External Expansion Limited

Thursday, 10 April 2014


Japan is currently the world's third largest economy after the U.S. and China. However, the country's traditional policy given its cultural conviction and a series of events outside their control have catapulted to a continued deadlock in time for decades. It was break the routine combining perfectly both monetary and fiscal policy, so it starts to show signs of a speedy recovery and hope to continue down the path right. Japan begins to leave behind deflation and would be interesting that the European Central Bank take note of how to do following suit.

Before World War II, Japan ranked fifth in world trade with a trade surplus directing most of its exports to territories that were part of the empire, as Pingyuan Dongbei (Manchuria) and China occupied, while trade relations with countries like the U.S. and Britain were unfavorable. From 1946, the Allied occupation authorities allowed private companies continue to trade since it was and is essential for the Japanese economy, because the domestic market is unable to absorb completely manufactured goods that producing industry Japanese. In addition, import most of raw materials which depends their industry so must export most of its annual production to maintain trade surplus materials.
This has allowed Japan to invest large trade surpluses during the 1970s and 1980s on the outside becoming the main creditor nation in the world. In the 1990s, trade with Asian countries accounted for nearly 42% of Japanese imports and 33% of its exports. The main Asian trading partners in Japan were South Korea, China, Taiwan, Hong Kong, Indonesia, Saudi Arabia and Singapore. During the same period, the countries of the European Union accounted for 13% of Japanese imports and 17% of its exports. United States accounted for 28% of its exports and 22% of its imports. Other notable trading partners in Japan are Australia, Canada and the countries from the former Soviet Union.
Manufactured products accounted 92.9% of total exports and 21.2% of its imports were represented by fuels. Japan imports food, live animals, basic manufactures like textiles, iron and steel, and raw materials such as wood or metal ores. Even until 1993 were banned rice imports, but those years of poor harvests forced to make emergency imports from Thailand, Australia and the United States, which led to the round of negotiations of the General Agreement on Tariffs and Trade (GATT) 1993 in Uruguay, a gradual relaxation of restrictions to free trade was imposed.
In 2003, Japan became the third largest exporter in the world, with a value of 383.452 million dollars of imports and a value of 471.996 million dollars of annual exports. Japan has been a net exporter for decades that in recent years this trend has been reduced due to increased imports of energy resources has led to the shutdown of its nuclear plants after the Fukushima accident in 2011. The Fukushima earthquake was the latest tragedy to hit the country and dragged the resulting nuclear moratorium would increase energy prices for Japanese consumers and generated a rare trade deficit.
In addition to the effects of the earthquake that affected its nuclear power plant, we can say that the end of 2012 Japan's image was failure also because economic growth in the past two decades, both absolute and per capita had been lower than USA. The Nikkei stock index was levels at the beginning of the 1980s. A fragile political situation prevailed with constant changes of governments. The exchange rate had appreciated by 25% since the start of the crisis, hurting exports and profits of Japanese companies. The growth was weak, negative inflation, the real interest rate was positive and higher than the growth rate of the country not only withdrew growth and investment, but also deteriorated the dynamics of public debt. The Bank of Japan through inaction, did nothing, whereas the problem of the Japanese economy was structural still the responsibility of the Government who should act to increase potential growth. In short, it was created a vicious circle that had dragged on the floor the morale resulting in an economy of contrasts, where over 20 years ago that does not increase the price of the home and where for a couple of decades of inflation expectations have been zero or negative. Where the deficit ended the year at 7% and public debt exceeds 200% of GDP. In 2013, the current account posted a surplus of u$d 32.162 million assuming a record low and the third consecutive year of decline.
In this situation, the country needed a drastic change that lead the country down the path of growth, and this would seem to come from the hand of Shinzo Abe, elected prime minister again in late 2012 (he had been by a few months in 2006) . His first decision was to break with the past by establishing a three measures program. The first measure, has been an aggressive fiscal expansion program of short-term combined with the promise to raise taxes on consumption gradually to allow them to close the budget deficit and stabilize the high debt. The second measure was to appoint a new Governor of the Bank of Japan, Haruhiko Kuroda, head of adopting an expansionary monetary policy that reduced the real interest rates, rising inflation, contribute to growth and reduced the tax burden. The third measure was a package of structural reforms that promote long-term growth and offset the negative effect of population aging. The results were immediate, the Yen depreciating 20%, rapid reduction in interest rates and appreciation of the stock by 50%.
A coordinated combination of fiscal and monetary policy were the key so that inflation stand at 1.3% (The goal is to reach a 2% inflation) and inflation expectations are positive after many years. Also the real interest rates in the long term are negative and thus improving the profile of public debt in the medium term. Due to the weakness of the national currency, exports increased 16.7% in January 2014 compared to the same month of 2013. Imports grew by 30.3% due to increased crude purchase. Note as the Yen depreciates against the dollar and the euro, 16.6% and 19.4% respectively in January, benefiting exports but also makes imports more expensive, aggravating Japan situation given the energy dependence by purchasing 90% the energy it consumes to third countries.
Accordingly last January the trade balance showed a deficit of $22.7 million given exports worth $53.5 million and imports worth $76.2 million. The current account deficit was also 15.4 million due to increased energy demand and depreciation of the Yen that triggered the cost of imports increase. Also Japan's GDP grew 0.7% real, after an estimate of 1%. Capital spending rose 0.8% and it was estimated at 1.3%. Private consumption grew 0.4% compared to the initial estimate of 0.5% upward. Other interesting facts are that Japan's trade surplus with the United States is reduced due to energy dependence and the main import from this country of Liquefied Petroleum Gas, passing it in 2013 to become the largest trade partner of Japan leaving in second place China. Japan's exports are headed by mineral fuels, automotive and plastics; growing in value terms. Imports from Japan are headed by liquefied natural gas, electronic components including semiconductors and automobiles; also grow in value. Imports grow faster than exports yielding a trade deficit would be solved as Japan eradicate your current energy import dependence to total reactivation of its nuclear plants.
To sum up as the analysis we have just discussed we could state that Japan having experienced for years with a tight monetary policy that has not worked, we leaves in its case a clear message that adopting expansionary monetary policy, the real interest rate may fall below the growth rate of the economy, making the austere fiscal policy is a success. Japan is a good example of breaking with past policies although is still missing be done. Fiscal policy that lie ahead is huge, must compensate for aging of the population and are reluctant to immigration. Should be set goals of higher inflation for finally escape deflation by expanding its monetary policy to make its austere fiscal policy is not in vain and end Japan get not take off. The important thing that the government and Bank of Japan are now walking hand in hand on the right track.
We wonder if this the European Central Bank may understand and combine better its measures with fiscal constraints easing to prevent deflation shadow that now threatens the European Community. If we look to the naked eye, it gives the feeling that there are forces that delay the implementation of solutions that are already old known issues that are purely related to class interests and should be the subject of another analysis that is beyond the issues purely related to international trade.
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Until the next article...

Leonardo Dufau

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