By: Dr. Mike Campbell

Part of a nation’s current account is derived from the difference between the amounts that a country exports and what it imports. If a country is running a trade deficit, it means that the value of its imports outweighs its exports; a trade surplus is the opposite. In short, a trade surplus is a good situation for a nation to find itself in.

As Japan struggles to shake off the aftermath of the March 11th natural disaster, it is inevitable that trade figures will have been badly affected. However, as we reported earlier, the rate of contraction of the economy in the second quarter of the year was better than expected, coming in at a contraction of 1.3%. Further good news has now emerged in the trade surplus figure for July which came in at ¥72.5 billion ($946 million). However, as they say, the devil is in the detail.

When the July trade figures are scrutinised, it is seen that the export component in the trade balance has fallen for a fifth successive month. The export figure has declined by 3.3% in comparison to the comparable period last year and was worse than the 2.4% analysts had expected. The surplus is due to the fact that the cost of (foreign currency) imports has also fallen strongly. The Yen has been seen as a safe-haven currency and this has driven its value up against those of its competitors. On the one hand, this makes exports less competitive in absolute terms, but, since Japan imports almost all of her raw material needs, production costs are also reduced.

Whilst the price of many imported goods will be cheaper to the Japanese consumer, the risk to the economy of a high Yen in destroying demand in exporting markets is a serious problem. It is likely that the Bank of Japan will make further intercessions to weaken the Yen.