Japan Balance of Payment
Fundamentals Update as at 17 December 2013 by Lorenzo Beriozza
Japan posted a seasonally adjusted current account deficit of ¥59.3 billion for October, marking a second straight month in the red (-¥125.2 billion for September) for the first time in records dating back to 1996 and only the fourth monthly deficit in that period.
This is further confirmation that Yen depreciation has provided only temporary relief from persistent structural pressures on Japan’s external balances, namely:
- A declined sensitivity of export volume to exchange rate movements, an increased import penetration as a consequence of ageing demographics and industrial hollowing out; and
- A long-term deterioration in the terms of trade.
The capital and financial account balance showed a ¥314.5 billion surplus for October on a seasonally adjusted basis (+¥711.5 billion for September), with the direct investment deficit more than offset by a large portfolio investment surplus as foreigners bought Japanese equities and domestic investors sold foreign equities. The “basic balance of payments” obtained by adding the capital & financial account balance to the current account balance thus remained in the black (+¥255.2 billion).
The consensus around the current account surplus is:
- It amounts to just 0.5% of GDP in 4Q as increased export volume is offset by deterioration in the terms of trade;
- It is recovering slightly to around 0.6% of GDP in 1Q 2014 as the weaker yen boosts the income surplus, thereby making up for stronger imports ahead of the April 2014 consumption tax hike;
- It is improving to around 1.2% of GDP from 2H 2014 through early 2015 as imports soften following a restart of several nuclear reactors and weakening of domestic household spending after the consumption tax rate hike; and
- It is worsening in the longer term due to a continued deterioration in the terms of trade and uptrend in import volume, reflecting the combined impact of ageing demographics and industrial “hollowing out”.
The secular deterioration of the current account balance if combined with increases in outward capital investment by residents might lead to higher domestic interest rates at least temporarily. Source: Credit Suisse
