By: Dr. Mike Campbell

Japan is still the world’s third largest economy and its strength has been due to its exports to the rest of the world. A nation’s balance of trade is simply the difference in value between what it exports and what it imports; so Japan has historically enjoyed a very healthy balance of trade. However, Japan has suffered from the global financial crisis more than most because its currency was perceived as a “safe haven” – despite the fact that the Bank of Japan has been operating a “near zero” interest policy for many years (a stable currency with a decent rate of return on monies on deposit makes for a highly attractive safe haven currency).

The demand for the Yen, as a safe haven currency has pushed up its value against its major competitors. Of course, uncertainty in the Eurozone caused by the sovereign debt crisis has not helped matters; despite a recent rally, the currency is still 7.9% lower than it was a year ago and down a whopping 38.5% since its highest point against the Yen (169.75 to the Euro in July 2008). Coupled with the devastating natural disaster in March last year and then catastrophic flooding in south east Asia, where significant Japanese overseas production was based, Japan has had to endure hard times recently..

The trade deficit in January came in at $19 billion; a record level. In addition to the high Yen, imports had been pushed up since much of the nation’s nuclear power generation capacity was taken off-line following the tsunami and damage to the Fukushima nuclear power plant. This meant Japan had to increase gas and fossil fuel imports to provide fuel to make up for lost electricity generation capacity. According to the Ministry of Finance, natural gas and coal imports were up by 74 and 26% on the January 2010 figures, respectively.

Reduced demand in Japan’s exporting markets, notably the EU and the USA also worked against the balance of trade which analysts expect will remain in the red throughout the first and second quarters of the year.