but also external issues. Slowing demand in China and increased tensions between China and Japan has caused its exports to its largest trade partner, China, to decrease. Just recently, China seized a Japanese ore caring ship due to Japan failing to pay wartime contractual obligations. Japan faced its lowest export by volume numbers since June, much of which was caused by a drop in exports to China. Another issues that Japan faces is due to the rise in the consumer tax on April 1st. The knowledge that the consumption tax was going to rise to 8% caused demand to increase among Japanese consumers, causing many producers to delay exports to meet the demand at home.
While the data coming from Japan is bad, it doesn’t mean that Japan’s future outlook is in jeopardy. The drop in the yen and Japanese consumer demand due to the increased consumption tax could increase the supply and demand for exports. Rising labor costs around the world and the weakening of the Yen has brought Japanese producers back to Japan. This would help the Japanese economy by increase local consumer expenditure and adding a slight bump to the economy. One issue that many analysts have with Japan at the moment is that the quality of goods in Japan is falling behind, leading to a drop in demand for Japanese goods. It seems that the lack of exports is a financial policy problem more than a monetary one. Domestic firms in Japan are sitting on large stock piles of money instead of focusing on making Japanese goods more competitive. Japanese firms hold as much as $2.1 trillion of cash and deposits. Japanese goods are becoming more competitive due to the weakening yen but it isn’t enough to increase demand abroad. Japanese firms aren’t being efficient enough to compete on a global scale. A recent Wall Street Journal article states that Japanese firms hold onto less profitable operations longer than US companies, leading to a net profit as a percentage of revenue being 2.1%, compared to 8.5% in the US. From this point of view, it seems that the problem that Japan is facing is less competitive firms than monetary policies. I believe that the Japanese government needs to shift its focus to financial policies in order to jump start its exports. The Japanese government could look into a R&D tax break, similar to the one that the US government in that past has used, to spur innovation and increase efficiency. Japan could also reduce restrictions on small business from obtaining capital. Japan won’t be able to rely on a weakening yen in order to decrease its trade deficit.