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Japan at risk with record trade deficit

Japan suffered a record trade deficit in January as growth in exports spurred by a weak yen was far outstripped by a surge in import costs, raising fresh doubts about Prime Minister Shinzo Abe’s strategy to spark an economic revival.

The trade numbers came on the heels of a survey showing manufacturers’ sentiment worsened in February in a sign that businesses were bracing for a chill in demand after a planned sales tax increase takes effect in April.

The drumbeat of disappointing data threatens to slam the brakes on the world’s third-largest economy barely a year after Abe set about recharging growth with a potent mix of fiscal and monetary stimulus.

Exports rose 9.5 per cent in January, Ministry of Finance data released on Thursday showed, though growth slowed for the third straight month with the effect of the softer yen on shipments outweighed by a substantial rise in import costs.

The trade balance came to a deficit of ¥2.79 trillion ($27.30 billion) in January — a record 19th straight month of shortfalls — as imports rose 25 per cent to a record amount. The ballooning deficit is a reminder that a weak yen alone cannot boost exports as Japanese firms are shifting production abroad, while overseas demand lacks strength needed to offset a blow from the planned sales tax hike. A stumble in the economy could force policymakers to resort to further stimulus to prop up growth, although at this week’s meeting the Bank of Japan ruled out the immediate need for more monetary steps.

The BoJ’s stance was reiterated again on Thursday by board member Yoshihisa Morimoto, who said the economy can continue to exceed its potential growth rate even after the tax increase. Morimoto, a former utility executive, stuck to the BoJ’s assessment that Japan’s economy was headed for a moderate recovery and making steady progress toward achieving the central bank’s two per cent inflation target.

Still, many analysts were guarded about the near term “If the economy weakens further after a sales tax hike, policymakers could resort to fiscal stimulus as early as summer.

The BoJ could ease policy further later this year if it becomes clear that its two per cent inflation target cannot be met,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute.