Japan’s trade deficit widens to an 8-year high, as imports of commodities surge
While this week’s Q4 GDP data showed export volumes returning back above the pre-pandemic level for the first time, today’s monthly goods trade data highlighted the marked deterioration in terms of trade at the start of the year, tallying with the downbeat assessment of export-oriented manufacturers in yesterday’s Tankan survey.

Admittedly, the headline figures suggested that exports held up in January, with the value of exports up 0.1%M/M to leave them still 9.6% higher than a year earlier. And there was solid growth in the value of exports to the US (11.5%Y/Y), EU (16.1%Y/Y) and elsewhere in Asia (6.3%Y/Y), with China the only outlier of Japan’s major trading partners (exports were down 5.4%Y/Y probably due to the timing of the Lunar New Year). By good-type, there was strong growth in the value of shipments of iron and steel products (47.0%Y/Y) and semi-conductors (18.7%Y/Y), although exports of autos fell back on supply constraints (-3.6%Y/Y). Of course, like elsewhere, exports continued to be inflated by higher prices at the start of the year – indeed, according to the MoF’s estimate, export volumes were down 3.9%Y/Y, only the second such decline in the past eleven months.

Higher prices were a clear driver behind the near-5%M/M jump in the value of imports in January too, taking the cumulative increase since July to roughly 17%. Indeed, price effects accounted for more than 80% of the 39.6%Y/Y rise in the value of imports, as imports of petroleum were up more than 80%Y/Y (to account for 15ppts of the Y/Y increase). As such, the unadjusted trade deficit widened to an eight-year high of ¥2.2trn. And while somewhat smaller on a seasonally adjusted basis, the deficit of ¥932.6bn was still the second-highest since 2014, exceeded only by that at the onset of the pandemic in April 2020.

When adjusting for price and seasonally effects, the BoJ’s trade numbers showed export volumes declining for a second successive month in January, by 1.5%M/M. Admittedly, this left exports still more than ½% higher than the Q4 average. But with import volumes up 3.4%M/M in January (and trending more than 4½% higher than in Q4), today’s report suggests strongly that net trade was a drag on Japanese GDP growth at the start of the year.

Machine orders rise to the highest since June 2019, but outlook weakens
More encouragingly (at face value at least), today’s machinery orders numbers came in well ahead of expectations, tentatively signalling an overdue recovery in private sector capex over coming months. In particular, core orders (excluding volatile orders for ships and electric power companies) rose for the third consecutive month in December, by 3.6%M/M. This left private sector core orders up 6.5%Q/Q in Q4, more than 10% above than the pre-pandemic level and the highest since June 2019. The pickup in December reflected a further increase in orders placed by manufacturers (8.0%M/M) to a near-14-year high, with particularly strong growth in non-ferrous metals (276%M/M), electrical machinery (11%M/M) and chemicals (58%M/M). In contrast, orders placed by non-manufacturers slipped back (-0.1%M/M) for the second successive month, although this still left them 9% higher over the fourth quarter as a whole.

But looking ahead, today’s survey also suggested that the latest pandemic wave might well continue to dampen capex plans over the near term. Indeed, while manufacturing orders were forecast to rise for the fourth consecutive quarter in Q1 (by 5%Q/Q), non-manufacturing orders were expected to largely reverse the increase in Q4. And after falling by more than 1%Q/Q in Q4, overseas orders were expected to slump 12.7%Q/Q at the start of 2022. Of course, the government’s fiscal package should help support public sector investment in due course, with orders forecast to rise a further 10%Q/Q in Q1 following growth of roughly 9%Q/Q in Q4.

Fed minutes unilluminating; housing starts data likely to be softer
Hopes that the minutes from the FOMC’s January policy meeting might shine a little light on the likely path of Fed policy over coming quarters were dashed yesterday evening as they added little to the information provided by Jay Powell’s hawkish press conference. Indeed, as Daiwa America’s Mike Moran notes here, if anything the minutes were less forceful, e.g. noting that only "a number of participants” think that “…conditions would likely warrant beginning to reduce the size of the balance sheet sometime later this year”. And there was no discussion of the relative merits of lifting off next month with a hike of 25bps or 50bps. It could be argued, however, that the minutes have again been overtaken by events – while the FOMC acknowledged that price pressures have broadened and the labour market and household balance sheets are strong and seemingly resilient to future tightening, plenty of data released since the meeting – not least the January CPI, PPI and retail sales reports – have been hot, suggesting again that the Fed’s forecasts once again missed the mark.

Data-wise, after what will be a quiet morning in Europe, US housing starts figures for January are due later today along with the February Philly Fed manufacturing survey results and usual weekly jobs claims data. Mike Moran expects a drop in housing starts of about 3.6%M/M to 1.64mn with an elevated inventory of unsold homes likely to weigh on the single-family component and risks of payback to a strong December for multi-family starts. Of course, the big increase in mortgage rates since the start of the year will be expected to weigh on new demand over coming quarters, pointing to a softening in house-building activity ahead.