One of the world’s greatest export engines is running out of steam.

For decades, Japan used the combination of manufacturing might and an export-oriented trade policy to shower markets around the world with its cars and consumer electronics and semiconductors.

No longer.

The Japanese government is expected to announce Wednesday that the country recorded its first annual trade deficit since 1980. If the yen remains strong and global demand weak, economists warn that Japan could run trade deficits for years to come.

 

The startling change is partly a result of one-time factors like the disastrous earthquake and tsunami last March, which destroyed factories, crippled supply chains and idled many of the country’s nuclear reactors. But the quake seems to have accelerated trends—like a decline in corporate competitiveness—that have been bubbling under the surface for years as the export superpower slowly transforms into a nation of pensioners.

More and more Japanese companies are moving production offshore. “This is a turning point for us,” says Masahiko Mori, president of machine-tool maker Mori Seiki Co., which this year is opening its first factory overseas—in Davis, Calif.—since the company was founded in 1948. Within five years, Mr. Mori says he wants to make around 40% of Mori Seiki’s machines outside of Japan, versus virtually none now.

Whereas Japan once forced the rest of the world to march to its drumbeat, now the island nation is being swept up by big global forces outside its control. The torrid growth of emerging economies like China and Brazil has pushed up the cost of what Japan pays for everything from oil and gas to the rare earths it imports for the manufacture of cameras, mobile phones or cars. Mr. Mori says high rare-earth material prices have doubled the cost of magnets used in the motors his company needs.

An Epic Run Ends

Japan’s domestic manufacturing malaise is being reflected in its trade numbers. For the first 11 months of 2011, it reported a trade deficit of ¥2.3 trillion ($30 billion), compared with a surplus of ¥6.6 trillion for all of 2010. Analysts say it is all but impossible for the country to report a big enough surplus in Wednesday’s December report to overcome the deficit for the rest of the year.

 

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