Publication date:  2/2/2012 Page:  D03 Section:  DEdition:  

Byline:  Ernest 'Doc' Werlin

Japan has lost its exporting magic. Japan's Ministry of Finance reported its first annual trade deficit since 1980: approximately $32 billion. A trade deficit occurs when a country consumes more (imports) than it produces (exports). If global demand remains weak and the yen remains strong, economists warn that Japan could suffer trade deficits for the foreseeable future.

 

Japan, the world's third-largest economy, was an export juggernaut 20 years ago. The country produced innovative products from companies such as Sony, Panasonic and Toyota. From 1960-1990, Japan's trade surpluses were so outsized that it caused friction with America and Europe. Western leaders, in a 1985 agreement known as the Plaza Accord, pressured Tokyo to allow the yen to rise. Subsequently, because of the currency appreciation, Japanese exporters were have had difficulty remaining competitive overseas.

 

Japan's exporting prowess broke down for both short-term and long-term reasons. Over the short term, the disastrous earthquake last March damaged factories, interrupted their supply chains and knocked out some of the country's nuclear reactors. Only four of the country's 54 nuclear power reactors are running because of public safety fears following the earthquake. As a consequence, Japan will have to import a significant amount of expensive oil.

 

Over the long term, Japan has suffered from a lack of corporate competitiveness. A 2010 survey of global manufacturing executives conducted by the U.S. Council on Competitiveness, a non-partisan group, projected that Japan would continue to slip behind developing countries as the Japanese population ages and the costs of making goods at home rises.

 

In the electronics industry, Japanese companies pioneered technological development. Later, South Korean firms surpassed the Japanese by making large-scale investments. South Korean firms have displaced the Japanese as leaders in liquid-crystal display panels, TV sets with organic electroluminescent displays and semiconductors.

 

The stronger yen and high labor costs are also encouraging manufacturers to move production out of Japan. JPMorgan Chase forecasts that by 2014, 76 percent of Japanese car firms' production will be based overseas, up from 49 percent in 2003.

 

The trade deficit calls into question whether Japan can rely on exports to finance its huge public debt, already twice the size of its $5 trillion economy. Trade is a major building block of the current account. Few analysts expect Japan to immediately run a deficit in the current account, which includes trade and returns on the country's huge portfolio of investments abroad. But the trade figures highlight Japan's declining global competitive edge.

 

Jesper Koll, head of equities research at JPMorgan Chase in Japan, succinctly stated other problems caused by Japan's continuing deficits. "It means Japan becomes dependent on global savings to fund its deficit, and either the currency weakens or interest rates rise."

 

To the extent Japan requires foreign creditors; it must increase the interest rates on its bonds. But the rise in bond yields could in turn seriously worsen the government's debt dynamics. If Japan pays just 1 percent more to finance its deficit, its borrowing costs double. This would detract seriously from funds available for social services.

 

The other solution is letting the yen decline relative to other currencies. But yen devaluation would lead to higher inflation.

 

A Korea University professor of international economics, Park In-won, articulated the Japanese mistakes and made recommendations on how to revive the country's exporting prowess.

 

"The Japanese economy concentrated on the traditional manufacturing industries for too long a time," he said.

 

Japan should now focus on research and development in order to become a global leader in new industries, such as bio-technology and those related to energy, he said.