The J Curve Effect Complicates Japan's Trade Woes

Don't expect the rise in the yen to help reduce Japan's huge trade surplus anytime soon. Rather, the stronger yen will actually boost the surplus for a while--at least in dollar terms. The reason is the so-called J-curve effect.

The J-curve effect refers to the fact that a country that devalues its currency to make its exports more affordable abroad and its imports less affordable at home usually experiences an initial worsening of its trade balance. That's because the price of its imports in its own currency rises immediately, while its export prices are unaffected. Only after some time do a slowdown in imports and a rise in exports affect its trade numbers. And Japan's problem is that a rise in the yen translates into a devaluation of the dollar, so that the U.S. deficit with Japan will tend to widen.

The upshot is that concern about Japan's soaring trade surplus is likely to grow just as the rising yen is weakening its real export performance and thus worsening its recession.