European talking heads have been reassuring us on an hourly basis, lest we forget, that the worst of the debt crisis is over. But the Japanese trade deficit, a measure of reality, not words, tells a different story about the crisis in Europe. And about troubles coming to a boil in China. But neither issue can be resolved by Prime Minister Shinzo Abe’s plan to decapitate the yen.
Trade deficits aren’t the end of the world for Japan. But they’re the end of an era. Since the mid-1980s, Japan has booked large annual trade surpluses, to the total and ineffectual aggravation of US presidents and lawmakers. The surpluses helped fund Japan’s budget deficits without having to rely on foreign investors. Now, these deficits have become a mountain of debt over twice the size of GDP, unequalled in the developed world.
But in 2011, that seemingly endless string of surpluses, on which the Japanese economy had become dependent, broke. Instead there was a deficit of ¥2.56 trillion, small by US standards. It was ascribed to the earthquake and tsunami, fuel imports, etc. A temporary blip. In 2012, the monthly trade deficits got worse, and over the last six months, they occurred in an uninterrupted sequence to reach ¥6.93 trillion ($78 billion), almost tripling from 2011. An all-time record.
Yet, even during the campaign late last year, Shinzo Abe, now prime minister, vowed to toss all fiscal restraints overboard and pile even more deficit spending on that mountain of debt that had been funded by the now evaporated trade surpluses. So the cabinet just approved another round of stimulus spending, $117 billion, the largest since the financial crisis. It will be up to the Bank of Japan to print enough yen and mop up the red ink.
It’s Abe’s effort to goose the economy, or at least remain prime minister for longer than 15 months, which was the limit for his hapless six predecessors, including himself, ever since Junichiro Koizumi vacated the post in 2006 (graph). And it’s causing a ruckus around the world. Politicians and lobbyists are accusing Japan of yen manipulation and of starting the next round in the currency wars, forgetting conveniently that it was the Fed that has been trying with all its might and for years to demolish the dollar, and is still doing so by printing $85 billion a month [The Currency Wars: Now US Automakers Are Squealing].
But Abe’s gyrations had no impact on the trade deficit in December. At ¥641.5 billion, it was once again worse “than expected.” Exports deteriorated 5.8% from December 2011, imports rose 1.9%. Of Japan’s three largest export markets—China, the US, and Europe—two had turned into a veritable trade catastrophe.
China had overtaken the US as Japan’s largest export market. And Japanese companies were brimming with optimism. Then the Senkaku Islands “dispute” erupted—in quotes because Japan insists that there is no “dispute,” the islands being Japanese. It didn’t take the Chinese government long to rile up its people against everything Japanese. And the images floating around the world were ugly.
At first, it appeared to be a spat that, like others, would be, after sufficient commotion, put back in the dirty-underwear drawer, unresolved, but out of sight. Instead, jets were scrambled by the Japanese to counter jets approaching the islands from China, and ships were involved, and perhaps shots might be fired. Rather than a spat, it has become an element of China’s growing territorial assertiveness.
Japan, which spends only about 1% of GDP on its military, can’t rattle its saber loud enough for China to notice. Instead, it has to rely on the resolve of its ally, the US, to keep the Chinese at bay. A resolve that China is testing. While a shooting war is somewhere between unlikely and unthinkable, given the economic ties between the three countries, tensions are rising, and tempers aren’t settling down, and Japanese exports to China are crashing.
In November they were down 14.5%; in December, 15.8% to ¥906 billion. Worst hit were cars, trucks, and parts (-47.5%), machinery (-22.2%), and electrical machinery, which includes tech products like semiconductors (-16.8%). Imports from China edged down by 2.1% to ¥1.24 trillion. And the trade deficit jumped by 76.8%.
This debacle is unrelated to the strength of the yen. It’s caused by the deteriorating relationship between two of the world’s largest trading partners. Knocking the yen off its lofty perch—it’s down 11% against the dollar and 15% against the euro since November—won’t have much impact. In that respect, Abe’s cure won’t work.
Then there’s Europe. In December, exports skidded by 12.3% to ¥561 billion, after having plunged 20% in November. To Germany, which now may be in a recession, they declined by 9.2%, to the UK by 10.2%, to France by 16.8%, to Spain by 26.2%, and to Italy by 28.2%.
These are crisis numbers, a function not of a strong yen but of the European economies that, despite ceaseless declarations to the contrary, have stepped up from a debt crisis to a full-blown economic crisis. And in this environment, Abe’s cure—demolishing the yen—will largely be ineffective.
And here is an awesome, amazing, and powerful appeal (video with lyrical English text) to the people of Japan to open their eyes. It slams the nuclear industry, the mainstream media, government bureaucrats, and politicians of all stripes.... humanERROR by “Frying Dutchman” (video).