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Current account runs up biggest deficit ever

Kyodo

Japan posted a record current account deficit in January, marking four straight months of red ink for the first time as soaring demand for energy and the weakening of the yen triggered a surge in import costs, the Finance Ministry said Monday in a preliminary report.

The deficit in the balance, one of the widest gauges of international trade for a country, stood at ¥1.589 trillion ($15.427 billion), the largest since comparable data became available in 1985, highlighting Japan’s diminishing ability to earn money from abroad.

Imports jumped 30.3 percent from a year earlier to ¥7.862 trillion against a backdrop of rising imports of crude oil, while exports climbed 16.7 percent to ¥5.517 trillion with the yen weakening, the ministry said.

The balance of goods trade marked a record deficit of ¥2.345 trillion.

Given that Japan logged a cumulative current account surplus of only around ¥130 billion from April last year to January, the nation’s current account balance may turn negative in fiscal 2013 through March for the first time in 33 years, analysts said.

Should concern intensify that the economy will become saddled with a persisting current account deficit, the yen is likely to plunge, causing economic and price conditions to deteriorate, they added.

“It is necessary to build a strong economy to avoid a sharp change in the current account balance” by taking measures such as capitalizing on growth in emerging Asian economies, Prime Minister Shinzo Abe said during a Diet session Monday.

The deficit has been widening amid strong demand for gas and oil from utilities falling back on fossil fuel-based power generation to offset the loss of all nuclear power caused by the nationwide idling of reactors since the Fukushima disaster.

On top of that, the Bank of Japan’s aggressive monetary easing has driven down the yen, which will make it hard for the time being for the trade balance to move into the black.

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

In January, the yen had dropped by 16.6 percent versus the dollar on year to 103.94 on an average basis, and by 19.4 percent against the euro to 141.50, it said.

With current account deficits, the Japanese currency will face further downward pressure, as importers’ yen selling to buy goods and services from abroad will outpace exporters’ yen buying to repatriate their overseas earnings.

A plummet in the yen would bring about high cost-push inflation, said Kenji Yumoto, vice chairman of Japan Research Institute, adding, “It is clear that such inflation is not favorable to consumers.”

A chronic current account deficit will also hurt Japan’s fiscal house, experts said.

If speculation grows that Japan’s current account balance will continue to worsen, investors would start to believe the government will be compelled to sell its bonds to foreign buyers and there would be a rush to sell them amid fears about the outlook for the sovereign bond market, they said.

Long-term bonds’ interest rates move inversely to their prices. A spike in the rates would create a vicious cycle where expansion in the government’s interest payments on its bonds will hamper efforts to restore Japan’s finances. That would prod more investors to dump government bonds, raising interest rates further.

Japan’s fiscal health is the worst among major industrialized economies, with public debt equivalent to more than 200 percent of gross domestic product. Central government debt topped ¥1.000 quadrillion for the first time ever last year.

With the current account deficits increasing, Abe has expressed eagerness to restart nuclear power stations, saying during the same Diet session that it is important to establish a responsible energy policy.

In January, the surplus in the income account, which reflects how much Japan earns from its foreign investments, rose 8.6 percent on year to ¥1.337 trillion, buoyed by higher dividends and profits from securities investments due in part to the yen’s slide.

The services sector, including passenger transportation and cargo shipping, registered a deficit of ¥467.4 billion.

Starting in January, the Finance Ministry and the BOJ have been calculating 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, have been accordingly revised.