Japan's July Exports Fall Mo-Mo and YoY

Japan's exports fell in July from the previous month for the first decline in two months. Exports fell 36.5% in July YoY, or slightly less than economists' median forecast for a 38.6% Exports to China fell 26.5%, while exports to the United States fell 39.5%, indicating that global trade is not about to come roaring back anytime soon.

In other words, China's recovery so far has not appreciably helped Japan's exports.
Japan's exceptionally serious decline in overseas demand is attributable to an implosion in the “triangular trade” among the advanced economies in Asia and the developing countries in Asia, namely China. Japan, South Korea and Taiwan export key components to China, Thailand and Vietnam which are assembled and exported in final products shipped to the US and Europe.

The Asian developing countries specialized in relatively low value-added assembly and manufacturing processes, while the advanced Asian countries (Japan, South Korea and Taiwan) concentrate on high-value added processes, such as the production of key components.

However, the sudden decrease in US demand triggered a rapid contraction in the triangular trade. As developing countries’ exports to the US decreased, there was a domino effect on demand for imports from Asia’s advanced economies. A large share of Japan’s exports consists of capital and durable consumer goods, such as cars, electric machinery, machine tools, and their components. Thus the global downturn triggered what is known as the “acceleration principle” as consumer demand shifted from high end items to more inexpensive ones, while suddenly excessive capacity caused companies to slash capital expenditure plans, which directly affected demand for exports of Japan’s capital goods.

JETRO (Japan External Trade Organization) is painting a bleak picture of Japan-China trade, which shrank 21.4% YoY for the first six months of 2009 to $102.84 billion in recording the first decline since the second half of 2001. Full year Japan-China trade is expected to decline for the first time in eleven years.

Japanese exports to China have declined year-on-year for nine consecutive months. Because of the triangular trade, sharply lower final demand from the US, Europe and Japan has a multiplier effect on Japanese exports of machinery, basic materials and components. While China’s massive stimulus has boosted domestic car sales, and sales of selected machinery such as construction equipment and pumps, the stimulus boost has not been enough to cause overall exports from Japan to rise, and will remain weak until China’s exports recover.