Sluggish exports of electrical goods, cars factor into record trade deficit

The Yomiuri Shimbun

7:00 JST, January 21, 2023

Sluggish growth in exports of electrical equipment and automobiles is cited as a factor contributing to Japan’s largest ever trade deficit in 2022, a record ¥19.9 trillion.

Japan’s trade balance was also affected by increased imports of semiconductors and vaccines for the novel coronavirus, as well as the weak yen and soaring resource prices.

A weak domestic currency is commonly thought to be favorable for industries that earn foreign currency through exports. However, many Japanese companies have been relocating their production bases overseas, which has slowed down export growth.

In 2014, when the trade deficit hit its previous all-time high of ¥12.8 trillion, imports of liquefied natural gas for thermal power generation were a heavy factor because of the shutdown of nuclear power plants following the Great East Japan Earthquake of 2011. Imports of crude oil, LNG and other fossil fuels accounted for 32.2% of total imports that year.

While such fuel imports grew significantly in 2022, their share of total imports was lower at 28.3%.

Meanwhile, imports of chemical products, including pharmaceuticals, increased to 11.2%, while imports of electrical equipment, including semiconductors, increased to 14.6%, pushing up the value of imports.

Given that consumer electronics manufacturers, which have supported Japan’s trade surplus, have been shifting their production bases overseas to cut costs, even the depreciation of the yen is unlikely to boost export volume.

With Chinese and South Korean manufacturers becoming dominant in the export of flat-screen TVs, which were once Japan’s star export, various Japanese manufacturers were forced to scale back or withdraw from the business. Hitachi Ltd. ended domestic production of flat-panel TVs in 2012, followed by Panasonic Corp. in 2021. Toshiba Corp. sold its television business to a Chinese manufacturer in 2018.

“Exports of domestically manufactured products are limited to very few products, including high-priced models,” an official of a major electronics company said.

Japanese pharmaceutical manufacturers, which had long excelled in the development of synthetic low-molecular-weight drugs, lagged behind in the development of biopharmaceuticals such as cutting-edge cancer drugs. This decreased the production of innovative new drugs originating from Japan.

They also lost out to foreign competitors in the development of vaccines for the new strain of the novel coronavirus, forcing Japan to rely on imports.

“Drug discovery requires a great deal of capital. Innovative drugs will not be created unless the culture of avoiding high-risk, high-return investments is changed,” said Kazuaki Hashiguchi, a senior analyst at Daiwa Securities Co., who is familiar with the drug industry.

Exports of cars, meanwhile, grew to ¥13.12 trillion in 2022, up 21.4% from the previous year. However, the number of vehicles exported remained unchanged from the previous year at 5.06 million units as a result of stagnant production due to the shortage of semiconductors.

The growth in car exports resulted from the weak yen, which inflated earnings when overseas sales were converted into yen.

“This is not a performance we can be proud of,” an executive of a major carmaker said.

The weak yen also has negative side effects. With escalating prices overseas, imports of auto parts rose by 21.3% to about ¥1 trillion, offsetting part of the surplus earned from auto exports.

Many companies are hoping to improve the current situation, in which they are at the mercy of exchange rates. “Volatility, such as a sharp depreciation of the yen, poses business challenges,” Nissan Motor Co. President Makoto Uchida said.

Some companies are beginning to move production back to Japan against the backdrop of rising geopolitical risks, such as the U.S.-China conflict.

“An environment for manufacturing in Japan is being created once again. Japanese management should be well aware of the importance of establishing a domestic production and supply network,” said Akira Minamikawa of British research firm Omdia.