Japan Record Trade Gap Shows Risk of Abenomics Losing Steam

Photographer: Tomohiro Ohsumi/Bloomberg

A man cycles through a park near a shipping terminal in Tokyo. Japan's trade deficit, partly triggered by extra imports of fossil fuel, trimmed the nation’s fourth-quarter growth to an annualized pace of 1 percent, less than half the median forecast of 2.8 percent in a Bloomberg News survey of economists. Close

A man cycles through a park near a shipping terminal in Tokyo. Japan's trade deficit,... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

A man cycles through a park near a shipping terminal in Tokyo. Japan's trade deficit, partly triggered by extra imports of fossil fuel, trimmed the nation’s fourth-quarter growth to an annualized pace of 1 percent, less than half the median forecast of 2.8 percent in a Bloomberg News survey of economists.

Japan’s record trade deficit adds to sinking consumer confidence and an April sales-tax increase, threatening to undermine Prime Minister Shinzo Abe’s bid to engineer a sustained recovery.

Credit Suisse Group AG yesterday cut its 2014 economic growth forecast for Japan to 1.6 percent from 2.2 percent, as the government reported a 2.79 trillion yen ($27.3 billion) trade shortfall for January. The full-year deficit for 2013 was an unprecedented 11.5 trillion yen.

While the yen’s 18 percent decline against the dollar last year has led Toyota Motor Corp. and Mitsubishi Motors Corp. to forecast record profits, inflation driven by higher import costs is set to squeeze households. At the same time, Abe risks choking off consumption by raising the sales tax this year and next as he tries to fix the nation’s finances.

“The sales-tax hike could be the straw that breaks the back of Abenomics,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, referring to the April increase to 8 percent from 5 percent.

In another restraint on growth, all of Japan’s 48 operable nuclear reactors are shut for inspections after the 2011 Fukushima crisis, with no set date for restarting them. Imports of crude oil surged 28 percent last month.

Wealth Effect

The Topix stock index is down about 7 percent this year after rising 51 percent in 2013, limiting the so-called wealth effect of asset-price gains leading to stronger consumption. The gauge rose 1.7 percent as of 9:48 a.m. in Tokyo today, after stronger-than-forecast U.S. manufacturing data.

At the same time as Abe is trying to fuel growth with fiscal and monetary stimulus, he’s wrestling with reining in the world’s heaviest debt burden. After gauging the strength of the economy in the third quarter, the government will decide whether to raise the sales tax to 10 percent in October 2015.

“Risks are mounting for Abenomics,” said Takahiro Sekido, a strategist in Tokyo at the Bank of Tokyo-Mitsubishi UFJ Ltd., who formerly worked at the Bank of Japan. “The next six months are very important for Abe because he will have to make a decision this autumn on the second sales-tax hike.”

Abe’s Campaign

Elected in December 2012, Abe jump-started a four-quarter expansion with fiscal stimulus and his prompting of the Bank of Japan to unleash unprecedented easing aimed at ending 15 years of deflation.

The boost from Abenomics lifted consumer confidence to a six-year high in May before it began to slide. Sentiment fell last month to the lowest level since Abe came to power, with perceptions of income growth, willingness to buy durable goods, and asset-price growth all declining.

The trade deficit, partly triggered by extra imports of fossil fuel, trimmed the nation’s fourth-quarter growth to an annualized pace of 1 percent, less than half the median forecast of 2.8 percent in a Bloomberg News survey of economists. Base wages excluding overtime and bonuses fell in December for the 19th month, dropping 0.6 percent from a year earlier.

“The effect of the yen’s depreciation on exports has been so slow,” former BOJ Deputy Governor Kazumasa Iwata told reporters in Tokyo on Feb. 19. Iwata also highlighted declines in the competitiveness of Japanese industries and production shifting overseas.

Central Bank

At the same time, some investors and analysts expect the BOJ to pick up the slack should Abenomics show signs of running out of steam.

On Feb. 18, the BOJ doubled a funding tool to 7 trillion yen and said individual banks can borrow twice as much low-interest money as previously under a second facility. It left unchanged a pledge to expand the monetary base by 60 trillion to 70 trillion yen per year.

The BOJ decision to not expand quantitative easing in January and February prompted Credit Suisse to cut its growth forecasts, economists at the bank led by Hiromichi Shirakawa said in a report yesterday. Credit Suisse had been expecting an increase in stimulus in the first quarter, and now forecasts chances of the BOJ boosting its monetary base target are much lower.

Central bank Governor Haruhiko Kuroda says he’s prepared to do whatever is needed to support Japan’s recovery and drag the nation out of deflation. He’s making progress: core consumer prices, the BOJ’s benchmark gauge, rose 1.3 percent in December from a year earlier, the most since 2008 and more than halfway to a 2 percent target.

Twenty-five of 34 economists forecast the BOJ will add to stimulus by the end of September, with 13 of those projecting action by the end of June, according to a Bloomberg News survey conducted Feb. 6-12.

“The trade picture is worse than policy makers anticipated, and may prompt the BOJ to act earlier than expected,” the strategist Sekido said.

To contact the reporter on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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