Japan reaching trade balance on a sustainable basis will take some time

October's trade balance is likely to have reached a balance at JPY0. This would mark a significant improvement from the JPY742bn deficit seen in October 2014. On a seasonally adjusted basis, the trade deficit likely reached JPY90bn in October, an improvement on September's JPY356bn deficit. Exports in October are expected to have grown by 1.0% yoy (0.5% in September), while imports likely shrunk by 9.1% yoy (-11.0% yoy in September). 

Japan's export recovery remains weak because the US economic recovery continues to be modest and there is uncertainty surrounding the Chinese economy. With exports and production stalling globally, production growth in areas such as components (parts), capital goods and IT-related goods has been sluggish. However, thanks to the effect of large-scale yen depreciation in recent times, exports have managed to continuously grow, supported in particular by car exports to the US. 

On the other hand, firm domestic demand is providing continuous support to import growth, but with oil prices having fallen substantially, imports are weakening. Due to sluggish industrial production, imports of raw materials and parts may have weakened. BoJ governor Kuroda explained in a press interview in October that exports are expected to remain more or less flat for the time being but are then likely to increase moderately due to emerging economies moving out of deceleration phases and yen depreciation. However, it will probably take some time to reach that stage. 

The BoJ's latest Tankan survey confirmed that the business sentiment outlook is deteriorating. There is a larger risk that the Japanese economy will see a downturn if the export recovery is delayed to a large extent. The trade balance is expected to continue to improve in the long term. However, oil prices are no longer falling and the recovery in domestic demand is likely to support import growth. Against this backdrop, it will take some time for a trade surplus to be reached on a sustainable basis.