Trade and Balance of Payments
Trade balance, current account, capital flows, and their impact on JGBs
Trade and Balance of Payments
Japan’s external accounts profoundly affect JGB markets through multiple channels:
- JPY exchange rate: Trade flows drive currency movements, impacting import costs and inflation
- Foreign JGB demand: Current account surplus → Foreign investors need JPY assets
- Inflation transmission: Weak JPY → Higher import prices → CPI inflation
- Fiscal sustainability: Trade surplus improves government finances → Lower JGB supply pressure
Japan has historically been a major creditor nation with persistent current account surpluses, but structural shifts (energy imports, aging demographics) are changing these dynamics.
Japan’s Structural Trade Position: Foundation for Understanding
Before diving into monthly data, understanding Japan’s structural trade characteristics is essential for interpreting economic indicators.
Japan as a Trading Nation: The Fundamentals
Trade dependency ratio: (Exports + Imports) / GDP = ~35%
- Compare: US ~25%, China ~35%, Germany ~90%
- Japan is moderately trade-dependent, but trade structure matters enormously
Key structural features:
1. Manufacturing Export Powerhouse
- Automobiles: #1 global exporter (Toyota, Honda, Nissan)
- Machinery: Industrial robots, semiconductor equipment
- Electronics: Components, not finished goods (shifted to China/Korea)
- Chemicals: Advanced materials, pharmaceuticals
2. Critical Energy Importer
- Oil: 100% imported (zero domestic production post-2010s)
- Natural gas: 97% imported (post-Fukushima nuclear shutdown)
- Coal: 99% imported
- Energy self-sufficiency: ~12% (among lowest in developed world)
3. Global Supply Chain Integrator
- Exports intermediate goods (parts, components) to Asia
- Asia assembles finished products
- Final goods exported to US/Europe
- Japan captures high-value-added production
The Fukushima Turning Point (2011)
Before March 2011:
- Nuclear power: 30% of electricity generation
- Energy imports: ¥15-20 trillion annually
- Trade balance: Consistent surplus (+¥5-10T)
After March 2011 (earthquake + tsunami + nuclear crisis):
- Nuclear power: Shut down entirely (0% by 2013)
- LNG imports: Surged +40 million tons annually
- Energy imports: ¥25-35 trillion annually
- Trade balance: Shifted to deficit (2011-2015)
Long-term impact:
- Japan structurally more vulnerable to commodity price shocks
- Trade balance now swings dramatically with oil/LNG prices
- Renewable energy push (solar, wind) gradually reducing dependence (target 15% self-sufficiency by 2030)
Current State (2024-2025)
Nuclear restarts: ~10 reactors back online (out of 54 pre-Fukushima)
- Provides ~6% of electricity (vs. 30% previously)
- Political opposition limits further restarts
- Energy independence remains elusive
Export competitiveness factors:
| Factor | Impact on Exports | Current State |
|---|---|---|
| JPY exchange rate | Weak JPY = competitive | ¥145-150 (supportive for exports) |
| Chinese demand | 22% of exports go to China | Slowing (real estate crisis) |
| US economy | 20% of exports | Strong (2024-2025) |
| Semiconductor cycle | Equipment exports sensitive | Recovery phase (2024+) |
| EV transition | Threat to combustion engine dominance | Toyota adapting slowly |
Import structure:
| Category | Share of Imports | Price Sensitivity |
|---|---|---|
| Energy (oil, LNG, coal) | 25-30% | Extreme (1.0 elasticity to commodity prices) |
| Machinery | 15% | Low (capital goods, essential) |
| Food | 10% | Low (necessity) |
| Raw materials | 10% | Medium (industrial inputs) |
| Manufactured goods | 35% | Medium (consumer goods, electronics) |
Critical insight for JGB traders: Japan’s trade balance is 70% determined by energy prices and JPY exchange rate, only 30% by export competitiveness.
Trade Balance: Exports vs. Imports
Published by: Ministry of Finance (MOF)
Release date: ~20th of each month (for prior month)
What it measures: Value of goods exported minus goods imported
\[\text{Trade Balance} = \text{Exports} - \text{Imports}\]Components
Exports (~¥9 trillion/month = $60B):
- Automobiles and parts (20%)
- Machinery and equipment (18%)
- Electrical machinery (12%)
- Chemicals and pharmaceuticals (10%)
- Iron and steel (5%)
- Other (35%)
Imports (~¥10 trillion/month = $67B):
- Energy (crude oil, LNG, coal): 25-30%
- Machinery and equipment (15%)
- Foodstuffs (10%)
- Raw materials (10%)
- Chemicals (8%)
- Other (30%)
Historical Trade Balance Dynamics
| Period | Trade Balance | Key Drivers |
|---|---|---|
| 1980s-2000s | Surplus (+¥5-10T annually) | Export powerhouse, cheap oil |
| 2011-2015 | Deficit (-¥5-12T annually) | Fukushima → Nuclear shutdown → LNG imports surge |
| 2016-2019 | Modest surplus (+¥1-3T) | Oil prices moderate, exports recover |
| 2020-2021 | Deficit (-¥2T) | COVID export collapse, energy imports stable |
| 2022-2023 | Large deficit (-¥20T in 2022!) | Energy crisis (Ukraine war), weak JPY |
| 2024-2025 | Returning to surplus (+¥5T projected) | Exports recover, energy prices normalize |
Critical insight: Japan’s trade balance is highly sensitive to energy prices and JPY exchange rate.
Energy Dependency and Trade Vulnerability
Japan’s energy self-sufficiency: ~12% (imports 88% of energy needs)
Energy import bill:
- $100 oil + ¥150/USD → ¥40 trillion annual energy cost
- $60 oil + ¥140/USD → ¥25 trillion
- ¥15 trillion swing from energy/FX alone!
Post-Fukushima shift (2011):
- Nuclear power: 30% of electricity (pre-2011) → 6% (2024)
- LNG imports: +40 million tons annually
- Made Japan structurally more vulnerable to commodity shocks
JGB market impact:
| Trade Balance Surprise | Signal | Typical JGB Reaction |
|---|---|---|
| Larger deficit than expected | Weak exports or expensive imports → Growth/inflation concerns vary | -2 to +3bp (ambiguous) |
| Surplus beats expectations | Export strength → GDP growth | +3 to +5bp (yields rise) |
| Chronic deficit (6+ months) | Current account concerns → Risk premium | +5 to +10bp cumulative |
Example (January 2023):
- Trade deficit: -¥3.5 trillion (vs -¥2.8T expected)
- Driven by: Energy costs (oil $85, LNG $30/mmbtu)
- Market reaction: 10Y JGB +4bp (inflation concern from import costs)
Current Account Balance: The Broader Picture
Published by: MOF
Release date: ~10th of each month (for 2 months prior)
What it measures: Comprehensive flow of funds between Japan and rest of world
\[\text{Current Account} = \text{Trade Balance} + \text{Services} + \text{Primary Income} + \text{Secondary Income}\]Four Components Explained
1. Trade Balance (Goods): Already covered above (~-¥1T to +¥0.5T monthly in 2024)
2. Services Balance: Trade in intangibles (~-¥0.3T monthly)
- Travel: Inbound tourism (+¥0.5T) minus outbound spending (-¥0.2T) = net positive post-COVID
- Transportation: Shipping services (positive)
- Intellectual property: Patent/trademark fees (small negative)
- Financial services: Commissions, insurance
3. Primary Income Balance: THE DOMINANT COMPONENT (+¥2.5T to +3T monthly)
- Investment income from overseas assets: Japan’s enormous foreign asset holdings (¥500T+) generate steady returns
- Corporate earnings from overseas subsidiaries
- Interest on foreign bonds
- Dividends from foreign equities
- Why so large? Japan ran trade surpluses for decades → Accumulated massive overseas wealth → Now earns income even when trade balance negative!
- This is Japan’s financial “superpower” status
4. Secondary Income Balance: Transfers (~-¥0.2T monthly)
- Foreign aid, remittances, pensions
- Always small negative
Historical Current Account
| Year | Current Account | Trade Balance | Primary Income | Key Driver |
|---|---|---|---|---|
| 2010 | +¥18T | +¥7T | +¥14T | Strong exports + investment income |
| 2014 | +¥3T | -¥11T | +¥18T | Fukushima trade shock, saved by income! |
| 2019 | +¥20T | +¥1T | +¥21T | Stable surplus era |
| 2022 | +¥11T | -¥20T | +¥35T | Energy crisis, income keeps surplus |
| 2024 | +¥18T (est.) | +¥5T | +¥30T | Exports recover, income steady |
Critical insight: Japan’s current account remains in persistent surplus (~¥15-20T annually) despite trade deficits because of massive primary income flows.
Why Current Account Matters MORE Than Trade Balance
For JGB markets:
- Fiscal sustainability: Current account surplus → Japan doesn’t need foreign capital to fund deficits → Lower risk premium
- JPY stability: Surplus = net demand for JPY → Supports currency → Lower imported inflation
- Foreign JGB demand: Surplus generates JPY that needs to be invested domestically → Buyers for JGBs
Scenario analysis:
| Current Account Trend | Market Signal | JGB Impact |
|---|---|---|
| Persistent surplus (current state) | Japan remains creditor nation, fiscally independent | Baseline (yields stable) |
| Surplus narrowing (<¥10T annually) | Structural concern, demographics draining savings | +5 to +10bp (risk premium) |
| Deficit (hypothetical) | MAJOR SHIFT: Japan becomes debtor nation | +30 to +50bp (crisis-level repricing) |
Example (September 2024):
- Current account: +¥2.9 trillion (vs +¥2.2T expected)
- Driven by: Primary income surge (¥3.5T from overseas dividends, USD strength)
- Market reaction: 10Y JGB -3bp (reassurance on external sustainability)
Capital Flows and Foreign JGB Demand
Published by: MOF weekly, BOJ quarterly
Release: MOF portfolio flows weekly (Thursday for prior week), BOJ Flow of Funds quarterly
What it measures: Cross-border investment in bonds, equities, and other assets
Foreign Investors in JGBs
Foreign holdings of JGBs: ~¥140 trillion (14% of outstanding JGBs)
Who are the foreign holders?
- Central banks: Official reserves (China, Taiwan, etc.)
- Sovereign wealth funds: Long-term strategic allocations
- Hedge funds: Relative value, carry trades, macro strategies
- Asset managers: Duration exposure, diversification
- Banks: Liquidity management, regulatory capital
Why do foreigners buy JGBs?
- Safe haven: AAA-rated (Moody’s/S&P), liquid, G7 sovereign
- Diversification: Low correlation with US/European bonds
- Carry trade funding: Borrow JPY at low rates → Invest in higher-yielding assets
- Currency views: Buy JGBs + hedge JPY risk → Earn covered yield
Weekly Portfolio Flows (MOF Data)
High-frequency indicator of foreign sentiment
Example week (October 3-9, 2024):
- Foreigners bought: ¥+800 billion JGBs (net)
- Foreigners sold: ¥-200 billion Japanese equities (net)
Interpretation:
- Large buying (>¥500B weekly) → Bullish on JGBs → Yields fall
- Large selling (>-¥500B weekly) → Bearish on JGBs → Yields rise
- Consecutive flows (4+ weeks same direction) → Trend forming
JGB Market Reactions to Foreign Flows
| Weekly Foreign Flow | Signal | Typical 10Y JGB Reaction |
|---|---|---|
| Heavy buying (+¥1T+) | Risk-off or JPY bullish | -5 to -8bp |
| Moderate buying (+¥300-700B) | Steady demand | -2 to -3bp |
| Neutral (±¥200B) | No strong view | Flat |
| Moderate selling (-¥300-700B) | Profit-taking or rotation | +2 to +3bp |
| Heavy selling (-¥1T+) | Unwinding positions, risk-on | +5 to +8bp |
Critical weeks in recent history:
March 2020 (COVID crisis):
- Foreigners sold -¥5 trillion JGBs (4 weeks)
- Why? USD liquidity crisis → Sold everything for cash
- 10Y JGB: 0.00% → 0.08% (+8bp)
- BOJ response: Unlimited QE announcement → Yields back to 0%
April 2024 (YCC exit aftermath):
- Foreigners bought +¥3.2 trillion JGBs (5 weeks)
- Why? Attractive yields finally (10Y at 0.85%), BOJ normalizing
- 10Y JGB: 0.85% → 0.73% (-12bp from foreign demand)
Hedging Costs and Covered Interest Parity
For foreign investors, currency hedging is critical.
Unhedged JGB return (for USD investor):
\[\text{Total Return} = \text{JGB Yield} + \text{JPY Appreciation/Depreciation}\]Example:
- Buy 10Y JGB at 1.00% yield
- If JPY strengthens 145 → 140 (3.4% appreciation) → Total return = +4.4%
- If JPY weakens 145 → 150 (3.3% depreciation) → Total return = -2.3%
Hedged JGB return:
\[\text{Hedged Return} = \text{JGB Yield} - \text{JPY Hedging Cost}\]Hedging cost = USD-JPY interest rate differential (approximately)
Example (October 2024):
- 10Y JGB yield: 0.95%
- 10Y US Treasury: 4.20%
- Hedging cost: ~3.25% (12-month forward)
- Hedged return: 0.95% - 3.25% = -2.30% ⚠️ NEGATIVE!
Why foreign investors still buy JGBs:
- Unhedged exposure: Bet on JPY appreciation (140-145 range expected by some)
- Tactical hedging: Hedge only 50-70% of position
- Diversification: Low correlation with US bonds worth negative carry
- Reserves management: Central banks don’t focus on profit
Impact on flows:
| USD-JPY Rate Differential | Hedging Cost | Foreign JGB Attractiveness |
|---|---|---|
| <1% (pre-2022 era) | ~0.5-0.8% | Very attractive hedged |
| 2-3% (2023-early 2024) | ~2.0-2.5% | Marginally attractive |
| >3% (late 2024) | ~3.0-3.5% | Unattractive hedged, need JPY view |
**When hedging costs spike (>3%), foreign demand weakens → JGB yields rise.
JPY Exchange Rate Impact on JGBs
The JPY-JGB relationship is complex and non-linear.
Channel 1: Inflation Transmission
Weak JPY (e.g., ¥150/USD) → Higher import prices → CPI inflation → BOJ tightening pressure → JGB yields rise
\[\text{Import Price Index} \propto \frac{1}{\text{JPY/USD}}\]Example calculation:
- Crude oil: $80/barrel
- At ¥140/USD: ¥11,200 per barrel
- At ¥150/USD: ¥12,000 per barrel
- 7% increase in JPY-denominated oil costs
Historical relationship:
| Period | USD/JPY | Import Price Inflation | JGB 10Y Yield |
|---|---|---|---|
| 2020-2021 | ¥105-110 | -2% to 0% | 0.00-0.05% |
| 2022 H1 | ¥115-130 | +8% to +12% | 0.20-0.25% |
| 2022 H2 | ¥130-150 | +15% to +20% | 0.25% (capped by BOJ) |
| 2023 | ¥130-150 | +10% to +12% | 0.40-0.60% |
| 2024 | ¥140-150 | +6% to +8% | 0.70-1.00% |
JGB market rule of thumb:
- JPY weakens 5 yen (e.g., 140→145) → Import inflation +3-4% → Adds +0.2-0.3% to CPI expectations → 10Y JGB yields +8-12bp over 3 months
Channel 2: Safe Haven Flows
Risk-off environment → Investors buy JPY + JGBs simultaneously → JPY strengthens + yields fall
Example (March 2020 COVID shock):
- Week 1: USD/JPY 110 → 102 (JPY +7.3%), 10Y JGB 0.05% → -0.05% (-10bp)
- Correlation: -0.80 (strong negative = JPY up, yields down)
Example (August 2024 carry trade unwind):
- Week of Aug 5: USD/JPY 153 → 142 (JPY +7.2%), 10Y JGB 0.95% → 0.78% (-17bp)
- Massive deleveraging: Funds borrowed JPY to buy Mexican/Brazilian bonds → Forced to repay JPY → Buy JGBs
Channel 3: Relative Value
Strong JPY makes Japanese exports less competitive → Growth concerns → Lower JGB yields
Example (Yen appreciation scenario):
- USD/JPY strengthens from 150 → 135 over 6 months
- Toyota profit margin compressed: Cars priced in USD, costs in JPY
- Export volume growth: +5% (prior quarter) → +1% (current quarter)
- GDP forecast: +1.5% → +0.8%
- 10Y JGB: 0.90% → 0.65% (-25bp on growth downgrade)
Repatriation Flows: The Fiscal Year-End Effect
Japan’s fiscal year: April 1 - March 31
Japanese corporations and institutional investors repatriate overseas earnings in March for fiscal year-end accounting.
The March Phenomenon
Typical pattern:
- January-February: JPY weakens (USD/JPY rises), foreign flows outward
- Mid-March: JPY strengthens sharply (USD/JPY drops 3-5 yen in 2-3 weeks)
- April: Flows reverse, JPY weakens again
Why it happens:
- Book-closing: Companies need JPY on balance sheet for March 31 snapshot
- Dividend repatriation: Foreign subsidiaries send profits home
- Portfolio rebalancing: Pension funds adjust allocations
Scale: Estimated ¥5-10 trillion flows back to Japan in March
JGB Market Impact
March repatriation → Demand for JPY-denominated assets → JGB buying
| March Period | USD/JPY Move | 10Y JGB Move | Driving Force |
|---|---|---|---|
| March 2020 | 112 → 107 (-4.5%) | 0.05% → -0.05% (-10bp) | Repatriation + COVID |
| March 2021 | 109 → 108 (-0.9%) | 0.10% → 0.08% (-2bp) | Modest year |
| March 2022 | 115 → 121 (+5.2%) | 0.20% → 0.22% (+2bp) | Ukraine war override |
| March 2023 | 137 → 130 (-5.1%) | 0.35% → 0.25% (-10bp) | Strong repatriation |
| March 2024 | 150 → 146 (-2.7%) | 0.75% → 0.70% (-5bp) | Moderate (BOJ exit noise) |
Trading strategy (used by hedge funds):
- Late February: Long JPY (short USD/JPY), long JGBs
- Mid-March: Unwind as repatriation peaks
- Typical P&L: 2-3% on FX, 5-8bp on JGBs
Important caveat: Works most years but not guaranteed—major geopolitical events (Ukraine 2022) can override seasonal patterns.
Key Takeaways
-
Trade balance is energy-dependent: Japan imports 88% of energy needs → Commodity prices dominate trade flows → Oil/LNG prices matter more than export strength
-
Current account surplus persists: Despite occasional trade deficits, primary income (+¥30T annually) from overseas investments keeps Japan in structural surplus → Fiscal independence → Lower JGB risk premium
-
Foreign JGB holdings matter (14% of market): Weekly MOF flows signal foreign sentiment → +¥1T buying weeks = yields -5 to -8bp → Consecutive flows create trends
-
Hedging costs kill demand: When USD-JPY rate differential >3%, hedged JGB returns go negative → Foreign demand weakens unless investors have bullish JPY view
-
JPY is transmission mechanism: Weak JPY → Import inflation → BOJ tightening pressure → JGB yields rise (non-linear, ~8-12bp per 5 yen depreciation)
-
March repatriation is real: Fiscal year-end flows (¥5-10T) strengthen JPY and support JGBs mid-March → Tradeable pattern, but geopolitical shocks override
-
Safe haven flows dominate in crisis: Risk-off → JPY+JGB buying simultaneous → August 2024 carry unwind: JPY +7%, yields -17bp in one week
Conclusion
Japan’s external accounts—particularly the persistent current account surplus driven by investment income—provide fundamental support for JGB markets by ensuring fiscal independence and reducing reliance on foreign capital. However, short-term dynamics are driven by:
- Energy prices and trade volatility affecting inflation expectations
- Foreign investor flows responding to hedging costs and relative value
- JPY exchange rate transmitting global shocks into domestic inflation
- Seasonal repatriation creating predictable March patterns
For JGB traders, monitoring weekly MOF portfolio flows, USD-JPY levels relative to 145-150 range, and current account trends provides critical real-time signals of supply/demand shifts. The August 2024 carry trade unwind demonstrated how quickly external flows can move JGB yields when global risk appetite shifts dramatically.
Understanding trade and capital flows is essential for anticipating BOJ policy responses to imported inflation and gauging foreign participation in JGB auctions.