Can Chinese Demand Keep Japan Out of Recession?

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Written by Ilya Spivak, Currency Analyst

Japan's Merchandise Trade Balance saw the surplus shrink further in July, registering at 91.1 billion yen versus 235 billion expected and 138.6 billion in the preceding month. The contraction in the trade surplus came courtesy of a spike in imports: inbound shipments rose at the fastest pace in two years at an annualized rate of 18.2% on higher oil prices. However, exports surged 8.1% having fallen -1.8% in the last release, the largest drop in seven years.

Exports to Asia surged 12.7%, with China leading the way seeing outbound shipments rise 16.8%. By comparison, exports to the EU rose just 4.1% and those to the US fell -11.5%. This comes on the heels of yesterday's JPMorgan report saying China will introduce a fiscal stimulus package in the near term.

All this adds up to very good news for Japan: the external sector is a major driver of growth for the world's second largest economy, which inched closer to recession having seen GDP shrink -0.6% in the second quarter. The top question going forward will be whether Japan can sustain such favorable trade results as the world economy decelerates. Slowing global demand will not leave China unscathed, and it remains to be seen if their hunger for Japanese goods will remain as robust after the Olympic Games are over.

From a technical perspective, we see USDJPY show a strongly bearish Three Inside Down bearish reversal candlestick formation following a false break of resistance at 110.15, the 76.4% Fibonacci retracement of the 12/27/07-03/17/08 selloff. This points to a period of Yen strength in the near term, with USDJPY eyeing support at 107.37 at the intersection of an upward-sloping trend line and the 61.8% retracement level.