US / Japan Trade - Reality Versus Perception

(July - 1997)

Japan has accumulated a huge investment in US Government debt and is thus dangerously exposed to both a devaluation in the US$/Yen exchange rate and to any reduction in the market price of US bonds. In an attempt to mitigate this risk it has tried, so far without any success, to encourage the US to pursue monetary policies which would provide dollar/yen exchange rate stability. Japan must therefore diversify, quite probably by selling their US dollar denominated reserves and buying gold. Oracle's article at Gold Eagle entitled "Japan Between a Rock and a Hard Spot" explains with great clarity the problems and the choices facing Japan, as well as the corresponding impact on the US markets.

For its part, the US has relentlessly levied a barrage of criticism against Japan for supposedly using a trade surplus to restore economic growth. In effect, the US imports cars and video recorders from Japan and exports dollars. Conventional wisdom suggests that the flow of capital out of the US as a result of this trade deficit should lead to a reduction in the value of the dollar, higher interest rates and an economic slow down in the US. The dollar has certainly reduced substantially in value during the past 10 years, but interest rates have remained relatively low and economic growth has been robust. On the other hand Japan, the country with the trade surplus, has suffered a severe recession during the 1990's.

A clue to what is really happening with international trade can be obtained from the following table which shows the combined export figures for Toyota and Nissan in terms of units (cars) and US dollars.

	No. of Units Exported	Net Export Sales Bil US$
1988 1989 1990 1991 1992 1993 1994 1995 1996	2,892,000 2,595,000 2,630,000 2,659,000 2,621,000 2,075,000 1,675,000 1,761,000 1,910,000	39.83 39.07 41.27 44.24 46.03 37.68 30.65 33.48 37.92

Between 1988 and 1996, the number of units exported decreased by 34%, but during the same period the net export sales, measured in US dollars, only decreased by 4.8%. What these figures are telling us is that the trade deficit is not causing a reduction in the value of the dollar. In fact, the dollar is depreciating at a faster rate than the reduction in the amount of units exported by Japan, creating the illusion of a Japanese trade surplus.

The data used to compile the above table were taken from a publication by Princeton Economics, and the reasons why the reported US/Japan trade statistics misrepresent reality are explained in a recent article by Martin Armstrong as follows :

Trade statistics are not adjusted for inflation or changes in exchange rates

Trade statistics only measure currency movement, not units of goods

Trade statistics, reported in isolation, ignore the fact that capital flows associated with trade only account for 10% of total international capital flows, with investment accounting for the remaining 90%. This is the opposite of the situation which existed prior to 1971 and is courtesy of a floating exchange rate system in which huge capital flows occur to take advantage of changes in currency exchange rates

The most fundamental decision in measuring anything is selecting the appropriate unit. The US Government and private sector will tend to make decisions solely based on the number of US dollars they expect to pay or receive. However, when this viewpoint is carried into the international arena it results in the distortion of truth and misguided actions. Whenever you start from an incorrect premise and you then use faultless logic to develop action plans, the actual effects of your actions will be the opposite to those which you intended.

The Japanese economy is having difficulty recovering from its drawn out recession due to lower exports when measured in terms of physical goods. The pressure being brought to bear on Japan to rectify a trade surplus which doesn't really exist could precipitate a total economic collapse inside Japan. Such a collapse would have a major global impact as Japanese capital invested overseas is repatriated, with the greatest effect being on the country which has received the highest level of Japanese investment - the US. Irrespective of whether or not the Japanese choose to purchase gold during such a crisis, Japan's wholesale divestiture of US dollar denominated assets would lead to a collapse in the US bond market, a massive devaluation of the US dollar, and a corresponding increase in the price of gold in US dollar terms.

US politicians and treasury officials are likely to continue their posturing over the supposed trade deficit with Japan. As such and as stated in Oracle's article, the ball is now firmly in Japan's court. It would appear that an economic crisis in Japan can only be avoided through the orderly disposal of its huge reserves of US debt instruments.

Milhouse

Also by Milhouse:
Is Gold Still a Store of Value ?

Central Banks and Their Gold

The Intrinsic Value of Gold

Gold & Disintegration of U.S. Economic Influence

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