Despite having one of the strongest, most developed economies in the region, Japan has suffered significantly during the global financial crisis. Its export volume fell sharply and continues to lag with low demand among its trading partners and slowing industrial production within Japan itself and around the world. Adding insult to injury, rising agriculture prices and a global commodity price boom further pushed the Japanese balance of payments into deficit. Today, Japan continues to face periodic trade deficits as export volume continues to fall, partly due to the strength of its currency, though an impending trade deal with the EU could help.
A highly developed and industrialized country, Japan is abundant in capital and skilled in producing finished goods like electronics and cars, as well as “added-value” goods, including processing inputs destined for export and further assembly into manufactured goods abroad. Meanwhile, its land and resource scarcity means that Japan must import large amounts of food, commodities and other inputs for its industrial production. Accordingly, its top imports by value are oil, electronic equipment, machinery used in manufactures, and medical and technical equipment (1). Though agricultural products do not top the list, Japan also imports around 60% of its food in terms of calories (2).
As such, Japan’s balance of payments is heavily affected by global prices for agriculture and commodities, which are notoriously volatile in the face of global boom and bust financial cycles. Since the financial crisis of 2007, its balance of trade has declined steadily, reaching a low of nearly -3000bn yen in 2014 (3). This was largely due to the global commodities price boom that lasted for the decade following 2003, as well as rising global oil prices until the summer of 2008 (4). These factors also contributed to Japan’s overall slowing of industrial production during this time period as the global price of inputs rose and demand for the finished products fell (4).
One main such product sector is automobiles, the country’s largest export product, comprising 15% of all total exports; Japan has one of the most technologically advanced auto sectors in the world. Other top exports include manufactures like iron and steel products, semi-conductors, auto parts and power generating machinery (2). Generally speaking, Japan’s main export categories are consumer durables, industrial supplies, and capital equipment, together comprising more than 90% of total export volumes.
In response to the financial crisis, demand for all of these export categories fell as consumers in the US and Europe (over 40% of Japan’s export market) demanded fewer Japanese consumer goods and developing Asian economies (over 50% of the export market) saw a slowing down of their manufacturing sectors, thus demanding fewer industrial supplies and capital equipment (4). In addition, the yen’s appreciation in recent times has made Japanese exports less competitive on the global market, further contributing to the decrease of export volumes (4).
It is this final factor that continues to pull Japanese trade into deficit even as the global economy recovers. According to recent reports, Japan’s trade balance for August slipped into deficit after several months of surplus; overall export volumes have fallen for the past 11 months (5). In response to such negative performance, the Bank of Japan may expand its already huge annual asset-buying plan, or possibly cut interest rates further into the negatives to encourage lending by charging banks for storing extra funds with the Bank (5).
Meanwhile, negotiations opened with the EU, which commenced in 2013, continue, aiming to conclude a free trade agreement by the end of 2016. The deal would lower tariffs and reduce non-tariff barriers to trade for key products for EU-Japan trade; the EU would eliminate protection against Japanese consumer goods like automobiles while Japan would drop protection on agriculture. However, domestic interests in Japan pressure negotiators to maintain tariffs on rice, wheat, beef and pork, dairy and sweetening products (6).
Although the EU has agreed to discuss these five farm products separately from the rest of the deal due to their sensitive nature for Japanese farmers, if the deal is successful in reducing protections on agricultural imports from the EU, Japan could see a further worsening of its terms of trade as more EU imports flood its domestic market. However, the opposite could also be true if the price of agricultural imports falls in the absence of tariffs while lowering protection against Japanese autos and other consumer goods stimulates European demand for these products. In this case, a free trade deal with the EU could help Japan raise export volumes.
(1) Workman, Daniel. “Japan’s Top 10 Imports.” World’s Top Exports, 24 September 2016. http://www.worldstopexports.com/japans-top-10-imports/.
(2) “Japan.” CIA World Factbook, 16 September 2016.
(3) Husna, Rida. “Japan Balance of Trade.” Trading Economics, 21 September 2016. http://www.tradingeconomics.com/japan/balance-of-trade.
(4) Kawai, Masahiro and Shinji Takagi. “Why Was Japan Hit so Hard by the Global Financial Crisis?” Asian Development Bank Institute, October 2009. https://www.adb.org/sites/default/files/publication/156008/adbi-wp153.pdf.
(5) “Japan logs surprise trade deficit in August: gov’t.” Yahoo News UK, 20 September 2016. https://uk.news.yahoo.com/japan-logs-surprise-trade-deficit-003755686.html.
(6) Jiji. “Japan, EU to discuss troublesome farm products separately in talks on economic partnership agreement.” Japan Times, 24 September 2016. http://www.japantimes.co.jp/news/2016/09/24/business/economy-business/japan-eu-discuss-troublesome-farm-products-separately-talks-economic-partnership-agreement/#.V-cW5JMrKqR.
Image: © Hiro1775 | Dreamstime.com - The city of Tokyo and Tokyo Tower Olympic illumination