Plunge in Japan's current account surplus fuels debt worries

PUBLISHED : Tuesday, 08 October, 2013, 2:16pm
UPDATED : Wednesday, 09 October, 2013, 1:53am

Japan’s current account surplus tumbled in August owing to declining overseas profits and chronic trade deficits, raising questions about the country’s ability to rely on its status as a net creditor to ease the pain of its massive public debt pile.

The 63.7 per cent annual decline in the current account surplus was the biggest in almost two years and confounded the median analysts’ estimate of a 23.4 per cent annual increase as the income surplus, which includes earnings from overseas subsidies, fell for the first time in nine months.

The income surplus decline could prove temporary, as overseas economies remain stable. Trade deficits will be more persistent, though, as energy imports soar to make up for closed nuclear power plants, which will in turn weigh on the current account.

“We have to worry about Japan’s debt dynamics in the long term,” said Shuji Tonouchi, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“Japan was a high-surplus country, but things are changing. Other countries have also transitioned from maintaining a high surplus via exports only to watch their surplus shrink.”

The current account surplus stood at 161.5 billion yen (HK$12.9 billion), versus the median forecast of a 549 billion yen surplus, finance ministry data showed on Tuesday.

The income surplus fell 10 per cent in August from a year ago to 1.3 trillion yen.

Other countries have also transitioned from maintaining a high surplus via exports only to watch their surplus shrink
Fixed-income strategist Shuji Tonouchi

Japan’s public debt has just surpassed 1,000 trillion yen. At more than twice Japan’s gross domestic product, it is the heaviest debt burden among industrialised nations.

Until a few years ago, some economists argued that Japan’s debt burden was not much of a problem because its hefty current account surplus meant it was a net creditor to the world.

However, the trade balance, which was already under pressure from a shift in production overseas, fell into deficit after the March 2011 earthquake and nuclear disaster as energy companies replaced nuclear energy with imported fossil fuels.

Since sweeping to power in December with a mandate to jump-start the world’s third-biggest economy, Prime Minister Shinzo Abe has launched an aggressive policy mix of government stimulus and monetary easing, dubbed Abenomics, that has driven the yen lower and buoyed the stock market.

Still, while a weakening yen has boosted the competitiveness of Japanese exporters and increased the value of overseas revenue in yen terms, it has also pushed up import costs.

In an effort to address the mounting debt problem, Abe agreed this month to raise the 5 per cent sales tax to 8 per cent in April to pay for rising welfare costs.

However, there are worries this will not make a sufficient dent in the debt burden, because the government is also compiling stimulus spending that will wipe out much of the gain in tax revenue.