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Alvin Liew, Senior Economist at UOB Group, reviewed the latest set of trade balance data in the Japanese economy.

Key Quotes

“Even though Japan’s exports contracted by the least in 4 months (on y/y terms), it was still a significant contraction of 19.2% y/y in July… This was also the 20th consecutive month of decline since December 2018, further extending the longest stretch of monthly contraction since 1987.”

“The decline in imports was a sharper -22.3% y/y… Imports have been on the decline for 14 straight months since May 2019.”

“The weak exports were offset by an even sharper decline in imports and resulted in Japan recording a surprise small trade surplus of JPY11.6bn for July (from a deficit of JPY269.3bn in June). On an adjusted basis, the trade balance showed a deficit of JPY34.8bn in July (narrowing from a JPY410.9bn deficit in June).”

“While we still believe the worst for Japan’s trade collapse to be in 2Q 2020, the subsequent recovery in 2H has not yet materialized as shown by July’s dismal exports decline. In the latest 2Q GDP report, external demand weakness added to the 2Q GDP collapse as the exports of goods and services shrunk by a massive -18.5% q/q and it overwhelmed the paltry 0.5% q/q decline of imports. As a result, net exports contributed -3ppts to the -7.8% q/q GDP contraction, meaning the fall in external demand was responsible for nearly 40% of Japan’s record GDP quarterly contraction. The current export trajectory will not help Japan’s recovery path unless there is an even sharper fall in imports (which in itself is also a bad thing, because a sharp decline in imports reflects severe weakness in Japan’s domestic demand).”

We have further revised our forecast of Japan’s exports slightly lower and will now contract by 16.7% in 2020 from previous forecast of -16.6% (+5.6% in 2019) while imports may contract by 12.6% from previous forecast of -11.7% (+5.0% in 2019). Based on these latest projections, Japan is likely to record a trade deficit, amounting to JPY 6.3 trillion in 2020 from previous forecast of JPY 7 trillion (versus a trade deficit of JPY 3.6 trillion in 2019).”