Why Japan's export growth could gain from yen depreciation

December data showed a -5.8% growth.

According to DBS, exports reported -5.8% YoY in Dec12. In the month-on-month (sa) terms, exports registered a positive 2.4%, the first significant growth since Apr12. Trade deficit, however, remained large at JPY 0.80trn (sa), compared to JPY 0.85trn in the previous month.

The ongoing depreciation of the yen is positive for Japan’s exports growth. The boosting impact on the trade balance would be less pronounced, however. 1) Imports of intermediate goods are expected to rise, in accordance with faster export growth. 2) Imports of capital goods and consumer goods may not decline because of a weaker yen, taking into account the expansion of the government’s fiscal policy to boost domestic demand this year. 3) Energy imports are inelastic.

"In short, it is likely to see upside surprise in growth data including exports in the coming months. But the trade and current account balance may not improve significantly. The trade deficit problem will continue to help the government justify the weak yen policy," DBS said.