Japan’s oil bill pushes its trade balance into deficit for a fifth month

What happened

Japan recorded a trade deficit of ¥536.6bn in September, its fifth monthly deficit in a row, according to preliminary figures from the Ministry of Finance on 21 October. That was smaller than August’s ¥1.1tn gap.

For the six months from April to September, the deficit reached ¥2.81tn, about $17.8bn. Imports rose 20.4% to ¥66.3tn and exports rose 18.4% to ¥63.5tn, both records.

Why oil hits Japan so hard

Japan has almost no oil of its own and relies heavily on shipments through the Strait of Hormuz, which is now effectively blocked. Oil is priced in dollars, so Japan’s cost depends on two things: the oil price, and how many yen it takes to buy a dollar.

Both have moved against it. Brent has risen from about $70 a barrel in February to above $110. And the yen is weak, at about 157 to the dollar, so each dollar of oil costs more in yen. This is imported inflation in its clearest form.

Where it sits in the chain

This is the third step of an oil shock: trade balances and currencies. A bigger import bill means Japan needs more dollars, which puts pressure on the yen, which makes imports dearer again. The Bank of Japan raised its policy rate to 1.25% in September, a 31-year high, partly to support the yen. Higher rates make yen assets more attractive to hold.

So far, the effect on prices has been moderate. Japan’s inflation was 1.9% in August, below the 2% target.

What to watch

• The Bank of Japan’s meeting next week, and whether it signals another rise.
• The yen. A sharp fall would raise import costs further and could prompt the government to intervene in currency markets.