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Year 2012 proved a difficult year yet again for the Japanese economy. While a strong Japanese Yen has been bad for the exports, the disputes with China over the islands in the East china sea came as a big hit to the Japanese exports.

The decline in Japanese exports

In 2010 China had displaced the U.S. as the biggest market for Japanese exports. The dispute about the ownership of inhabited islands in the East China sea  resulted in strong protest from China and in the boycott of Japanese goods. The exports fell heavily and the U.S. displaced China as the biggest market for Japanese exports.

Japanese exports and yen

Japan has no other way but to focus on other markets to lower down the dependency on China for the exports. A strong yen comes as an obstacle here again..

Plans to weaken the Yen

On January 8th, 2012 Japanese finance Minister Taro Aso mentioned about Japan’s plans to use the foreign exchange reserves to buy bonds issued by the European Stability Mechanism (ESM) and euro-area sovereigns to weaken the Japanese Yen. This is a good strategy as Europe would welcome this move for their financial stability. If Japan goes for a direct intervention by increasing their Forex reserves to weaken it then it may again face criticism from other countries as happened during  the Japanese currency intervention during 2011. A direct intervention may also invite reactions of other countries as they may decide to take a counter step of buying Japanese yen against their currencies and that may lead to a cold currency war.

Effects of Weakened Yen

A weakened yen is good for Japanese manufacturing industry to help their exports and hence is good for the economy in general, however any excessive weakness will not be good for the Japanese economy.

Increase in Japanese imports

Monthly imports during 2011-2012

In the recent past there has been a sudden growth in Japanese imports. The average imports of Japan during 1979 to 2012 has been 3398.6 billion Yen per month. Fuel has the major share of Japanese imports with 32% of the total. The average imports during 2012 were quite higher than the average a weaker yen makes the imports quite expensive.

The rise in Japanese imports

Breakup of Japanese imports

• Fuel: 32%
• Machinery: 19%
• Food: 9%
• Manufactured goods: 9% (9 percent),
• Chemicals: 8.5%
• Raw materials: 8%
• Clothing: 4%

Increasing trade deficit

With the increase in the imports Japanese trade deficit is going dangerously high.  The following chart shows the historical balance of trade data since 2000.

Japan trade deficit since 2000

Japan trade deficit at 20 years high

The following chart shows the historical trade deficit since 1980:

The following chart from Japan Ministry of finance gives a clearer picture of the changing trend of Foreign trade at one glance:

Japanese foreign trade

The above chart shows the data till 2011 but the latest data can also be seen at the Japan Ministry of Finance site.

Weakened Yen – threat to imports and manufacturing cost

The import of fuel is expected to further go up because of more dependency on crude oil to generate power is even more now after the earthquake and tsunami of March 2011 because of the shutdown of Nuclear plants. The oil consumption. The weakened yen is a threat for rising energy generation cost and hence manufacturing. This is true not only for fuel imports but all industrial imports.

Any drastic and sudden weakness of yen would also be considered as weakness of the economy and may send wrong signals to the foreign investors.

Japanese Yen Update

USD/JPY Update

The price action has been mainly below 85.00 level since the end of September 2010. Only once during early April 2011 it had tried to break over that level but had failed at 85.52 to touch a low of 75.36.After this continuous weakness,  USD/JPY not only broke above 85.00 but went as high as 89.67. The resistance of 90.00 psychological level may bring some consolidation or keep it in some sideways move, but overall a test of 90.00 is expected to take place. Any decisive break over 90.00 and sustained price action above that may target first the resistance level of 92.86 and then probably a strong resistance zone of 94.60/94.90.

EUR/JPY Update

EUR/JPY had been below 115.00 level since July 2011 and during July 2012 the currency pair had gone as low as 95.12. The recent jump has not only taken out the key psychological resistance of 110.00 but also 115.00. The move to 119.98 came as surprise but the momentum indicates that EUR/JPY will take out this key psychological level also. The next key resistance for EUR/JPY will be 123.32 where the pair had failed during April 2011.

Whatever said and done, the underlying uncertainties about Euro zone’s debt crisis and increasing unemployment levels have not vanished. Germany is not doing bad but then Germany alone does not represent the Euro. Sooner or later another fall in Euro/Japanese yen cannot be ignored.

GBP/JPY Update

Similar to other Japanese crosses GBP/JPY has also been seeing new recent highs. The current price action has entered the territory of the psychological resistance of 145.00. The pair hit 145.81 during the Asian session of Monday, January 14th. The momentum indicates that the barrier of 145.00 may not hold for long. The eyes may be soon set for the strong resistance which the currency pair had witnessed during April 2010 i.e. 145.98.