Japan’s sinking exports raise risks of prolonged economic downturn

Japan’s exports plunged at a double-digit pace for the fourth month in a row in June, backing signs the coronavirus crisis has knocked the economy into its worst postwar recession and raising the spectre of a longer and more painful global downturn.

US-bound Japanese shipments nearly halved again due to plummeting demand for cars and autoparts, and exports to China remained weak, pointing to the absence of a strong growth engine for the world economy.

Ministry of Finance (MOF) data showed on Monday that Japan’s exports dived 26.2 per cent in June from a year earlier, bigger than a 24.9 per cent decline seen by economists in a Reuters poll.

The contraction slowed slightly from the prior month’s 28.3 per cent fall - the worst downturn since September 2009.

Global demand for cars and other durable goods has sunk since March as the pandemic prompted many countries to lockdown.

Though more countries have now started re-opening their economies, analysts say the trade data could diminish hopes for a quick rebound in global demand and Japan’s export-led economy, especially given the resurgence of coronavirus cases in major economies like the United States, Brazil and India. The International Monetary Fund last month forecast global output will shrink by 4.9 per cent this year, versus a 3.0 per cent contraction predicted in April. It also predicted a slower recovery in 2021, with growth of 5.4 per cent for the year compared with a 5.8 per cent rise seen in April.

“Exports are likely to seesaw for the time being,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“If domestic and external demand remain sluggish for a prolonged period, supply capacity could be slashed, triggering a jump in bankruptcies and job losses in the latter half of this fiscal year.”

Meanwhile the Bank of Japan (BOJ) policymakers debated the risk of the country sliding back into deflation but stopped short of advocating stronger steps to prevent firms from going insolvent due to the coronavirus pandemic, minutes of their June meeting showed.

With the impact of COVID-19 likely to last for a prolonged period, more companies could face the risk of insolvency even if they received immediate liquidity support, some on the BOJ’s nine-member board were quoted as saying.

But those who spoke out on the matter said the BOJ ought to be cautious about directly injecting capital to save struggling firms, suggesting such action should be the preserve of the government.

“A few members said the BOJ’s role was to provide liquidity, and that it was important for the BOJ to cooperate with the government while clarifying the respective roles,” according to the minutes released on Monday.

After easing monetary policy in March and April, the BOJ kept policy settings unchanged at the June 15-16 meeting and maintained its view the economy will gradually recover from the damage caused by the pandemic.

But many board members remained gloomy on Japan’s recovery prospects as the impact from the outbreak deepened, the minutes showed.

“The impact of the pandemic was broadening to companies of all size and sectors. If corporate bankruptcies and closures increased, there was a risk Japan could slip back into deflation,” a few board members were quoted as saying.

Many members also said economic activity could be “severely curtailed” if there was a second wave of infections, the minutes showed. Japan lifted nationwide state of emergency measures in late May but has seen a renewed spike in infections in its capital Tokyo, stoking fears of a second wave that could hit an already weakened economy. Japan has reported over 25,000 cases, including nearly 1,000 deaths.

The latest slump was aggravated by a massive annual decline in US-bound car shipments, a major export item for the Asian giant.

Overall shipments to the United States - Japan’s key market - dived 46.6 per cent, due to 63.3 per cent decline in exports of automobiles, 56 per cent drop in plane engines and 58.3 per cent fall in car parts. Nissan Motor Co, Japan’s No. 2 automaker, plans a 30 per cent year-on-year cut in global car output through December as falling demand due to the COVID-19 pandemic complicates its turnaround efforts, two sources told Reuters. In 2018, the United States was Japan’s largest export market, followed closely by China and led by cars and car parts.

Exports to China, Japan’s largest trading partner, fell 0.2 per cent in the year to June, as declines in shipments of chip-making machinery and chemical materials more than offset increase in nonferrous metal and car shipments.

Reuters