After the second quarter of 2020, Japan’s terms of trade — the price of imports versus exports — worse for nine quarters in a row. According to national accounts, import prices increased by 60.7 % during the same time period, while export prices decreased by only 26.7 percent.
The causes of this were dual in nature. The treatment of the world economy from the Covid – 19 pandemic and the supply shock brought on by Russia’s invasion of Ukraine both contributed to a surge in commodity prices.
The other reason was the depreciation of the yen as a result of Japan & nbsp’s loose monetary policy while the United States and Europe pursued tightening policies.
Japan’s national salary has been impacted by the worsening terms of trade. The amount of this income loss was 4.6 % of real gross national income ( GNI ). Since real GDP growth contributed 8.8 % to the real GNI growth rate during this time, investing losses weakened more than half of that factor.
At the same time, the rise in net earnings from abroad partially offset the trading loss. Real GNI increased by 3 % during that time due to the increase in interest charges internationally and the loss of the yen.
However, the Japanese economy has been severely impacted by the investing damage because it has recovered from the Covid-19 pandemic more slowly than other economies.
The rise in inflation, which caused the headline consumer price index ( CPI ) to peak at 4.3 % in January 2023, has particularly significantly deterred private consumption. It took until the first quarter of 2023 for the level of personal intake attained in 2020 to return.
Due to a lack of certainty regarding potential future growth, organization investment has likewise remained low. The core CPI, which excludes food and energy, remained below 2 % during the time due to weak domestic demand. Even when the economy experienced headline inflation rates that exceeded 4 %, the Bank of Japan was unable to alter its monetary policy position because its CPI target is 2 %.
Instead, the authorities took charge of fiscal policy to lessen the effects of the increase in commodity prices, particularly energy costs. & nbsp,
In order for wholesale fuel companies to cover their wholesale prices, subsidies were given to them starting in January 2022, and to electricity and city-gas companies beginning in December 2023. Value cover policies were chosen as emergency measures, even though the policies to anticipate rate increases could have been more focused and consistent with efforts to reduce electricity usage and greenhouse gas emissions.
The government also intervened in the foreign exchange market to support the yen in order to address the & nbsp, or depreciation of the currency. Since June 1998, the initiatives that were made in late 2022 were the first to help the yen.
Even though these expensive precautions were taken to protect Japan from outside shocks, the terms of trade did not begin to gradually improve until commodity prices suddenly peaked in the second quarter of 2022. & nbsp,
As of the second quarter of 2022, the total amount of cumulative trade gains from that time until the second quarter 2023 was 1.7 % of true GDP. In August 2023, the headline CPI inflation rate decreased to 3.2 % as a result of this.
The immediate position appears to have improved, but there are still a few issues. The yen began depreciating once more in May 2023 as a result of expectations that Japan’s economic policy would continue to vary from that of other economies, which partially offset the benefit of the decline in commodity prices.
Trends in the commodities industry can easily be reversed, and prices may increase once the global business regains its growth speed or if an external surprise occurs. These innovations will have a significant impact on the Japanese economy, which is highly dependent on trade and susceptible to changes in the global market.
And the long-overdue task of reshaping Japan’s business to improve its endurance has yet to be completed.
At the Japan Center for Economic Research, Jun Saito holds the title of Senior Research Fellow.
This andnbsp, post, and was originally published by East Asia Forum and are being reprinted with a Creative Commons license.