Japan's March exports show technical rebound only

The rebound reflects re-stocking after strong inventory clearances in past months, rather than a sustained recovery, says Credit Suisse economist.

Japan's export rebound in March, after a truly terrible performance at the beginning of the year, is not a sign that the country has steered through the crisis, says Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.

Exports fell to ¥4.18 trillion ($42.6 billion) in March 2009, a 45.6% decline year-on-year. Crucially though, that is an improvement on February's export figures, which fell a record 49.4% from the same month in 2008. According to Bloomberg News, the consensus among economists was for a 46.4% drop for March.

Also in March, imports dropped by 36.7% to ¥4.17 trillion and the trade surplus fell 99% year-on-year to ¥11 billion, the same value as in February. The trade balance defied analysts' expectations of a ¥5 billion deficit. 

Fiscal year 2008 (which ended in March 2009) saw Japan register a yearly trade deficit for the first time in 28 years, as a result of rising oil costs and slowing exports. 

"I see this export upswing as a function of firstly, foreign companies resuming imports after a period of very sharp inventory clear-outs; second, an increasingly liquid trade finance environment thanks to the global monetary stimulus, and thirdly, some effect from the Chinese stimulus package, " says Shirakawa. However, the Japanese economy will continue to be held back by structural issues, especially the weak tax base, he adds.

"Half of Japanese households pay no income tax at all, while corporate income tax is too high. The government needs to raise value-added tax (currently at 5%) to reassure the population that their pension and medical costs will be met in the future, while a lower corporate tax (currently 41% for large companies) could improve productivity," says Shirakawa.

In effect, consumption in Japan is being held back because consumers are sure that taxes will eventually rise. Japan's debt to GDP is already 150% and the budget deficit is moving towards 8% of GDP. Still, the technical rebound in exports will help the economy over the next few months, concedes Shirakawa.

"If you take 2007 as the peak of Japan's export performance, then we calculate that we fell to 50% of that at the beginning of the year. Going forward I expect a rebound to a level amounting to 70% of Japan's peak export performance. That's impressive in percentage terms -- a 40% improvement -- but it's still well down on the peak," says Shirakawa, who expects exports to stop growing from around September 2009.

Shirakawa also says that the government stimulus package is insufficient to return the economy to its full growth potential. "The stimulus is essentially a one-off shot in the arm. Admittedly, the government has done well to focus spending on green technology such as environmentally friendly flat-panel TVs, solar panels and green cars. This is better than spending on bridges to nowhere and on roads. But the economy needs deeper underlying reforms," he says.

Shirakawa expects Japan's GDP to contract 4% on a calendar year basis, but from April 2008 to March 2009, he expects the contraction to be just 1.7%. That's because the calendar year was dragged down by Japan's terrible performance in the first quarter of 2008. The 1.7% decline contrasts with the Bank of Japan's forecast that the economy will contract by 3%-5% in fiscal year 2009, according to a leak on the Nikkei website earlier this week. The BOJ will release its April semi-annual outlook later this month.

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