Japan to Report Another Trade Deficit

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By Marc Chandler

NEW YORK ( BBH FX Strategy) -- Early Thursday in Tokyo, Japan is likely to report a trade deficit for February. On a unadjusted basis, it will be the fifth monthly deficit. Based on the trade figures for the first 20 days of February, it will likely be the smallest of the streak. The consensus is for a JPY120 bln shortfall. On a seasonally adjusted shortfall, it will be the eleventh in a row. At the consensus guesstimate of a JPY342.5 bln deficit, it will be the smallest since September.

Exports are still falling on a year-over-year basis, but at a slower pace. Imports are still rising, but here too the pace is slowing. The swing into trade deficit for Japan happened from both sides. Exports were squeezed by the strengthening of the yen and weaker foreign demand. Imports were bolstered by energy imports as its reliance has dramatically risen since last year's tragedy.

Still, the January record trade deficit (JPY1.48 trillion) and the anticipated recovery in February was distorted by the Lunar New Year, which shuts down many Asian centers, most importantly, Japan's biggest trading partner China. Nevertheless, if the trade deficit comes in near consensus, it will likely be sufficient to see broader current account measures swing back into a surplus for the first time since February 2011.

The key driver for the current account is not the trade balance, which is so yesterday, but the investment income. This consists of items like dividends, coupon payments received, licensing fees and royalties. It is fairly stable. Over the past six months, Japan has received an average of JPY1.11 trillion a month. The monthly average over the past year is JPY1.17 trillion.

We have argued that in the past, the yen appreciated when Japanese investors were unable or unwilling to recycle its trade surplus. Now the challenge is recycling its capital inflows.

Part of the reason the yen is weakening is that speculators, judging from the IMM Commitment of Traders, have reversed out of a net long into a net short position of roughly the same size. Portfolio flows have also changed.