Tokyo has reported its first trade deficit in more than three decades, explaining the downturn as the result of last year's devastating earthquake and tsunami that caused an energy crisis, and weak global demand for Japanese exports.
The $32bn deficit for 2011 reflected a 2.7 per cent decline in the value of Japan's exports, which fell to $843bn, according to the Ministry of Finance figures released on Wednesday.
The first annual trade deficit since 1981 calls into question how much longer the country can rely on exports to help finance a huge public debt without having to turn to foreign investors.
"[The deficit] reflects fundamental changes in Japan's economy, particularly among manufacturers," Hideki Matsumura, senior economist at Japan Research Institute, told The Associated Press news agency. "Japan is losing its competitiveness."
The trade figures underscore a broader trend of Japan's declining global economic clout and a rapidly aging population, compounding the immediate problem of increased reliance on fuel imports due to the loss of nuclear power.
Only four of the country's 54 nuclear power reactors are running due to public safety fears after the March disaster.
Ben Collett, of Hong Kong's Louis Capital Markets brokerage firm, said the deficit was "shocking" and "indicative of a longer-term trend".
The yen's surge to record levels against the dollar and euro has made Japanese exports more expensive and also lessens the value of foreign-earned income when brought home. Japan is also facing stiff competition from countries such as South Korea, Taiwan and Singapore, where labour and production costs are cheaper.
"It's gotten difficult for manufacturers to export, so they've moved production abroad so that products sold outside the country are made outside the country," Matsumura said.
In December, Japan's exports fell eight per cent from a year earlier, down for a third straight month. The fall was in line economists' average forecast for a 7.9 per cent drop, and followed a 4.5 per cent decline in the year to November.
Imports rose 8.1 per cent in December from a year earlier, also in line with a median forecast for an eight per cent gain.
"If you remove nearly 20 to 25 per cent of their power production capability, which the Fukushima incident did, that's a situation that's going to create a short-term increase [in energy imports]," Collett said. "The nuclear power situation, in and of itself, is going to continue to contribute to a net trade deficit."
Masaaki Shirakawa, governor of the Bank of Japan, has said he did not expect trade deficits to become a pattern, and did not foresee the country's current account balance tipping into the red in the near future.
But Japan's days of logging huge trade surpluses may be over as it relies more on fuel imports and manufacturers move production offshore to cope with rising costs and a strong yen, a trend that may weaken the Japanese currency longer term.
A fast-aging population also means a growing number of elderly Japanese will be running down their savings.
"They [the Japanese government] need to increase money supply, they need to increase money demand, and that’s something that’s going to take generations for them to achieve," said Collett.
"Currently, they have significant initiatives to increasing the population. So, consequently, domestic demand is going to decrease and the economy's going to deflate."
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