By: Dr. Mike Campbell
The balance of payments is simply the difference in costs between what a country exports and what they import. Japan has enjoyed a trade surplus for many years, but in the aftermath of the earthquake and tsunami a year ago, it has endured five months of trade deficit. The reasons for this include the weakening of demand for Japanese goods in importing markets because of a general downturn of demand globally; the high value of the Yen and concerns in Europe due to the sovereign debt crisis. However, as a result of the natural disaster last year, much of the nation’s electrical power generation capacity, based on nuclear energy, has been idled. Prior to the crisis, Japan produced a third of its electricity from nuclear power. The energy shortfall has had to be made up by importing fossil fuels, bumping up the import bill.
In January, the trade deficit stood at 1.5 trillion Yen (~ $19 billion), a record high, but the figure for February has come in at a surplus of 329 billion Yen (~$394 million), taking analysts by surprise. The Yen has been falling against other major currencies since February. At the start of February, a Dollar would buy 76.22 Yen; yesterday, the Dollar hit a 13 month high of 84.08 – it has relaxed back and is currently trading at 83.09. No doubt, the weaker Yen will have had a role in promoting Japanese exports last month (and more so for March), but the flip side is that a weaker Yen pushes up the costs of imports (notably raw materials) and the oil price has been rising due to tensions over Iran. Demand from the USA has been stronger than predicted in line with better than anticipated economic data.