News Column

Japan's current account surplus marks record low in FY 2013

May 11, 2014

Tomoyuki Tachikawa

Japan's current account surplus in fiscal 2013 was the smallest since comparable data became available in fiscal 1985, as soaring fossil fuel imports drove up its trade deficit amid the prolonged halt of nuclear power plants, government data showed Monday.

A record goods trade deficit of 10.86 trillion yen brought the country's annual current account surplus -- one of the widest gauges of international trade -- to 789.9 billion yen in the last business year, down 81.3 percent from the previous year, the Finance Ministry said in a preliminary report.

The results sparked fears that the world's third-biggest economy may face a constant current account deficit down the road, which would cause a sell-off of Japanese government debt and a sharp rise in the country's long-term interest rates, hurting the fiscal and economic situation.

The current account surplus shrank for the third straight year, after the devastating March 2011 quake-tsunami disaster hit northeastern Japan and triggered an emergency at the Fukushima Daiichi nuclear power plant, the ministry said.

In fiscal 2013 through March 31 this year, exports climbed 12.2 percent to 69.80 trillion yen on the back of the yen's depreciation, but imports surged 19.6 percent to 80.67 trillion yen. The annual goods trade balance -- exports minus imports -- consequently fell into the red for third years in a row.

Imports of crude oil jumped 18.4 percent and liquefied natural gas increased 18.2 percent, while the Japanese currency slid against the U.S. dollar by 20.8 percent and the euro by 25.7 percent on year on an average basis.

A falling yen usually supports exports by making Japanese products cheaper abroad and boosts the value of overseas revenues in yen terms, but it drives up import prices. Japan depends on imports for more than 90 percent of its energy needs.

Some analysts say Japan's current account balance is likely to improve in the near future, as domestic demand is expected to wane in the wake of the 3-percentage-point consumption tax hike to 8 percent from April 1.

The first tax increase in 17 years will undermine consumer spending and production at home, in turn preventing imports from expanding further, said Koya Miyamae, senior economist at SMBC Nikko Securities Inc.

Others, however, said Japan could become a nation with a chronic current account deficit, given that exports may not grow with some emerging economies slowing owing to capital outflows following the U.S. Federal Reserve's tapering of its massive monetary stimulus.

Should Japan's current account balance deteriorate and the government be compelled to rely on other countries for its financial funds, concern would grow over the outlook for the sovereign bond market and the value of the debt could plunge.

This would "have an undesirable effect" on Japan's long-term interest rates, as they would move inversely to government debt prices, said Hideo Kumano, executive chief economist at the Dai-ichi Life Research Institute.

A spike in long-term interest rates would create a vicious cycle, where expansion in the government's interest payments on its bonds would hamper fiscal consolidation, prodding more investors to sell bonds and pushing up the interest rates.

Prime Minister Shinzo Abe's government would be "urged to speed up economic reforms at a faster pace than in the past" to restore its fiscal health, already the worst among major industrialized economies, Kumano said.

So far, more than 90 percent of Japanese government bonds have been smoothly financed domestically, as the Bank of Japan has pledged to buy a huge number of the bonds in an attempt to keep long-term interest rates low to stimulate the economy.

Last fiscal year, the surplus in the primary income account, which reflects how much Japan earns from its foreign investments, gained 14.0 percent from the previous year to a record high of 16.66 trillion yen.

It was the fifth straight year of rise in the income account, buoyed by higher dividends and profits from securities investments due largely to the weaker yen, the ministry said.

The services sector, including passenger transportation and cargo shipping, registered a deficit of 3.58 trillion yen last fiscal year. The deficit became smaller from fiscal 2012 as the number of foreign travelers to Japan increased.

In March alone, Japan posted a current account surplus of 116.4 billion yen, down 90.9 percent from a year earlier.

From January, the Finance Ministry and the BOJ calculate data related to the country's current account balance based on the sixth edition of the International Monetary Fund's Balance of Payments and International Investment Position Manual.

Some figures previously released by Japan's financial authorities, such as trade and service balances, were accordingly revised.

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Source: Japan Economic Newswire

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