Abenomics is Failing on Multiple Fronts

With each passing month it is becoming more clear that Abenomics is, at least so far, failing to meet one of its critical goals, which is to stimulate exports and bring the country back to a trade surplus. Indeed, the latest trade statistics revealed the largest single month trade deficit ever. The blame for the now persistent deterioration in the trade account is usually attributed to the fact that Japan's nuclear facilities are shuttered thus causing energy imports to soar in yen terms. Another popular explanation is that demand is being brought forward ahead of the consumption tax increase that is to take place in April. While these two explanations may be true in part, we would offer another explanation: Japan's trade account is deteriorating because it has for the last decade consistently lost competitiveness relative to it's North Asian rival, South Korea. In the second chart below we show Japan's exports to Asia relative to South Korea's exports to Asia (blue line) and then plot the KRW/JPY exchange rate (red line) on top. The main takeaway here is that over the last 10 years Japan's exports to Asia have fallen by almost 50% relative to South Koreas's exports to Asia. Further, this stunning loss of market share shows almost no relationship to the exchange rate (indeed the exchange rate today is almost exactly the same as it was 10 years ago) signaling that the competitiveness issues go much deeper than exchange rates. Unfortunately Abenomics has done little to address the competitiveness issue while at the same time exacerbating (perhaps temporarily) the strain on trade.