Japanese trade toils

Emily Nicol
Chris Scicluna


The mood in Asian markets today was unambiguously downbeat. Weighed among other things by some disappointing earnings reports, including from Netflix and SAP in the tech sector, a downbeat report on Canon, and ongoing pessimism about the Japan-Korea and US-China trade spats, the major Asian equity indices fell across the board. With the yen appreciating sharply to 107.7/$, the TOPIX closed down 2.1%, its worst showing since March, as Japan’s June trade report showed ongoing weakness in exports and a plunge in imports, while a pair economic surveys added to the negative tone (detail below). Elsewhere, China’s CSI300 closed down just shy of 1.0%. Korea’s KOSPI fell a more modest 0.3% as the BoK delivered a surprise 25bp rate cut, taking the repo rate to 1.50%, but also revised down its growth forecasts significantly. As had been expected, Bank Indonesia followed suit a little while with its first rate cut for two years.

In the bond markets, having made significant gains throughout yesterday, USTs were broadly stable overnight (10Y yields down to 2.5%, 9bps below Tuesday’s peak). JGBs were firmer, and ACGBs opened higher and locked in those gains (10Y yields down more than 4bps to below 1.35%) as the latest Aussie jobs data disappointed (more on these numbers below too). In Europe, most euro area govvies and Gilts have also opened higher ahead of this morning’s release of the latest UK retail sales data, which are expected to report a third successive monthly decline.


With concerns about external demand top of the list of current concerns for markets, businesses and the BoJ alike, the main economics focus in Japan today was June’s trade report. But while the trade deficit narrowed more than expected last month, the underlying message was far from upbeat, among other things suggesting (perhaps unsurprisingly) that net trade provided a drag on GDP growth in Q2

Admittedly, there was a notable improvement in the trade balance in June, with the adjusted deficit narrowing ¥607bn to just ¥14.4bn, the best reading in four months. Moreover, on an unadjusted basis, the trade balance recorded its largest surplus (¥589bn) since April 2018. This in part reflected a decline in the value of imports, down 4.4%M/M, 5.2%Y/Y. There was also a pickup in value of exports in June, up 4.8%M/M. But this didn’t even fully reverse the weakness in May, and left export values down compared with a year earlier for the seventh consecutive month and by 6.7%Y/Y, the second sharpest drop since January. Within the detail, exports to the US were up for a ninth successive month and by 4.8%Y/Y. However, there was a steeper pace of decline in the value of shipments to China (down 10.1%Y/Y, the most since January), as well as a hefty decline in exports to Korea (-14.8%Y/Y, the biggest drop since January 2016, even before the latest export restrictions hit). The pace of decline to the EU also intensified (-6.7%Y/Y). By sub-sector, the weakness was broad based too, with noteworthy declines in exports of iron and steel products (-11.6%Y/Y), metalworking machinery (-22.2%Y/Y) and electrical machinery (-9.3%Y/Y).

When also adjusting for price effects, the BoJ’s measure of export volumes was still up 4.0%M/M in June, although this left them up just 0.1% over the second quarter as a whole. But despite a whopping 6.8%M/M drop in import volumes in June – the steepest since the post-consumption tax hike slump in April 2014 – they were still up more than 2% in Q2. So, having been the main driver of GDP growth in Q1 (thanks principally to a decline in imports) today’s report suggests that net goods exports provided a notable drag on growth last quarter.

If the latest Reuters Tankan survey is anything to go by, Japan’s goods trade data are not expected to improve significantly for a while yet. The headline indicator for business conditions in the manufacturing sector declined in July for the second successive month, dropping 3pts to a three-year low of 3. And the survey’s forecast index for expectations in the sector in three months’ time fell a steep 7pts – the most in almost three years – to 4, likewise the lowest since 2016. While the indices for certain important sub-sectors, including general and electrical machinery and autos, ticked higher, marked deterioration was reported by manufacturers of some materials and intermediate goods such as chemicals, textiles and paper, and most strikingly, steel and metals, for which the respective index plunged 33pts to -44, the lowest since the Global Financial Crisis.

Slightly more positively, the headline Reuters Tankan index for non-manufacturers improved modestly in July, rising 3pts to 25. However, the June reading had matched the lowest since 2016. And the respective forecast indicator dropped 5pts for the second successive month to fall to a three-year low of 16. The improvement in the latest month came principally from wholesalers and firms in real estate and construction. The deterioration in expectations, meanwhile, was led by retailers, whose forecast index dropped a whopping 22pts to -9, the first negative reading for the sub-sector since 2017 and one which highly likely reflects apprehension about demand once the consumption tax is hiked in October.

The BoJ’s latest Senior loan Officer survey further added to the downbeat tone of today’s Japanese data. Most notably, the survey reported a drop in loan demand from non-financial corporations in Q2 for the first time in six years. Demand reportedly fell from firms of all sizes and across most sectors. A wide range of factors were cited as the cause of the drop in loan demand, including lower customer sales, reduced fixed investment and higher interest rates. Demand for loans from households was mixed, however. While demand for housing loans edged lower, demand for consumer loans rose the most in two years. From a lending perspective, meanwhile, banks eased credit standards further, and reported a narrowing of spreads on loans, with more aggressive competition from other banks and non-banks cited as the most common drivers. And this trend is expected to continue.


With developments in the labour market set to remain central in determining the near-term path of RBA monetary policy, today’s Australian jobs report was closely watched. And, on balance, it continued to suggest that there was plenty of slack in the labour market in June. Certainly, there was a notable slowdown in employment growth last month, with an increase in the number of people employed of just 500, the smallest for almost a year, to leave annual growth moderating 0.5ppt to 2.4%Y/Y. Admittedly, there was a larger increase in full-time employment (21.1k), while employment of part-timers fell (-20.6k). So, full-time employment was still up an impressive 247k compared with a year earlier. But with the labour force participation rate unchanged at a record high 66%, the unemployment rate also moved sideways at 5.2%, still significantly higher than the RBA’s central estimate of the equilibrium rate (4½%). Therefore, upwards pressures on wage growth look set to remain absent for a while yet, and in the absence of new momentum, the RBA’s inflation target seems highly likely to remain elusive too.


Focus in the UK today turns to the official June retail sales figures for further insight into household consumption in the second quarter. In line with the downbeat messages from various retail sector surveys, today’s figures are expected to report a further decline in sales in June, to leave them down over the second quarter as a whole. The BoE’s latest quarterly credit conditions survey is due to be published too. And with Prime Minister-in-waiting Boris Johnson having over the past few weeks promised Conservative Party members lashings of budgetary largesse in terms of tax cuts and more public spending – while at the same time talking up the prospect of a highly damaging no-deal Brexit – the OBR’s Fiscal Risks report might also be worth watching today.


In the US, along with the usual weekly jobless claims numbers, today brings the Philly Fed and Conference Board’s Leading indices. In the markets, the US Treasury will sell 10Y TIPS.

Euro area:

Today should be a quiet day for euro area economic news with no top-tier data due for release. Supply-wise, France and Spain will sell fixed-rate and index-linked bonds.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.