Filed Under:  U.S. & World

Oil’s Slump and BOJ Currency Policy May Lead To Trade Surplus

Contributed by on January 27, 2015 at 4:32 am

Falling Oil PricesBack in 2011, something unusual happened to the Japanese economy: it experienced its first negative trade deficit in over 30 years. Japan has always had an export economy. Its products, ranging from Sony to Mitsubishi and all points in between, are known throughout the world. Japan is primarily an export-driven market player.
Well, things changed in 2011 after its nuclear power plants were forced to shut down. To supply Japan’s huge need for energy resources to fuel its factories, as well as meet its consumer demand, it had to import fossil fuels. In 2011 and later years, the price of oil was over $100. Not surprisingly, Japan’s trade balance was in the red for much of the past three years.
Things have turned around. Thanks to the Bank of Japan’s currency devaluation scheme, which made the Yen cheaper and cheaper, Japanese products have become more attractive to trade partners. Japan’s primary trade partner is, of course, the United States. Japanese products are cheaper since the Yen has crashed against the U.S. dollar. Not surprisingly, more Japanese goods are entering the U.S. economy, as Americans snap up Japanese bargains.
In terms of costs, Japan also caught a break with the recent slump in oil prices. Since Japan is completely dependent on external energy sources, a large portion of its annual expenditures goes to imported oil. Now that the global price of petroleum has crashed more than 50%, it has become much easier for Japan to produce products and continue operating its economy.
All told, these two factors should contribute to a sharp rebound in the Japanese trade. Analysts are forecasting that Japan will return to its usual trade surplus by the end of 2015. Keep in mind that this is different from saying that Japan’s economy will improve. All this says is that Japan’s export-driven economy will no longer produce a trade deficit. Japan will now start operating on a trade surplus. This doesn’t mean that its economy will finally wake up from its multi-decade slumber.
As you probably already know, Japan’s economy has been on a deflationary spiral for the better part of close to three decades. While its looming trade surplus is definitely good news, it is worth bearing in mind that – for most of the time Japan has been on a deflationary spiral – it has operated trade surpluses. Simply regaining its trade surplus doesn’t make Japan’s deflation-based economic headaches go away anytime soon