Japan exports drop 4% in October

Exports fell -3.5% MoM sa in October, reversing the 1.4% rise in September. Note that the supply-side restoration has been largely completed by 3Q, thus the demand-side development is becoming crucial to drive growth from 4Q onwards. There are reasons to be concerned that the weakness in October exports will in turn weigh on the supply performance.

Our annual GDP estimates of -0.3% for 2011 and 2.1% for 2012 are based on a slower but still above-trend QoQ growth of 1.5-2% in 4Q11-4Q12, which will largely rely on the progress of domestic reconstruction. The positive note is that import growth was strong at 2.8% MoM sa in October, probably suggesting that reconstruction demand has remained solid.

With import growth (8.0% 3M/3M saar) again outpacing export growth (7.3%), the improvement trend in the trade balance has paused, and the trade deficit widened significantly in October (JPY 458bn sa, vs. JPY 97bn in September). The downward pressures on the trade and current account balance will likely prevail, given that the export outlook is sluggish, and import demand on raw materials will stay at elevated levels due to reconstruction.

Nonetheless, a monthly trade deficit of less than JPY 1trn could be easily offset by the surplus in income account, which is backed by the steady and strong income receipts from overseas investment. The risk of the current account slipping into a deficit remains low for the near term.