Japan's trade balance to remain in deficit

Japanies's trade balance returned to deficit in April and will likely remain in the red in coming months.

After recording the first surplus in years in March, the trade balance returned to the usual deficit in April. The headline deficit amounted to ¥53.4 billion last month following March's ¥227 billion surplus. Adjusted for seasonal factors, the shortfall reached ¥209 billion following a ¥8 billion surplus in March. However, the deficit widened by less than expected.

The renewed deterioration of the trade balance reflects a combination of weaker exports and a rebound in imports. Import values rose by  1.8% m/m last month after March's 5.0% m/m plunge, whereas export values dropped by 1.5% m/m, notes Capital Economics.

The rebound in import volumes should have been even larger. While seasonally-adjusted trade volume data will only be released in a few hours, the Bank of Japan's earlier-released import price index showed a 1.8% m/m drop in import prices last month.

The fall in import prices is largely the result of a sharp fall in the cost of natural gas imports, which plunged by 12% m/m in April. The usual lag between natural gas and crude oil prices suggests that gas prices may fall by another 30% in the near-term, which would reduce monthly imports by around ¥150 billion.

However, if the exchange rate starts to weaken again in the second half of the year as analysts expect, crude oil imports will become more expensive again, soon. Overall, therefore, the trade balance will likely remain in the red in coming months.