The Story Behind Japan's Trade Deficit

The Story Behind Japan's Trade Deficit

For almost 30 years, many Americans have purchased their cars from companies like Honda and Toyota, and their electronics from companies like Sony and Toshiba. Japan has long been known as a hotbed of new products and state-of-the-art manufacturing. And Americans were always happy to buy. But things have been changing lately. According to this week’s article in the Wall Street Journal, Japan officially reported a trade deficit for the first time since 1980.

What’s a Trade Deficit? Or a Trade Surplus?

A trade deficit occurs when a country consumes more than it produces. More technically, there’s a deficit when a country imports more than it exports.

A surplus is the reverse—it happens when a country exports more than it imports. Like an individual who saves part of her paycheck, a country is growing its cash balance when it runs a surplus. When a country has a trade deficit, it needs to find a way to finance its consumption, and it typically does this by borrowing from investors.

Which Countries Run Deficits

Japan is traditionally a net exporter, meaning that it usually has a trade surplus—because, historically, it's been really good at producing goods that the rest of the world wanted to pay for. The same is true for other younger economies emerging as world powers, like Russia, China and other Asian countries. These nations strive to grow their exports massively, which is why they generally run trade surpluses.

The U.S, on the other hand, has run a trade deficit for decades (it was nearly $500 billion in 2010). Many European countries, like the UK and France, do as well. We’ve evolved from being an economy focused on producing real stuff to one that likes to drive foreign cars, eat fruit from abroad and wear clothes produced in emerging markets. Instead of exporting manufactured goods to the rest of the world, we work in service professions and focus much of our energies internally.

Is a Trade Deficit Good or Bad?

Depending on your politics, and your perspective, trade deficits can be good or bad. One thing's for sure: They definitely impact how a country's economy functions. Export economies require larger workforces to manufacture goods; import economies can hire fewer people to do that and just import things from abroad.

That said, especially in light of unemployment in the U.S., President Obama is committed to changing the way that Americans consume without producing. During his State of the Union address, the President indicated that he wants American businesses to sell their products all over the world, and that he’ll travel anywhere to open new markets for American products. In particular: “Soon, there will be new cars on the streets of Seoul imported from Detroit, and Toledo, and Chicago.” (For a full summary of his speech and what it could mean for your finances, read this.)

The trade deficit (or surplus, as the case may be) has ramifications for international currencies, as well. As you probably know if you’ve ever traveled abroad, most Americans like a strong U.S. dollar. It means we can buy a lot (more) from other countries, since our dollars go further. Japan, on the other hand, actually wants a weak yen. If the yen is too expensive, its goods are also more expensive for foreigners to buy. A weak yen would ensure the cost of its goods remain competitive internationally.

What’s happened during Japan’s transformation from net exporter to net importer, though, has been a surprisingly robust yen. Its currency sits near historic highs against the dollar, making Japanese goods more expensive abroad—and crimping the country’s already sluggish manufacturing sector.

How Tsunamis and Nuclear Disasters Affect Trade

The horrible tsunami that hit Japan last year and the nuclear disaster that followed only compounded Japan’s problems. A strong currency, weakening manufacturing sector and rising debt has hit Japan with a financial triple whammy. There’s no way around it: Japan is facing trying times. But we all are. The economic prosperity we’ve enjoyed over the past few decades has been reset.

In the wake of disaster, Japan has always proven to be amazingly resilient. We’re thinking of the tragic tsunami, the burst economic bubble of the 80s and more. Like the futuristic cars they once introduced to the world, we feel confident that they will innovate their way through their current financial struggles.

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