Weekly Commentary – Japan’s current account deficit and its medium and long-term impacts to Japanese Yen
Japan posted a larger-than-expected current account deficit as exports fell in November 2012. The current account deficit hit 10-month high and exceeded the market estimation (Actual - JPY 222.4 billion vs Forecast - JPY 3.5 billion). Current account measures the difference between a nation’s total exports of goods, services and transfer, and its total imports of them, and excludes transactions in financial assets and liabilities in the calculation. Exports fell and imports rose can widen the current account deficit of a country, vice versa.
Recovering global economic and softer yen can boost the external demand of Japanese goods and the current account is expected to run a surplus again in next few months. However, investors should aware the current account surplus in Japan shrank since the beginning of year 2007. Strengthened Japanese Yen was one of the reasons to blame on, however, lack of innovative products was another reasons that dragged the current account in Japan. Share of visible trade balance in Japan’s GDP dropped gradually since year 2000.
What is the implication from Japan’s current account deficit? Japanese government ran the budget deficit since year 1993 and the budget deficit was around 10 percent of GDP from year 2010 to year 2012. Budget deficit can either be financed internally or externally. Household savings can be the main internal source of finance. However, the saving rate of Japanese was decreasing since early 90’s because of the aging problem. That means budget deficit in Japan will more rely on external source of finance, such as capital inflow and export.
Current account is one of the indicators to measure the external finance in Japan. Shrinking current account surplus or resurface of current account deficit of Japan means Japan government becomes more and more difficult to finance its deficit. If this trend cannot be reverse, this can become a new catalyst for Japanese Yen to go down in the medium and long term.
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