Japan’s Ticking Time Bomb: Worsening Streak of Current Account Deficits

We have been told by mainstream media and experts that PM Shinzo Abe’s inflationist policies popularly coined as “Abenomics” will deliver economic “competitiveness” .

Yet even in the short term, where the magic of inflationism should work best, Abenomics fails. 

Exports which supposedly should have been boosted by a devalued currency shrank, while imports continue to surge.

From Bloomberg,

Japan posted its longest run of trade deficits in three decades as exports fell in February, underscoring challenges for Bank of Japan (8301) Governor Haruhiko Kuroda in reviving the world’s third-biggest economy.

Shipments dropped 2.9 percent from a year earlier, the Finance Ministry said in Tokyo today. The median estimate of 22 economists surveyed by Bloomberg News was for a 1.7 percent decrease. Imports rose 11.9 percent, leaving a trade shortfall of 777.5 billion yen ($8.1 billion).

Kuroda, who began his tenure as governor yesterday and will give his first press briefing this evening, is pledging more aggressive monetary easing that may further weaken a yen down about 10 percent against the dollar this year. While the currency’s decline boosts the outlook for exporters in coming months, it’s already swelling the nation’s import bill as nuclear-plant shutdowns force bigger imports of fossil fuels.

Apologists for Abenomics say that a “time lag” exists for such policy to create “traction”. But contrary to such an absurd idea, rising input or producers prices, e.g. energy, will neutralize any gains from the supposed currency panacea. (chart from tradingeconomics.com)

Yet consumers have also been exhibiting signs of a squeeze in purchasing power through reduced spending.

And a string of worsening current account deficits will parlay into a drawdown on savings or increasing reliance on foreigners that amplifies the fragility of Japan’s precarious fiscal balance. As I previously wrote,

Worst, a sustained deterioration of current accounts means that Japan will increasingly rely on foreign capital and or draw down from the her pool of savings which has been estimated at $19 trillion and which could also extrapolate to a reduction of assets held overseas or $4 trillion net foreign investment position.

And given the deliberate debasement of the yen, I am not inclined to see a reduction of foreign assets by Japanese households. Instead, Japan’s private sector will likely increase their exposure overseas couched under euphemism of Foreign Direct Investment (FDI) or portfolio flows when in reality they account for as “capital flight”.

So “Abenomics” will mean that Japan will transition from a net savings-net creditor nation to eventually a net debtor country overtime or a sordid tale of from riches to rags, if such policies continue.

And given the nation’s colossal debts, any signs of funding stress will mean a jump in interest rates which should further aggravate highly vulnerable Japan’s fiscal balance. This increases Japan’s potential transition to a crisis whether through a debt or through a currency strain, depending on how policymakers will react.

One recent positive development though is Shinzo Abe’s proposal for Japan to join the Trans Pacific Partnership Free Trade Agreement (FTA). 

Yet it remains to be seen if gains from expanding trade will be enough to offset the negative effects from massive interventionist measures of monetary easing and fiscal stimulus.