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Japan Contending With Surging Trade Deficit As Challenges Mount

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For decades Japan was renowned for its high levels of exports and low reliance on imports. The tides have turned in recent years, however, with the monthly trade deficit ballooning to its highest level ever in March. While analysts note that the rising deficit was likely bolstered by a rush to buy cheap consumer products ahead of a looming sales tax, exports also remained weak.

Shinzo Abe stormed into office with big promises and after a series of aggressive policy reforms, he seemed to have momentum on his side. Unfortunately for Mr. Abe, however, Japan’s economy has continued to limp along.

Despite a 9 percent fall in the value of the Yen, which should in theory boost exports by making them cheaper in world markets, Japan’s exports have grown only 1.8 percent on the year. Imports, meanwhile, spiked 18.1 percent, causing the trade gap to widen to USD 14 billion in March, the highest ever recorded. March also marked the 21st straight month of deficits.

Exports remain weak across the board

Before China, Japan was once seen as the next manufacturing hub of the world. Known for its advanced robotics and dedicated workforce, Japanese manufacturers quickly built a reputation for building high quality and affordable products. The drive to cut costs, however, has shifted most production to China, even if quality has suffered as a result.

Exports to every country except the United States declined, with China and Thailand representing two of the biggest drops amid an economic slow down currently spreading across Asia. Meanwhile, the trend of off-shoring production is continuing, resulting in a further loss in demand for Japanese products.

Japan will face challenges ahead

Few developed countries are facing as many challenges as Japan. The country’s population is slowly shrinking as its population rapidly ages. Already, people over the age of 65 make up one quarter of Japan’s population, the highest of any country, and that number is expected to rise in the years to come.

Meanwhile, debt now measures twice the country’s GDP. While most of the debt is owned by the Japanese themselves, not foreign countries and investors, the fact is that the Japanese government has a lot of IOUs.

The government’s efforts to reach fiscal stability, however, could slow economic growth. The sales tax will soon increase to 8 percent, from 5 percent, which could slow consumption. Meanwhile, with the labor force shrinking, income revenues are drying up.

Combined, Japan is facing a perfect storm of challenges. The country could soon find itself metaphorically besieged on multiple fronts.

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