There is no sign of stabilisation in exports in the Japanese January trade figures released overnight. In real terms exports plunged 15.7% m/m following a 9% m/m decline in December last year (see chart 2). Compared with January last year exports are down a massive 45% y/y! (see chart 1) The scale of the collapse in Japanese exports is just incredible.

Japanese imports were surprisingly resilient in late-2008, but weaker domestic demand and cuts in inventories are starting to have an impact on import volumes. In January import volumes declined 7.3% m/m after dropping 3.2% m/m in the previous month (see chart 2). Nonetheless, import in current prices is still down by close to 30% y/y because of lower commodity and crude oil prices.

With import growth still running far ahead of export growth the Japanese trade balance surplus has turned into deficit (see chart 1). There is still a minor surplus on the current account because of Japan's considerable investment income. Import weakness is likely to become more pronounced in coming months and for that reason we are likely to see some stabilisation in the trade balance deficit in the coming months. Nonetheless, the deterioration in Japan's current account surplus has been significant and its impact on the yen should not be underestimated (see chart 6).

Outlook: With new export orders in the manufacturing PMI stabilising in February albeit at very depressed levels, at least the pace of deterioration in exports looks set to slow in coming months. In addition the Asian figures in January might be distorted by the golden week holiday this year being in January rather than February, as last year. Nonetheless, the January foreign trade figures were worse than expected and we will possibly have to adjust our GDP forecast for Q1 09 (currently: -1.6% q/q) down further. Based on the latest development in foreign trade net export might subtract as much as 3pp q/q from GDP growth in the current quarter (see chart 3). It is looking increasingly likely that GDP growth for 2009 as a whole will be less than -4% (our current forecast is - 3.8%).

Impact: No significant market impact overnight. However, the extraordinarily weak economy, political uncertainty and the sharp deterioration in the current account surplus has started to weigh on the yen in the recent week. The yen remains under pressure and is trading just below 97 against the US dollar this morning.


Danske Bank


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