Morgan Stanley - Why the Yen Should Strengthen

Introduction: Trade Balance Collapse Will Likely Reverse
The drop of the Japanese trade surplus has been breathtaking. Japan has run a seasonally adjusted trade deficit since July 2008, a string of deficits not seen for nearly 30 years. Moreover, this decline of the trade surplus has occurred against the background of falling oil prices.
The collapse of global demand and consequent collapse of exports are widely seen as the key source of Japan’s trade balance drop. Indeed, seasonally adjusted exports were running at over JPY7 trillion per month through most of 2007 to mid-2008, but recently have dropped to only about JPY4 trillion. Thus, it is understandable to attribute the drop of the trade surplus to exports, and thus to believe that the yen will be weak until the global economy recovers. However, the full story is more complicated, and has a very different implication for the yen exchange rate.

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