This year Japan has witnessed an uptick in both air and containerised ocean trade. But things are not always as they seem, with much of this growth a consequence of the depreciation of the Japanese Yen. Nevertheless, some sectors and markets are showing real growth and changing dynamics in the world trading system may bring opportunities in the medium term. This includes semiconductors and automotive, and trade with Southeast Asia and North and Central America.
Long Term Background
Two thirds of world economic output and just over half of world trade is linked to four economies – the European Union, the United States, China and Japan. Although number four worldwide in terms of output, Japan’s economic role in the world has diminished since the mid-1990s.
Japan’s share of global economic output peaked at about 18% in 1995 and has declined to around 4% today. Japan’s share of global exports (shown below) and imports (not shown) have followed a similar trajectory.
In the medium term, forecast import and export growth in Japan is expected to underperform other parts of the Asia Pacific region and even underperform much of the EU (which is hardly a benchmark for what growth should look like).
Recent Performance
This year, Japan experience a strong growth in the value of airfreight exports and moderate increase in ocean imports. However, measured in US dollar terms both declined.
In USD value terms both Japanese air and ocean trade are no bigger than they were in 2018. There has been an encouraging uptick in air export tonnage in the past two months, but it’s too early to say whether this represents a reversal of the trend. There has been no uptick in shipping traffic.
Pockets of Growth
However, a number of markets and segments have shown positive developments. This includes:
- Semiconductor related exports by air. This is a sector where Japan stands to benefit from ongoing trade tensions between China and the US.
- Imports of computers and accessories by air
- Aerospace exports by air
- Automotive exports by sea. This relates partly to automotive components but also vehicles shipped in containers.
- Overall vehicle export numbers increased by 7% in the first five months of this year, with hybrid vehicle shipments up 32%
At a country level we are seeing:
- Growth in containerised exports to the US, but large drops to China
- Strong growth in containerised imports from Vietnam
- Growth in airfreight exports to China, Vietnam, Mexico and some parts of Europe but generally declines elsewhere.
Outlook
Contrary to China where a decline in volumes has been compensated by a surge in cross border e-commerce traffic, Japanese air and ocean trade is more dependent on industrial supply chains. As such manufacturing activity is a key driver of demand for air and ocean shipping. Japan’s manufacturing PMI has been moderately positive for the last two months (May and June) and further expansion is forecast for the rest of the year. As such additional growth is to be expected.
However, while industrial sectors such as semiconductors and automotive will potentially benefit from the ongoing spat between the US and China, we do not think that this will fundamentally change the trajectory of the Japanese economy. Japan’s demographic structure is the primary constraint here.
Nevertheless, it is worth noting the reach of Japanese companies outside Japan and the trade opportunities that this may create. The chart below provides an overview of the top destinations for Japanese outbound investment between 2020 and 2023. While much of the investment has flown to established markets in North America and Europe, all key Southeast and South Asian nations are within the top destination countries.
We are also seeing a shift on the ocean side away from trade with other Northeast Asian countries. At present this trend does not appear to be mirrored on the airfreight side where the only change seems to be increasing dependence on trade with North America.