Yen Appreciation Increases Japan’s Trade Deficit

Japan’s exports failed to meet expectations in August increasing only 2.8 percent for the month compared to the 8 percent increase predicted by analysts. The weaker-than-expected showing, coupled with a gain in imports, caused Japan’s August trade deficit to widen to 775.3 billion yen (US$10.1 bn).

On a more positive note, for the first time in six months exports to the U.S. increased, rising by an annualized rate of 3.5 percent to 803.541 billion yen (US$10.5 bn). Exports to the European Union rose for the third straight month with a 6.0 percent gain in August as manufacturers wrestle back market share lost in the aftermath of the earthquake and tsunami earlier this year.

Strong Yen Limits Exports

Japan’s exporters also face the daunting challenge of an appreciating yen that continues to climb higher despite efforts by the Bank of Japan to contain the currency’s appreciation. As a result, prices for products made in Japan have jumped thereby placing Japan’s exporters at a disadvantage compared to products produced in other jurisdictions.

To slow the yen’s appreciation, the Bank of Japan has sold trillions of yen into the market in an attempt to weaken the currency but with limited success. On Tuesday, the central bank announced further measures it hopes will slow the yen’s appreciation.

Newly-minted Prime Minister Yoshihiko Noda – clearly concerned over the recent wave of corporations relocating outside Japan to escape the higher yen – has also promised to provide subsidies to corporations willing to build new factories in Japan. While this will not address the yen’s appreciation, it may encourage manufacturers to expand their operations in Japan.

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