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Japan's Trade Balance Swings to Surplus Upping Expectations for Q4 Growth

Japan's trade balance transitioned to a surplus of ¥62.1 billion ($419 million), moving away from the revised deficit of ¥780.4 billion observed in the previous month. This shift was primarily fueled by a significant increase in exports, which saw the fastest growth rate in a year last month, bolstering prospects for the nation's economic rebound in the October-December quarter.

In December, exports rose by 9.8% compared to the same period in the previous year, marking the most pronounced increase in a year and a stark reversal from the 0.2% decrease noted in the prior month, as per the data released by the finance ministry on Wednesday. Noteworthy is the fact that exports to the United States surged at a double-digit rate, and, for the first time in 13 months, exports to China also saw an uptick. In contrast, imports decreased by 6.8%, a sharper decline than the 5.4% predicted by economists, mainly due to reduced imports of coal and liquefied natural gas, contributing to the overall dip in imports.

These figures indicate that the adverse effects of external demand on the economy may lessen in the fourth quarter, potentially supporting a recovery after the economy witnessed its most severe contraction since the peak of the pandemic in the July-September quarter.

Our Take: This is further bullish news from Japan, reinforcing the case for the normalization of the Bank of Japan's (BoJ) interest rates and consequently a stronger Japanese Yen (JPY). However, we remain skeptical that the robust export growth to the U.S. (mainly cars) will persist into 2024, as we anticipate a slowdown in the U.S. economy. Nonetheless, this development adds one more reason to be optimistic about Japan and the JPY.


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