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Is Japan’s Trade Deficit Becoming Chronic?

Is Japan’s Trade Deficit Becoming Chronic?

JUNG Ho-Sung

Aug. 19, 2013

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Japan's exports and imports are rebounding in a sign of recovery from the 2008 global financial crisis and 2011 Tohoku earthquake. At the same time however, Japan's trade deficit rose to a record 8.2 trillion yen last year as growth in exports failed to keep pace with growing imports. This was almost twice the amount recorded in 2011 when the earthquake derailed the Japanese economy. Even with a cheaper yen thanks to Abenomics, Japan's trade deficit in the first half of this year, at 4.8 trillion yen, has outpaced last year's numbers.

According to the Japanese government, the widening deficit came due to expanding demand for conventional fuel under its post-Fukushima "zero nuclear" policy, as well as the "J-curve effect," indicating a trade balance that initially worsens after depreciation of the currency, before improving later. The government claims that the trade deficit is a temporary phenomenon and that the country will see a surplus in the second half.

Such optimism however, may be misplaced. Japan's trade deficit may actually be structural rather than temporary, requiring a significant amount of time for improvements to make themselves felt. Trade deficits may have become a chronic fixture of Japan's economy. This paper examines the underlying causes of Japan's trade deficit, including structural factors, and assesses whether the deficit is here for the long-term.

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