Research Briefing | Feb 28, 2022

Impact of falling terms of trade on Japan’s growth and deflation

report - Japan - Impact of falling terms of trade on growth and deflationJapan’s terms of trade, which saw steady deterioration until the mid 2010s, have since trended sideways, albeit with substantial fluctuation. The decline reflects Japan’s extreme dependence on imported resources and a drop in export prices amid intensifying global competition.

What you will learn:

  • Deteriorating terms of trade has been one of the sources of Japan’s long-term growth stagnation and disinflation. Worsening trading gains have steadily driven down real gross domestic income (GDI) further from already stagnant gross domestic production (GDP).
  • From 2005 to 2012, the terms of trade drove down a GDP deflator sharply, delaying a return to positive growth even after the economy had completed the balance-sheet adjustment following the bursting of Japan’s bubbles.
  • GDI has been squeezed again due to last year’s commodity price rise, and a GDP deflator continued to decline in 2021. Should commodity prices remain high, the risk of Japan falling into a deflationary trap will become elevated.

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