Japan increased its consumption tax from 5 per cent to 8 per cent on April fools’ day. It seems unlikely that the negative impact of this on demand will be totally offset by other changes in the budget. There is therefore a risk that Japan’s economic growth this year will fail to match its trend rate (ie, its economy will grow less than its potential). The most likely way that this will be avoided is for Japan’s exports to pick up.
Japan’s exports have moved in a very similar fashion to its gross domestic product, as chart one (above) illustrates. This is not only because of their direct impact but because exports are much more capital intensive than domestic output. While Japan’s ratio of investment to GDP has fallen and is likely to continue to weaken over time (see my blog entitled “Why Japan invests too much”), strong exports slow the rate of decline and provide temporary support for the economy.
I hope and expect that exports will rise and keep the Japanese economy growing in line with its long-term potential, which I think is about 1 per cent a year. My reason for this moderate, but only moderate, confidence is that Japan has devalued by about 33 per cent since the fourth quarter of 2012 (from $1 = ¥75 to ¥100; see chart two below). Since then exports have been improving, as chart three (further below) illustrates, but more by value than by volume. It looks as if Japanese export prices have risen by about 10 per cent to 15 per cent, which is a lot less than the devaluation. This should have had two results. First, profit margins should have picked up and, second, Japanese exports should have become much more competitive in world markets.
The improvement in profit margins is already clear from the profits data; what we now await is stronger evidence that the apparent improvement in the competitiveness of export prices is resulting in rising exports.
Countries and companies usually find that demand for their products rise when their prices fall and, in Japan, prices should have declined quite sharply, not only in dollars and euros but in virtually all currencies. Unless the world economy slows, exports should soon start to show clearly that they are growing in volume as well as in value.
Hopes, however, are not facts and it would be encouraging to see export growth appearing in the data. Unfortunately, these may be far from clear for several months ahead, partly because 23 per cent of Japan’s exports go to China and Hong Kong and the Chinese new year seems to have a large impact on trade. As the Chinese new year is a moveable feast, it seems very difficult to make adjustments for it.
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