Exports to pick up as advanced economies recover and JPY weakness takes root

Japanese exports continue to be weak, especially shipments to Asia and the US. Real exports (in GDP figures) slipped an annualized -2.0% QoQ in Apr-Jun, the first decline in three quarters, due to weakening import demand around the world because of the struggling global economy. As the share of advanced country exports (the weight of advanced country exports among overall global exports, in real terms) has been shrinking overall, Japan has maintained its share of exports since 2013, when the excessively strong JPY began correcting (Figure 5). This is an indication that Japan's recent export softness is not necessarily due to the country's unique factors of declining competitiveness and production shifts overseas.

Exports are likely to pick up gradually going forward. First, we expect global import demand to grow more strongly as the world economy slowly recovers, especially in advanced countries. Further, Japanese export goods have shifted from final consumption goods to intermediate goods and investment goods. Thus, although retail prices are reflecting exchange rate fluctuations after longer lags compared to the past, export price in contract currency-denominated terms has been steadily declining (Figure 6). Improved price competitiveness due to the weaker JPY appears to be supporting Japan's export volume somewhat.

Exports to pick up as advanced economies recover and JPY weakness takes root

Real capital expenditures slumped an annualized -18.8% QoQ in Apr-Jun, the first drop in five quarters. Capital expenditures marked a record increase in Jan-Mar due not only to improved corporate profits and investment sentiment, but also because of the surge of demand brought ahead of the consumption tax hike and one-time demand that arose as software support ended. The reactionary slump appeared in Apr-Jun.

The upward trend in capital expenditures is persisting, and expenditure is likely to start to rise again in Jul-Sept. Companies listed on the first section of the Tokyo Stock Exchange reported higher current profits in Apr-Jun, and the strong results were reported by not only manufacturers but also non-manufacturers, which tend to be more strongly impacted by declining domestic demand. Profits have neared the peak levels of prior to the collapse of Lehman Brothers (Figure 7). A sustained earnings recovery will also likely contribute to maintaining corporate business sentiment and improving investment sentiment. An August Development Bank of Japan survey on corporate capital expenditures plans (among companies with capital of at least JPY1.0bn) showed that a wide range of industries, including manufacturing sector companies in the chemicals, iron and steel, and transportation machinery areas, plan to increase investment (Figure 8). Companies are expected to invest more for maintenance/repairs, rationalizations and labor savings, as well as to strengthen operating capacity in non-manufacturing sector like transport, real estate, wholesaling, and retailing.