1/12/2015
Japan / Economics
Cheaper fuel will lower Japan’s trade deficit and could boost domestic growth. But falling oil prices might also hamper attempts to reflate the economy.
Japan relies heavily on energy imports. So, the fall in oil prices should lower its trade deficit and boost domestic growth.
The trade deficit for mineral fuels stood at Japanese yen 24 trillion in the first eleven months of 2014, which more than explained the Japanese yen 12 trillion deficit in overall trade during the same period Looking at volumes, net fuel imports have been falling steadily through the 2000s, thanks to the improvement in energy efficiency and the weakness in domestic demand. The amount of net fuel imports has started to increase again since 2011, due to the shutdown of nuclear power in the aftermath of the earthquake/tsunami disaster. In the last four years, the annual average of net fuel imports was equiva¬lent to 2.4bn barrels.
Assuming global oil prices remain at the level of US$50 this year and the US dollar / Japanese yen exchange rate remains at 120, Japan’s oil trade deficit could fall by as much as Japanese yen 11 trillion. This would just about bring Japan’s overall trade into balance.
As a percentage of GDP, the Japanese yen 11trn savings from oil import bills will come to 2%. Corporate profits will increase due to lower production costs and household real incomes will improve due to cheaper living costs.
Depending on how well these income gains are utilized in the domestic economy – and translate into higher spending by corporates and consumers -- GDP growth will rise proportionally
However, the fall in oil prices will challenge the Bank of Japan’s goal of reflating the economy. Indeed, the pace of oil price declines has surpassed that of yen depreciation in the last few months, resulting in a drop in the yen-denominated oil import prices and the retail gasoline prices in Japan.
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