JAPAN, which is struggling to restructure its domestic economy, came out with surprisingly good economic data during the past half year. But economists say this run is probably over, and growth will slow markedly.
An early sign of a slowdown came Wednesday, when the government reported trade data for April. Though exports rose 4% from April 2007, imports surged 12% because of rises in the price of raw materials, such as oil and natural gas. Overall, the trade surplus fell 46% year-to-year.
That matters because Japan's net exports (exports of goods and services minus imports) have been a major source of its growth over the years. According to a breakdown of figures for gross domestic product for the first quarter of 2008, exports grewat an annualized rate of 20%, and contributed 0.5 percentage point of the overall 0.8% quarter-to-quarter growth. The result was a second straight quarter of strong growth: 3.3% annualized, following 2.6% in the fourth quarter of 2007.
For the current quarter that ends in June, economists on average forecast growth of roughly zero from January-March, in part because of slower export growth. Moreover, private consumption is expected to weaken, after it grew a surprisingly fast 3.4% in annualized terms during the first quarter, helped by an extra shopping day, Feb. 29.
"Exports were stronger than expected," says Akira Maekawa, an economist at UBS Securities Japan. But in spite of that, he says, the result "still implies a slowdown."
Meanwhile, the U.S. economy has slowed, raising the question: How dependent is Japan still on its exports to the U.S.?
U.S.-bound exports from Japan dropped 9% in April from a year earlier, with big declines for core products such as auto parts. In the past, that would have been critical, because the U.S. was the dominant overseas market for Japanese companies. But last year, just 20% of Japan's exports went to the U.S., compared with 30% in 2001.
At first glance, overall exports are holding up well, even though the growth rate has slowed. Shipments to the rest of Asia, rising steadily for more than six years, were up 7% in April from a year earlier. That growth was fueled partly by ships, whose export value jumped 154%.
The trouble is, Japan has started seeing the downside of its strengthening currency. The yen has risen nearly 20% against the dollar in the past year, as the Federal Reserve pursues a policy of low interest rates to try to stabilize the U.S. financial system. That reduces the yen value of exports denominated in dollars or in currencies linked to the dollar,like China's yuan.
"The U.S. is deteriorating," says Richard Jerram, Japan economist at Macquarie Securities, "and then the yen has been going up."
Meanwhile, Japan's imports are soaring, largely because prices for oil and raw materials have risen sharply. Imports in April of oil, natural gas and coal all rose by more than 50% from a year earlier, and the total value of imports rose 12%.
Japan imports almost all of its oil and many of the other raw materials it needs. This squeezes corporate profits when the costs aren't passed along to consumers-and dissuades people from shopping when these costs are reflected in higher store prices. Inflation rose to 1.2% in March-the highest level in years.
But because these rising prices are caused by higher industrial input prices rather than stronger demand, the country's central bank appears in no mood to try to stamp them out. "Uncertainty over the outlook for the economy and prices remains extremely high," Bank of Japan Gov. Masaaki Shirakawa told Parliament Thursday. "Under such conditions, it is inappropriate to have a preset direction for monetary policy."
More than a year ago, the central bank set its target for shortterm interest rates at just 0.5%. Economists now think it will stay there a while.
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