RISING OIL PRICES TRIM JAPAN'S TRADE SURPLUS
--- by Douglas Ostrom

Japan's customs-clearance trade surplus fell for the fourth consecutive quarter in the January-March 2000 period, contracting 6.1 percent from the same time last year (see Table 1). The drop lead to an unusually wide range of interpretations — most of which were off base. Higher oil prices were the main factor behind the decline, as reflected by the fact that the shrinkage in the trade surplus was one-third as large as the jump in oil imports. In other words, had the value of crude purchases not risen and had other factors remained the same, the huge gap between Japan's exports and imports would have widened significantly in the first quarter.
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The 14.1 percent jump in the value of imports over the winter raised eyebrows because it suggested to some analysts that the economy had developed an addiction to foreign goods. To other experts, however, the surge was encouraging evidence that Japan's recovery was on track.

Notably, the value of the yen rose 8.9 percent during the first quarter. That development alone would have meant lower prices for imports, in turn suggesting that the expansion in the volume of purchases from abroad might have been even greater than indicated by the yen-based numbers. Still, pessimists and optimists alike overlooked the impact of higher oil prices, which more than doubled and, as a result, lifted overall import prices 3.1 percent despite the stronger yen. The net result, though, was a still-impressive 10.6 percent gain in import volume during the January-March period.

Purchases from the United States fell 11.4 percent, however, and were the main reason for the big jump in the bilateral imbalance (see Table 2). In contrast, imports from Asia soared 23.2 percent. While part of that growth was triggered by a 30.9 percent increase in shipments from Indonesia, Japan's only important oil supplier outside the Middle East, arrivals from other Asian countries also were up sharply. Two-way trade with the recovering South Korean economy surged, for example. Exports to Japan's nearest neighbor jumped 45.3 percent from the first quarter of 1999, outpacing the robust growth of imports, which climbed 35.1 percent.
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The January-March trade statistics underscore the renewed importance of Asia to Japan in the aftermath of the region's 1997-99 financial and economic crisis. In the latest quarter, Asia, including the People's Republic of China, bought 38.7 percent of Japan's exports and supplied 40.6 percent of its imports, far ahead of the 29.8 percent share for U.S.-bound exports and the 19.2 percent cut for American-made imports. While the United States remains Japan's largest trading partner on both the export and the import side, China now is a rival supplier, accounting for 13.6 percent of Japan's imports in the first quarter.

The latest quarterly trade numbers contain little, if any, evidence that the relatively strong yen of the past year or so is having a negative impact on Japan's apparently still-struggling economy. Export volume rose 13.1 percent from the January-March 1999 quarter, which implies that the price-adjusted trade surplus continues to go up despite the widespread Japanese fear that the appreciation of the yen would curtail overseas sales. While the expansion in the import volume generally is welcome as a sign of stronger domestic demand in general, the surge in exports in the face of the yen's run-up in value points to the persistence of rapid growth among Japan's key trading partners, the United States in particular.

A reasonably high proportion of those economic gains that Japan has managed to achieve may, in fact, represent spillover from more robust economies in North America, Europe and Asia. If so, the stronger yen may not reflect improving conditions in Japan, as many American analysts assume, or Washington's failure to support the Japanese currency at some reasonable level, as some officials in Tokyo might argue, but, rather, healthy demand abroad for Japanese goods and services. In this interpretation, the world currency market is driven by the demand for exports rather than by capital flows, the usual assumption. The corollary is that Japan ends up with a more expensive currency and export growth that probably accounted for much of whatever overall economic expansion occurred over the past 12 months.

While this explanation appears to suggest an export-driven economy — something for which Japan often has been faulted — Tokyo likely will avoid more lectures from Washington for at least two reasons. First, as noted, the surge in exports is not a consequence of a deliberately engineered weak yen, as critics once charged; instead, it reflects strong demand in big importing countries for made-in-Japan products. Second, with the U.S. economy expanding at an incredible rate quarter after quarter, Clinton administration policymakers have turned their attention to other issues.

Should the high-flying American economy suddenly lose altitude, the issue of the fast-widening transpacific trade gap might move to the front burner — but then again, maybe not. Washington increasingly seems to find it hard to imagine that Japan, with its near-decade-long experience of subpar economic performance, represents much of a threat to U.S. prosperity, surging exports notwithstanding.