Japan: Export Recovery Remains in Place

• The recovery in Japan's exports remains in place, although on the surface today's export data may appear to look a little disappointing. Export volumes continue to show very healthy gains suggesting that Japan's export engine has been turned back on.
• The trade balance is now back in surplus and should continue to improve in coming months. We believe there is very little risk of Japan getting a current account surplus.
• We now expect net exports to contribute more than 1 percentage point q/q to GDP growth. We are feeling more confident that GDP growth will be positive in Q1 09.

Details

On the surface today's foreign data may look a little disappointing, but the detail remains strong. As there were two working days less in May this year compared with last year we really should not place too much emphasis on the year-on-year figures. Nevertheless, the 0.3% m/m decline in exports was a little disappointing in light of the increase in the previous two months.

Apparently declines in export prices continue to mask the underlying strength in export volumes. Seasonally adjusted and in volume terms, exports in May increased by a healthy 5.1% m/m following a robust 7.9% m/m increase in the previous month. Asia continues to be the main driver, but export volumes to both the US and Euroland increased in May. Overall volume exports are about 15% from the bottom reached in February.

Seasonally adjusted imports in current prices declined by 3.6% m/m but increased 2.2% m/m in volume terms. This is the third month in a row with a slight increase in volume imports.

The trade balance has turned back into surplus. Growth in import volumes is still running well behind export volumes and in addition the Japanese trade balance is still benefitting from term of trade gains.

Assessment and outlook

The recovery in Japan's exports remains in place, although on the surface today's export data may appear to look a little disappointing. Our indicator for net exports contribution to GDP growth now suggests that it will exceed 1 percentage point q/q in Q2 (see chart). While we expect inventory cuts to be a significant drag on GDP growth in Q2 we feel increasingly confident that GDP growth will be positive in Q2.

Our main message remains that GDP growth is turning positive, will exceed potential GDP growth in H2 and outperform both the US and Euroland in H2 09, see Research - Japan: From underperformer to outperformer. However, we expect the outperformance to be temporary and largely a catch up on growth underperformance in Q4 08 and Q1 09. Hence, we do not expect the Bank of Japan to tighten monetary policy before the ECB and the FED, despite relative strong growth performance in the coming quarters. It will probably not be able to prevent a modest weakening of the yen in an environment of continued improvement in risk sentiment.

Danske Bank
http://www.danskebank.com/danskeresearch

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