Naomi Fink on CNBC Tue 17 Jun 4.40pm PST

On Japanese Trade, Abenomics and the BOJ

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Despite the fact that both imports and exports came in lower than expected, it’s hard to read too much into this one data release.  Certainly, a slightly narrower deficit is on the margin, positive for GDP.  At the same time, lower imports are both good and bad – a dip in resource import volumes (the key driver for softer imports) on one hand might be one indicator of softer consumption and investment but on the other, we knew to some extent of the front-loaded demand at the end of the last FY and expected a dip in demand in Q1 FY14, so it should not be a great shock.  On the other, exports (particularly of autos, in volume terms) were also softer, yet remains much more robust in value terms, a potential positive for the long-suffering Japanese terms of trade.  In general, if demand  were collapsing either abroad or internally, we should worry, but the trade data certainly does not indicate this type of collapse.  At inception of the consumption tax hike, we had foreseen a modest mid-year dip in the wake of front-loaded consumption at the beginning of the year; trade data appear more or less in line with this outlook, thus no great surprise.

In the 80’s trade data was much more closely watched thanks to the greater volume of exports (rather than domestic production abroad), as well as the accompanying predominance of trade flow with respect to currency flows especially.  However, capital flows have long ago surpassed trade by a significant margin, as such we should more closely be watching sentiment in capital markets itself (and cross-border capital flow) to read market expectations about the economy rather than trade data, so long as there is no anomalous reading or shift in the overall trend.  Where trade data is however important is on the policy side, particularly when in regard to energy policy and specifically, to nuclear restarts.


The Abenomics update released on 16 June in the form of a progress report do little to change my view regarding structural reform.  of these points are a good start, but (it may be argued apart from the Australia-Japan EPA), all of them have yet to crystallise in actual policy.

Just to name a few examples (which I did not do on air given time constraints), plans for GPIF changes in personnel and investment guidelines are one hopeful signal but fall short of sweeping changes that would lead to expectations of a consistently activist new investor in Japanese risk assets (to enforce the stewardship code, now under discussion).  We have already outlined the paucity of underlying data supporting Abe’s goal of boosting female labour force participation and thus Japanese productivity (the update does not address this).  The report highlights some government efforts to gather data, which still appear insufficient to support policy.   We discussed this in greater detail at Roundtable Japan.  Special economic zones identified to promote Japanese innovation and productivity run the risk, by virtue of imposing artificial barriers to innovation, of failing to realise the productivity potential of innovation.   For instance, research that might be primarily developed for medical purposes (in applied materials sciences, for example) that might otherwise have enjoyed greater cross-disciplinary applications could potentially, due to the segmentation of this research fail to live up to its full potential outside of the target industry or zone.  On a separate note, it surprises me not at all that social security reform was not included in the update, given that it is as much a fiscal as a structural issue.

On the “second arrow”, we note some potential policy inconsistency – strictly speaking it is impossible to have a stimulatory and restrictive fiscal policy at any one point in time – either your outlay net of tax receipts is increasing, decreasing or unchanged.  Clearly however, the implication of Abe’s “growth friendly yet responsible” fiscal policy is that stimulus now will at some point (probably at the peak of the cycle) give way to a rise in tax receipts vs expenditures.  Thus, as recovery (and inflation) progress, expenditures, in yen terms, might remain unchanged yet still conducive to fiscal restraint.  If so however, there will be a necessary cut in real expenditures, part of which might come in the form of social security reform.  Don’t expect anything momentous on the second arrow before then.

BOJ: start thinking of exit policies now for later implementation

On one hand, the latest BOJ minutes recognized the tighter-than-anticipated conditions in the labour market, particularly among skilled labourers but on the other, the BOJ maintains its 2% target, which it has not yet achieved.  It is natural for the BOJ to be considering an exit from its stimulus policies, but unless it shifts its target would risk credibility damage to signal that it is done easing as yet.