By Daniel Leussink

TOKYO, Reuters – Japan reported a larger-than-expected February trade deficit due to an energy-driven spike in import prices caused by huge supply constraints and vulnerabilities for the third largest economy in the world.

Although exports increased slightly more than anticipated, shipments to China rebounded. This is a troubling sign in an economy that faces increasing uncertainty due to supply problems and Russia’s invasion in Ukraine.

The increase in imports in February was 34.0% according to Ministry of Finance data. That’s higher than the average market forecast of a 28.0% rise in a Reuters survey.

The 19.1% annual increase in exports in February was outpaced by this 668.3 Billion Yen trade deficit ($5.65 Billion). This is more than the 12.6 billion yen expected shortfall in a Reuters survey.

The deficit in February was however smaller than the gap in January of 2.19 trillion Japanese yen. This was the highest in any month over eight years.

Exports decreased by 0.5% in the seasonally adjusted month against the prior month according to the finance ministry. This indicates that there are headwinds with outbound shipments. The seasonally adjusted 2.7% increase in imports was reported month-on-month

Capital Economics’ Japan economist Tom Learmouth stated that exports dropped again in February. However, they will rebound in the months ahead if the Omicron virus in China does not cause supply chain disruptions.

The net trade data from February could reduce by as much 1.0 percentage points GDP (gross Domestic Product) growth in this quarter, as imports continue to rise while exports remain flat.

After a Lunar New Year-linked contraction, Japan’s biggest trading partner, China, grew 25.8% over the twelve months to February due to stronger semiconductor machine shipments.

Due to stronger imports of semiconductor machinery and cars, 16.0% more exports were made to America, which is the largest country in the world.

Data showed that oil from United Arab Emirates and liquefied petroleum products were two of the biggest contributors to an increase in imports.

According to Reuters Tankan’s March poll, Japanese companies fear a new surge in energy costs due to Ukraine. However, they report the first increase in business confidence for three months.

Japan’s economy recovered less in the last quarter of 2021 than originally thought, according to the government. This was due to weaker consumer and business spending growth.

For policymakers who are responsible for sustaining fragile recovery after the Ukraine crisis, the downgraded fourth quarter growth was bad news.

($1 = 118.2800 yen)