Japan may be strongly urged by its Group of 20 counterparts to push forward with structural reforms in the near future as fears grow that it will soon become a country with a constant current account deficit.
At a two-day meeting of the G-20 finance chiefs ending Sunday in Sydney, some emerging economies were called on to reduce their current account deficits, which have triggered a selloff in their currencies and spread volatility in markets around the world.
If the current account deficit widens while its trade deficit expands, that could raise concern that Japan cannot cover its fiscal deficit with domestic assets alone, possibly sending Japanese government bond prices into a tailspin — and their yields into a climb — disrupting global financial markets.
The nation’s fiscal health is already the worst out of all the major developed economies and central government debt has topped a whopping ¥1 quadrillion.
The impact on the world economy of a collapse in Japan’s sovereign debt market would be much bigger than a repeat of the Asian currency crisis of the late 1990s.
Before the worst-case scenario takes place, the G-20 members would put intense pressure on Prime Minister Shinzo Abe’s government to bolster the global competitiveness of Japanese companies by following through on his economic growth strategy — the highly touted third arrow of his “Abenomics” deflation-busting strategy, some analysts said.
Tokyo may also be asked to stop trying to strengthen exports by weakening the yen, because its decline under the Bank of Japan’s drastic monetary easing tactics has driven up import costs, expanding the trade deficit, they said.
“There is always a risk that Japanese government bonds will plunge,” a source familiar with the G-20’s behind-the-scenes talks said on condition of anonymity.
“Many G-20 nations are interested in whether Japan can carry out a growth strategy centering on deregulation and incentives for innovation” after promoting aggressive credit easing and massive fiscal spending, the source said.
Since it was launched in December 2012, Abe’s administration has apparently taken measures that could help push down the value of the yen, believing they would improve the profitability of export-oriented manufacturers, such as Toyota Motor Corp. and Sony Corp., and in turn shore up the economy.
A falling yen usually props up exports by making Japanese products cheaper abroad and increases the value of overseas revenue in yen terms. But the yen’s slide has also jacked up import prices at a time when demand is soaring for liquefied natural gas and crude oil to replace the loss of nuclear power from the meltdowns at the Fukushima No. 1 complex.
Since exports have grown at a slower pace than the government expected due in part to a slowdown in emerging economies, the trade balance of resource-poor Japan has been sharply deteriorating.
Japan posted a record trade deficit of ¥11.47 trillion in 2013, up 65.3 percent from the previous year.
The country’s current account balance posted a deficit for the third straight month in December, as a surplus in income account, which reflects how much Japan earns from its foreign investments, has become smaller than trade and other deficits.
“Japan is no longer an export powerhouse, and Japan’s power to obtain money from abroad has been clearly flagging,” said Masanobu Ishikawa, general manager of spot foreign exchange at Tokyo Forex & Ueda Harlow.
“The possibility is very high that Japan will turn into a nation with chronic twin deficits in the budget and current account, like the United States,” he said.
“The shrinking current account surplus is credit negative for Japan,” Moody’s Investors Service Inc. warned in a report released earlier this month.
“The decline in the current account surplus means that Japan’s savings-investment balance is closer to reaching a tipping point in which national savings are inadequate to finance domestic credit needs, creating a dependency on external debt,” the U.S. credit agency said.
“This would ultimately have negative consequences on government funding costs, and the sustainability of the very large stock of government debt” at more than 200 percent of gross domestic product.
To reduce its current account deficit, Japan needs to make every effort to boost exports without relying heavily on the yen’s decrease, experts said.
“It is important that Japan will improve the export environment by actively joining regional trade pacts such as the Trans-Pacific Partnership deal and will develop new export-oriented industries,” Akira Kojima, an adviser for the Japan Center for Economic Research, said in his column on its website.
“The task of Abenomics is to consider how to foster new industries that can ensure international competitiveness, and the key is deregulation, which will draw out growth potential of the private sector,” Kojima said.
“Foreign people have turned their attention to the progress of the third arrow.”