Right, so on Sunday evening, we delivered the following fatalistic take on Japan and the fading prospects for monetary policy normalization:
There’s a ton of data on deck in Japan, including CPI, PMI, core machine orders, trade balance, all industry activity index and machine tool orders, but at this point, it’s by no means clear that anything matters. The recent dovish turn by the BoJ’s global counterparts likely means any effort to normalize policy has been pushed out even further. Throw in the usual bit about the yen being the beneficiary of safe haven flows tied to any acute bouts of risk-off sentiment, and you’re left with the same inevitable conclusion: there is no end to accommodation in Japan.
About 24 hours later, Kuroda told parliament that if the yen ends up impacting the economy and inflation, the BoJ might have to “consider additional easing” in order to hit its price target.
Well, overnight, Japan reported trade data and as you might have heard, exports dove 8.4% YoY in January versus estimates of a 5.4% drop – that was the biggest plunge in more than two years. The deficit ballooned to 1415.2 billion yen versus estimates of -1029.1 billion. Shipments to China plunged 17.4% YoY, fanning worries about an acute slowdown in global growth tied to ongoing trade tensions. Here it is all rolled up into two charts via Goldman:
Obviously, that egregious number on China-bound exports cannot be chalked up entirely to holiday effects. The trade war and a decelerating Chinese economy are starting to take their toll and what looks like a synchronous global slowdown is starting to manifest itself in the data. That’s really the long and the short of it.
Of course there’s always nuance. Here’s Goldman with a closer look:
Export volume from Japan to China came in at -20.8% yoy, declining even further than in December (-13.8%). The import volume growth rate printed at +9.3%, an upturn from -3.1% in December. We note that exports volume bottomed out for semiconductor production equipment (-28.0% yoy, December: -42.1%) and integrated circuits (-6.4%. December: -42.8%) for now, after declining sharply at the end of 2018. However, given the Lunar New Year effect occurred 10 days earlier this year versus 2018, it is difficult to take these figures purely at face value.
“The size of the decrease in exports to China, though perhaps due to Lunar New Year effects, was much larger than the decrease in imports from Japan (-1.5%) based on Chinese data”, Barclays notes, adding that while they “do not expect exports to decelerate sharply in 2019”, the bank does think investors should be wary of “downside risks, including the current slowdown in exports to Asia, signs of weakness in Euro area economic indicators and the potential intensification of the US-China trade conflict.” As a reminder, Barclays recently pushed out the date for a possible BoJ normalization effort to Q2 2020.
When you consider all of this, don’t forget that it’s also possible Japan will end up targeted by the Trump administration as part of a push to slap tariffs on autos because, as Wilbur Ross will be happy to explain to you during any of the 16 minutes he’s awake on a given day, cars are a threat to national security. The rate of auto export growth to the US continues to accelerate (23.2% in January versus 1.9% in December).
In any case, the disappointing headline numbers clearly suggest the BoJ will need to roll out more easing, especially if the bank’s global counterparts continue to lean dovish. Yen appreciation in the current environment is a massive risk. As National Australia Bank’s Rodrigo Catril told Bloomberg on Wednesday, the wider-than-expected deficit suggests “the BOJ will keep its foot firmly on the easing pedal with the threat of more to come if yen appreciation derails Japan’s inflation outlook.”
Right. And if you’re starting to get the feeling that we’re about to head right back down the rabbit hole towards a scenario where it’s impossible to differentiate between “coordinated global easing” and “competitive currency devaluation efforts in an environment of slowing global growth” you’re not alone.