Weak Yen: Why Japan Can't Have Its Cake and Eat It Too
Weakness in the yen, which has fallen to its lowest level against the dollar since 2009, has led to a surge of optimism over the outlook for Japan's ailing economy, but it appears that the depreciating currency could be doing more harm than good for the country.
Japan's trade balance for February, which was released on Thursday, is a reflection of the less favorable implications of a rapidly depreciating currency, which has fallen over 22 percent against the greenback in the past six months.
The value of Japan's imports rose 11.9 percent, as weakness in the yen led to soaring fuel costs, while exports fell 2.9 percent on weak global demand, leaving the trade balance in a deficit for the eighth straight month. The overall trade deficit stood at 777.5 billion yen ($8.14 billion).
According to Izumi Devalier, Japan economist at HSBC, exports are likely to continue trending at low levels, while imports are set to remain elevated due to the weak currency, weighing on Japan's trade growth outlook.
"The latest trade print offers another reminder that when it comes to a weak yen, you can't have your cake and eat it too," Devalier said.
"The latest bout of dollar-yen strength has raised hopes that a weaker yen would offer a significant boost to Japanese exporters. However, the overall impact on the trade balance has been negative so far, as the import bill has reacted more quickly," he added.
The negative impact of the weaker yen has been amplified due to the closure of the country's nuclear reactors, which has removed 30 percent of electricity output and increased its reliance on imported hydrocarbons, he noted.
However, the negative implications of a weaker currency are unlikely to remain over the medium to longer term, according to economists. A country's trade balance typically worsens after the depreciation of its currency before any subsequent rise in exports.
"Looking ahead, we expect a gradual recovery in exports that will offset the impact from elevated imports. However, the adjustment will be slow, and external demand will continue to weigh on Japan's first quarter growth outlook," he said.
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The economy, which exited a recession in the fourth quarter of 2012, is expected to grow around 1.6 percent this year, according to Morgan Stanley.
By CNBC.com's Ansuya Harjani, Follow her on Twitter: @Ansuya_H