Japan’s new economic realities

Japan’s current account surplus in 2013 is at its lowest since the mid-1980s as trade deficits have soared for three years in a row to a record high. Despite the yen’s roughly 20 percent fall against the dollar, growth in the nation’s exports remain sluggish, while the weak yen has pushed up the cost of fuel imports, which increased as nuclear power plants went offline after the 2011 Fukushima nuclear crisis.

These trade and current account figures represent structural changes in the Japanese economy, which in the past used to be driven by robust exports. Large trade deficits and shrinking current account surpluses appear to be the trend for years to come and the government needs policy responses, including a review of the nation’s growth strategy, as well as speeding up fiscal reconstruction to brace for the possibility of Japan posting current account deficits on a long-term basis.

The surplus in the current account — the broadest measure of the country’s trade with the rest of the world including trade in goods and services, tourism and returns on foreign investment — stood at ¥3.06 trillion in 2013, a decline of more than 30 percent from the previous year. A 9 percent gain in exports was overwhelmed by a 15 percent surge in imports.

A 16 percent increase in the income account surplus (covering such items as interest and investment yields earned abroad) was not enough to halt the steep fall in the current account surplus.

The yen’s sharp fall under the aggressive monetary easing since Prime Minister Shinzo Abe took office has boosted the profitability of large export-oriented firms, but the exports have not increased as expected. That’s because many Japanese manufacturers have shifted their production bases abroad after years of a strong yen, and the electronics makers that once drove the nation’s exports along with automakers are losing out to overseas rivals.

According to a think-tank analysis, ¥7 trillion of the ¥11.5 trillion trade deficit for 2013 is attributable to the hollowing out of domestic industries and their declining international competitiveness, while the high costs of oil and gas imports account for ¥4 trillion.

It must be noted that exports depend more on demand in overseas markets than on the yen’s exchange rate.

Trade deficits in themselves ares not necessarily a bad thing for the economy. Shoei Utsuda, chairman of the Japan Foreign Trade Council, recently said trade deficits reflect the maturity of the nation’s economy and that the shifts to overseas production by Japanese firms will bring more income from investment overseas, thereby keeping up the current account surplus. Indeed, the income surplus reached a record ¥16.5 trillion in 2013.

The January trade deficit hit a record ¥2.79 trillion. Part of the surge in imports was attributed to strong consumer demand before the consumption tax goes up in April. Some forecasts say trade deficits will shrink once such demand recedes after the tax hike.

Japan has posted a current account deficit for three months in a row since October. The prospect of a continuing decline in the current account surplus and the specter of long-term current account deficits raise concerns about the nation’s fiscal sustainability. Japan’s public debt has reached the worst level among major industrialized economies. The total value of outstanding national government bonds and other debt hit ¥1.017 quadrillion at the end of last year.

A sustained current account deficit could result in Japan becoming unable to finance its own debts with domestic savings, forcing it to rely on foreign investors. Fiscal rehabilitation will be an even more urgent challenge for the government along with the efforts to rebuild the growth strategy in light of the new realities of the nation’s trade structure.