Trade data for the US, Germany, Japan and China were released earlier today. While the US, Germany and China had robust export growth that caused their surpluses to swell, Japan’s numbers showed weakness despite the recent drop in the value of the Yen. The dichotomy in readings says a lot about the politics surrounding this difficult economic environment and the associated currency wars.
First, let’s look at the data.
In the US, it was record petroleum exports which flattered the data set. The US is benefitting from the shale oil boom and this is now having a direct impact on the American trade balance as the US trade deficit was the smallest in two years. The deficit came down by 20.7% to $38.5bn. Bloomberg News noted that this figure was lower than any of the estimates that 73 economists gave before the release in a survey that Bloomberg conducted. Bloomberg also noted that the US imported the smallest amount of crude oil in almost 16 years.
In Germany, imports actually declined by 1.3% in December, underlining the weak German domestic demand environment. Exports were surprisingly solid at 0.3% higher than November. So the German figures were dominated by the weak import numbers more than robust export numbers. For the full year, Germany’s trade surplus hit €188bn, which according to the Guardian is the 2nd highest figure since records began in 1950.
In China, the Telegraph reports that the figures were distorted somewhat by the lateness of the Lunar New Year celebrated in China. Nonetheless, the data were good as exports in January grew at a 25% rate. That compares to December’s 14.1% increase. Here’s the important part that contrasts to Germany; import growth was even higher at 28%. Again these figures are distorted somewhat by the calendar. Moreover, I am not sure how China, a country notorious for data collection difficulties is able to report January numbers in early February while Germany is only just now reporting for December. So, the exact numbers should be read with caution. Nonetheless, directionally we see big improvements in China’s trade data telling us that the economic fortunes of the country are improving.
In Japan, the data were weak. In December, the current account was in deficit at Y264.1 bn (equivalent of $2.8 billion). Notice that the Japanese also reported for December like the Germans and unlike the Chinese. Also note that the current account covers trade and overseas income both. For the full year, Japan had a current account surplus of Y4.70trn (equivalent to $50.5 bin). But according to the Wall Street Journal, this is the “smallest since comparable data became available in 1985”. It is also half the levels of the previous year 2011. Moreover, the current account surplus was possible only because of overseas income, because Japan is now running a deficit in goods and services that is also at record high levels. This is the reason Japan has been trying to weaken the currency.
This juxtaposition between China, Germany and Japan is the most obvious takeaway from the data. The US has the world’s reserve currency and is therefore subject to the Triffin Dilemma in which the longer-term objective of the Obama Administration to cut deficits via increased exports is at odds with the need to accumulate dollar reserves outside the US. That means the US is a de facto current account deficit nation – the largest external debtor in the world. On the other hand, China, Germany and Japan are collectively and individually the largest current account surplus nations who have traditionally seen strong exports and current account surpluses as their birthrights. This is still working for China and Germany but it has gone pear-shaped for Japan.
The reason for the dichotomy is deflation. Japan’s currency is appreciating relative to other currencies because, with the crisis causing all central banks to engage in near zero-rate interest policies, it is the inflation rate that matters in terms of real interest rates for major economies outside of the commodity currencies. The commodity currencies from the dollar bloc and the Norwegian Krona are still benefitting from the commodities cycle and have not cut policy rates as much as other developed economies. Elsewhere, all central banks are on easy street. But in Japan, easy street means positive real interest rates because of deflation whereas zero rate policy means financial repression elsewhere. And this differential has caused Japan’s currency to appreciate in the aftermath of the crisis period of 2008-2009. The low nominal rates in Japan and the currency appreciation make Japan a perfect candidate for carry trades when asset markets are in risk on modes as they are now (see here here and here).
Given the deflationary politics in Euroland, aided and abetted by the British Prime Minister Mr. Cameron and his EU austerity budget strike, the euro is the next most obvious candidate for carry trades after the Swiss Franc. More importantly, however, the shrinking current account surpluses in Japan are what this would mean for Europe and that would be disastrous for the periphery. This is why the ECB will increasingly feel pressure to help Europe deal with the currency wars. The EU austerity budget and national austerity politics tells you that the ECB is the only reflationary tool the euro zone has left to use.
It is interesting that Germany’s surpluses are at record levels during all of this. It tells you that the euro one size fits all straitjacket is working for Germany despite the country’s exceedingly weak domestic demand. The euro is a weak currency for the German’s given unit labor cost trends. And since the Germans also benefit from having a fixed rate to their European trading partners, one should only expect big export numbers from the Germans. While in the euro straitjacket, countries in the periphery like Spain and Italy can only win at this game by continuing with their policies of internal depreciation via wage suppression. But because of the weak global economic environment, I doubt this can work, especially since the hit to demand and inflation from these policies will cause the euro to strengthen and partially offset the benefit of lower unit labour costs.
Despite the problems besetting the Japanese economy, I am more bullish on Japan than the other three economies because of the effect Abe’s reflationary economic policy is going to have on the economy in Japan. Much of the gains here have already happened as the Nikkei is up over 30% and the currency is down 20%. But I think the currency will continue to fall and I believe Japan will be the best performing stock market amongst major developed economies in 2013.