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Japan logs largest six-month current account deficit ever

Kyodo

Japan logged a current account deficit of ¥507.5 billion in the first half, the biggest for any six-month period on record, government data showed Friday, underscoring its diminishing ability to earn money abroad.

It was also the first time since officials started compiling comparable data in 1985 for the current account balance — one of the widest gauges of international trade for a nation — to slip into the red for January-June, the Finance Ministry said.

Imports jumped 14.7 percent from a year earlier to ¥41.88 trillion on rising imports of liquefied natural gas and crude oil, while exports climbed only 8.1 percent to ¥35.76 trillion, sustained by the weakened yen, the ministry said in the preliminary report.

The balance of goods trade marked a record deficit of ¥6.11 trillion.

Fears are growing that Japan could face a constant current account deficit in the near future — a situation that could ultimately damage Japan’s already dicey economic and fiscal situation.

The current account balance has shown little sign of improving in the near future amid ongoing strong demand for gas and oil from utilities that can no longer use nuclear power. And prices for fossil fuels have been soaring, fueling inflation.

Around 95 percent of Japanese government bonds have been financed smoothly at home so far, as the Bank of Japan has pledged to buy massive amounts of debt to keep long-term interest rates low and stimulate the economy.

But if the current account balance deteriorates further, the government may be compelled to sell its bonds to foreign investors seeking higher yields. Under those circumstances, selling pressure on JGBs could grow and intensify concern over the outlook for the sovereign bond market.

Bond prices move inversely to long-term interest rates. A spike in rates resulting from price plunges would trigger a vicious cycle where expansion in the government’s interest payments on its bonds would “hamper efforts” to improve the government’s dire fiscal health, prompting more investors to sell and push up interest rates even further.

Some analysts, however, say the current account deficit is likely to narrow in the long run, as the consumption tax hike to 8 percent in April might continue to choke domestic demand, preventing imports from expanding. And another tax hike is in the pipeline for 2015.

“Exports are also expected to grow on the back of a recovery in the global economy. With the trade deficit shrinking, Japan’s current account balance may improve down the road,” said Masahiko Hashimoto, an economist at the Daiwa Institute of Research.

During the January-June period, the surplus in the primary income account — which reflects how much Japan earns from its foreign investments — dropped 4.2 percent to ¥8.32 trillion as dividends from foreign direct investment decreased.

The services sector, including passenger transportation and cargo shipping, posted a deficit of ¥1.58 trillion.

The travel balance — which compares spending by visitors to Japan with that by Japanese overseas — registered a record surplus of ¥873.4 billion.

For six months through June, the yen slid against the dollar by 7.1 percent year on year to 102.45 on an average basis, and by 11.8 percent against the euro to 140.40.

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

For June alone, Japan logged its first current account deficit in five months, standing at ¥399.1 billion.