Color the U.S.-Japanese trade outlook bright over the short term, dark over the long term. Japan's total trade surplus in volume terms has been shrinking since mid-1993, and in dollar terms, it was down nearly 16% in May from May, 1993. Were it not for a surge in demand for Japanese products caused by America's robust expansion, Japan's surplus with the U.S. would already have started to shrink, experts say.
As the U.S. economy slows later this year and the Japanese recovery gathers steam, the betting is that the high-flying yen will erode the appeal of high-priced Japanese exports in the U.S. and whet the appetite of Japanese consumers for low-priced U.S. goods. And once Japan's trade surplus with America begins to decline, the yen is likely to follow suit.
The problem, says economist Daisaku Ueno of Nomura Research Institute America Inc., is that any narrowing of the U.S.-Japanese trade gap is unlikely to last. Indeed, basic economic trends, he warns, suggest that the Japanese surplus could widen again without continued dmllar declines.
Ueno concedes that Japanese unit labor costs in manufacturing measured in dollars are up 125% relative to such U.S. costs since 1980. But he estimates that almost all of that rise is due to dollar depreciation against the yen. Only 10% or so reflects a relative improvement in America's economic fundamentals.
For example, while U.S. wage hikes over the years have been low, Japanese labor costs in yen have risen even more slowly. And relative U.S. productivity gains have been concentrated in the 1990s, when Japan's recession has hurt worker output, even as America's upturn has enhanced output. Once Japan recovers, these trends will reverse.
Meanwhile, on the price front, Ueno notes that U.S. domestic inflation has consistently outpaced Japanese inflation, making it difficult for U.S. manufacturers to maintain their competitiveness in the absence of dollar depreciation. Moreover, U.S. consumers are far more responsive to price drops in Japanese goods than Japanese consumers are to price declines in American goods. Ueno also calculates that U.S. demand for Japanese products tends to rise nearly 3% for every 1% rise in gross domestic product, whereas Japanese demand for U.S. products rises only 1.4% for every 1% increase in its GDP.
The bottom line is that once near-term cyclical effects fade, the U.S.-Japanese trade gap is likely to start widening again even if the dollar stabilizes at 100 yen. Only structural changes, such as opening up Japan's distribution channels to U.S. products, says Ueno, offer hope of achieving more balanced trade over the long term.