The October trade deficit for Japan turned out to be the “best” month since June 2013. While commentary has been quick and sharp about an export-led recovery path, actual analysis of what is taking place would lead to the opposite conclusion. This is revealed by simple geography.

ABOOK Nov 2014 Japan Trade Balance

A full part of the problem starts with context, in that a ¥710 billion deficit is only a “positive” in relation to the other months of 2014 – which were clear and obvious pain. Despite any “improvement” in October, all of 2014 is on track to be more than twice the deficit of 2012 before all this yen rejiggering began.

ABOOK Nov 2014 Japan Trade Balance By Year

Further, while mainstream analysis continues to somehow miss the difference between nominal export growth and actual volume growth, Japan’s trade balance with the trade partners it “needs” most to show actual improvement worsened. Exports to the US, for example, rose only 8.9% in October 2014 over October 2013, but imports from the US rose more, +11.4%. In terms of raw volume, the export increase wasn’t even enough to make up the decline in the yen, while importation is all “real” and then some.

ABOOK Nov 2014 Japan Trade Balance US

In terms of China, Japan’s largest trading partner, the one-way trade in China’s favor actually grew worse in October. Exports to China grew 7.1% Y/Y, again only in nominal terms, while imports still increased at a faster 9.8%. That left the trade deficit with China 16% worse in October 2014 than the prior year.

ABOOK Nov 2014 Japan Trade Balance China

The only improvement in the trade balance for Japan was a decline in importation from the rest of Asia in relation to exports there. Exports to Asia ex China grew by 12.2% Y/Y while imports fell 1.1%. That positive difference in exports (or negative difference in imports) reverses the trend that had been very visible all along and contrary to every orthodox theory and expectation.

ABOOK Nov 2014 Japan Trade Balance Asia ex China YYABOOK Nov 2014 Japan Trade Balance Asia ex China YY DiffABOOK Nov 2014 Japan Trade Balance Asia ex China

I suppose it is possible that QQE has finally worked on the rest of Asia, but I think there is a far simpler and more consistent account. If QQE and yen devaluation suddenly began to show intended effects in this second go-around then you would think it would not be limited to non-China Asia. We would very much expect to see favorable trade with Japan’s two largest partners, the US and China. Instead, again, those two geographical trade regimes continued to debase toward productive Japanese capacity – offshoring seems to be uninterrupted where it needs to be most.

Japan’s imports from the rest of Asia also include manufacturing components for internal uses as well as production in Japan itself, but at the margins here the vast majority of importation is energy. It could very well be that Japan has suddenly found or rediscovered a domestic energy source to lighten the import load, however the context of Japan’s “sudden” re-acquaintance with recession in 2014 more than suggests simply that as Japan’s economy is collapsing so is its energy “demand.” That would certainly add impetus to the behavior of crude oil prices lately, especially since the drop off in Japanese imports from non-China Asia really began in earnest around July.

ABOOK Nov 2014 Japan Trade Imports Aussie

The dropoff in imports from Australia clinches that for me.  Australian exports to Japan are almost totally raw materials, and the dropoff from Oz coincides exactly with worsening recessionary forces.

Thus there isn’t any hope in these figures for a quick ascent back toward something not even favorable, but less damaging, as there is no actual export growth in either of the largest trade markets for Japan; while the offshoring problem continues unabated. Instead, the only “improvement” is likely due to Japan’s internal economic collapse. QQE has produced the worst case, where the domestic economy falls apart while the external “economy” continues to impoverish with the wrong-way flow of true wealth (productive capacity). If you need a depression to finally break the trade problem, you are doing it wrong.