Exports and Mayonaise in Japan

Many things can be learned from the recent report on Japan's trade surplus which saw a whopping increase on 36.9% y-o-y in March.

Japan's current account surplus widened to a record in March, as exports to Asia and Europe helped counter slower growth in shipments to the U.S.

The surplus expanded 36.9 percent to 3.32 trillion yen ($28 billion) from a year earlier, the Ministry of Finance said in Tokyo today, more than the 2.95 trillion yen median estimate of 28 economists surveyed by Bloomberg News.

Today's report supports comments made this month by Asian finance ministers that growth in India and China will help the region withstand a slowdown in the U.S. and Europe. Japan's exports to China, which overtook the U.S. as its largest trade partner last year, surged 15 percent to a record in March.

First of all it appears that Japan is indeed decoupling from a trailing US economy but not as it were through an increase in domestic demand but rather through exports to China, Europe and India. A notable data point is the surge in the trade surplus of 62.1% in March and more specifically the 15% increase in exports towards China.

A second point is derived from the income balance which of course reflects the low interest rate environment and subsequent low yield environment for capital in Japan. Especially net revenue earned in foreign direct investment grew at a very healthy clip.

Meanwhile, much ado have been made of the recent gain in producer price inflation (wholesale inflation) which rose 2.2 percent y-o-y in April. Yet, the gain was mainly and quite naturally derived from energy and commodities which of course begs the question of what measures of inflation you want to look at? Also, as is customary when gauging Japanese inflation figures the odd data point stands out. Normally it is café lattés from Starbucks but this time around the focus is on mayonaise and salt where prices are set to go up on the back of the high commodity component in the production. More generally we should really try to think about the inflation dynamics in Japan and whether and to what extent producer prices will trickle down into consumer prices to any sustainable degree? Remember here at producer prices and especially those tied to commodities are for a large part tied to capex and as we saw above capex in Japan is mainly driven by booming exports. Essentially, as I and other Japan watchers have been arguing we are looking at a disconnect between the domestic economy and a capex driven export sector. This does not mean that PPI inflation won't perhaps make those consumer price figures look better but as always with the Japanese economy, textbook theory should be applied with caution.