If you have been reading the headlines attached to Japanese export data releases in recent months you will be excused for being somewhat confused, as the pundits vacillate between optimism and despair with each new data point. Below are the headlines reported by Bloomberg news for each release since the April data was published in late May:
5/27: “Japan Exports Fall at Slower Pace as Recession Eases”
6/24: “Japan Export Slump Deepens, Casting Doubt on Recovery”
7/23: “Japanese Exports Fall at Slower Pace as Slump Eases”
8/26: “Export Slump Deepens, Signaling Japan Economic Recovery Could Be Weakening”
This manic depressive cycle of hope and fear underscores the great dilemma for anyone following the Japanese economy: the almost complete dependence on external demand for expensive durable goods and external supply of basic materials. Until recovery in the EU and North America achieves critical mass, Japan is essentially dead in the water. All government attempts to stimulate internal demand will ultimately function as a band aid since the economy is structured with such a profound dependence on external trade (fun fact: according to some estimates Japan is calorically 60% dependent on food imports). To make matters worse, the new programs being cooked up by the presumptive Democratic Party victors will not only fail to address these structural weaknesses or the looming demographic disaster, they will actually increase the national debt to well beyond 200% of GDP and keep the zero rate train rolling.
Exports for July reported last night declined by 36.46% year-over-year. We have begun to see signs of recovery in the major European economies, and some of the important developing economy markets for Japanese exports are starting to show modestly increasing consumer spending levels, but there is clearly no chance that auto or big ticket consumer electronics sales in any these markets will be able to rebound to pre recession levels in the intermediate term.
As Japan readies for this weekend’s national election it finds itself in the familiar role of global waterboy, sitting on the bench next to the US while the real recovery game is happening on the field. We will continue to trade Japanese equities tactically on Yen relative strength, but remain bearish on the long term on fundamentals there.