Japan needs trade peace with the US

It must be because Bank of Japan (BOJ) policy exit speculations have died down or that Japan's response to Donald Trump's tariff increases has been less confrontational than China, the EU or even Canada but Japan had rarely been on headlines in recent times.

It's back again when Prime Minister Shinzo Abe went to Washington to meet with the US president about North Korea and trade. Early reports were encouraging with Trump announcing at their joint press conference that, "We're working hard to reduce our trade imbalance which is very substantial, remove barriers to US exports and to achieve a fair and mutually beneficial economic partnership" and that Abe communicated to him that Japan "billions and billions of dollars of additional products of all kinds - military jets, airliners from Boeing, lots of farm products".

This is good because Japan is an export-dependent country and the US, its biggest export market accounting for 19% of total exports. China accounts for 18%.

This would further energise the renewed strength in Tokyo's stockmarket. As at yesterday's closing of 22,823.26 points, the Nikkei-225 index has already climbed by 10.7% from this year's low of 20,617.86 points recorded in late March, supported by the 4.7% depreciation in the yen to ¥110.16/US1 from ¥104.93/US1 over the same period.

While the strengthening US dollar is partly responsible for the yen's recent weakness, credit also goes to the BOJ when it ditched the forward guidance on the timing of when it would achieve its inflation objective.

BOJ Governor Haruhiko Kuroda explained the reason for eliminating the target date, at his post-meeting conference after the 26th April BOJ meeting:

"There was a market tendency to see our forecast as a deadline, and to seek connection between the forecast and policy actions."

This prompted speculations of a policy exit that in turn, sent the Japanese yen and the yield on 10-year Japanese government bond yields higher, nullifying the BOJ's efforts.

Japan needs to come good on its external accounts especially with the latest contraction in its economy. Preliminary estimates show that the country's real GDP contracted by 0.2% in the March quarter, more than reversing the 0.1% gain in the previous three-month period. Another quarter of negative GDP growth would bring it back into a technical recession.

The details of the National Accounts show that the economy would have contracted by more had it not been from the 0.1 percentage point contribution from net exports. Private demand fell 0.3% in the first quarter subtracting 0.2 pps to growth.

Not surprisingly, the growth slowdown has impacted inflation. Japans' headline CPI inflation slowed to 0.7 in the year to April from 1.1% in March and 1.5% in February. The annual core inflation rate eased to 0.7% in April from 0.8% and 0.9% in March and February, respectively.

Read more: USChinaBank of Japanlate MarchApril BOJBOJ Governor Haruhiko KurodaDonald TrumpBoeingCanadaCPIEUJapansNational Accountsnegative GDPNorth KoreaPrime Minister Shinzo AbeTokyoWashington
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