Japan's Trade Deficit Balloons Past Forecasts as China Exports Slow and Energy Costs Surge

Japan's Ministry of Finance released its March trade figures on Wednesday, and the gap between what the country sold abroad and what it bought was far larger than anyone had predicted. The deficit came to 412.4 billion yen, about $3.19 billion. A Reuters poll of economists had expected 100.8 billion yen, so the actual number was more than four times the forecast.

The arithmetic behind it is simple. Imports rose 31.2% from a year earlier, beating the median forecast of 28.9%. Exports grew 14.7%. With purchases climbing roughly twice as fast as sales, the gap opened wide. It was the eighth deficit in a row, although it was the smallest in five months.

Energy was a main driver. The data showed imports pushed up by larger shipments of oil from the United Arab Emirates, along with coal and liquefied natural gas from Australia. Soaring energy prices raised what Japan paid for them, and the conflict in Ukraine added to the economic strain. The persistent deficit, as the report put it, underlines how exposed the world's third-largest economy is to rising import costs.

On the export side, the weak spot was China. Shipments to Japan's largest trading partner grew just 2.9% in the 12 months to March, helped in part by stronger sales of audiovisual projectors. The previous month's growth had been 25.8%. Takeshi Minami, chief economist at Norinchukin Research Institute, pointed to China's zero-coronavirus policies and city lockdowns, which cut production and hurt Japanese exports of parts and capital goods. He noted that China takes more than a fifth of Japan's total exports by value, and warned that a sluggish China could slow Japan's recovery.

Other markets were firmer. Exports to the United States grew 23.8%, lifted by motor vehicle parts and power-generating machinery. Overall, though, exports were held back by a 0.7% drop in motor vehicle shipments, a decline that reflects the continuing risk from global supply constraints and the pandemic.

The drag reaches into growth figures. Tom Learmouth, Japan economist at Capital Economics, estimated that net trade took around 0.5 percentage point off GDP growth last quarter, because import volumes rose much faster than export volumes. He was nonetheless optimistic about the direction of travel, saying that cars and capital goods, the staples of Japanese trade, should soon let exports outpace imports.

There is also some support at home. A separate Reuters poll of economists points to annualised growth of 4.9% in the current quarter, as consumer activity picks up after the government ended pandemic curbs last month.

The yen complicates that picture. It has slid to two-decade lows against the dollar on expectations that the gap between U.S. and Japanese interest rates will widen, with the exchange rate at 129.18 yen to the dollar. A weaker currency inflates the price of imported fuel and food, which were already rising, and presses on household spending power. Whether exports recover quickly enough to offset that, and whether China's lockdowns ease, are the things to watch in the coming months.