The Yen and Japan’s Trade Deficit; Exchange rates don’t drive trade flows

January 17, 2014 Leave a comment

The Yen and Japan’s Trade Deficit

Exchange rates don’t drive trade flows, savings rates do.

Jan. 16, 2014 7:39 p.m. ET

According to conventional wisdom, a weaker currency should boost exports and reduce imports, but the real world doesn’t work that way. Take the trade figures out of Japan this week. Despite the yen losing 15% of its value against the dollar over the past year, Japan posted a record trade deficit of $5.7 billion in November.The usual caveat about a single month’s data applies, and most of the deficit is due to imports of fossil fuels post-Fukushima. Nevertheless, it’s striking that a depreciating currency hasn’t arrested a trend of declining trade surpluses that’s been underway for years.

In the 1980s, the situation was very different, with Japan running a large surplus and the U.S. in deficit. But the lesson was the same. Washington pushed Tokyo into the 1985 Plaza Accord, an agreement to strengthen the yen. But even after the Japanese currency appreciated by a whopping 87% over the following three years, the bilateral trade gap continued to grow.

The real driver of Japan’s exports, as Charles Wolf, Jr. wrote on these pages in 1989 and we excerpt on the following page, was a high savings rate due to demographic trends. As Japan’s population aged and savings declined, he predicted, Japan would become a mature creditor country and trade surpluses would give way to deficits. And so it is coming to pass.

Despite history’s repetition, the fact that exchange rates don’t drive trade flows hasn’t sunk in. The Bush and Obama Administrations pressured Beijing to appreciate the yuan by 37% since 2005, but the bilateral trade gap grew by 45% over the same period. China, like Japan in the 1980s, has a very high savings rate that causes trade surpluses, but its population is set to age even more rapidly than Japan’s. Why not let this supposed problem solve itself?

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment