Japan in First Trade Gap Since ‘63: JPMorgan

Japan probably recorded its first annual trade deficit (JNTBAL) since 1963 last year, part of a shift that may see the world’s largest net creditor come to rely on inflows of foreign capital by 2015, according to JPMorgan Chase & Co.

“If foreigners don’t believe Japan’s fiscal situation will improve, Japan could become like Greece,” said Masaaki Kanno, chief economist at JPMorgan in Tokyo. “We’re getting poorer as the trade deficit increases.”

Japan’s ability to keep borrowing costs the second lowest in the world depends on its position as a net holder of external assets. A drop in savings as babyboomers dip into retirement funds and as a strong yen erodes company profits could push the nation’s current-account surplus (JNBPAB) into a deficit, making it more expensive for the country to borrow.

If Japan has a shortfall, the government must reassure investors of Japan’s creditworthiness or risk seeing an increase in bond yields, said Kanno, a former chief foreign-exchange dealer at the Bank of Japan. A failure by Prime Minister Yoshihiko Noda to bolster the nation’s 5 percent sales tax could shake investor confidence, he said.

Japan retained its rank as largest net holder of external assets for a 20th straight year in 2010, with a position of 251.5 trillion yen ($3.3 trillion), according to the finance ministry. Figures for 2011 are due in May. Japan’s 10-year government bond yield, at 0.985 percent today, is the second lowest in the world after Switzerland.

Current Account

The world’s third-largest economy had a current-account surplus of 562.4 billion yen in October, the latest data available, while posting a trade deficit of 273.8 billion yen in the same period. The current account tracks the flow of goods, services and investment income between Japan and its trading partners.

The appreciation of the yen against the dollar also erodes Japan’s current-account surplus by making the country’s goods more expensive abroad. The yen has gained 8.5 percent against the dollar in the past year and reached a postwar high of 75.35 on Oct. 31. It traded at 76.73 per dollar as of 2 p.m.

JPMorgan estimates a 1 percent gain in the yen could reduce the export volumes by 0.34 percent, damping growth for a country that has relied on overseas demand to sustain its recovery from last March’s earthquake. According to JPMorgan calculations, a global expansion at 4 percent and a 5 percent drop in the yen would be necessary to stop a future expansion of the trade deficit, a situation that Kanno says is “unlikely.”

Japan’s current-account surplus could move into a deficit sooner than 2015 if more companies shift production abroad, Kanno said. Over 75 percent of Japanese cars will be produced abroad by 2014, up from 67 percent in 2011, JPMorgan estimates. Nissan Motor Corp. and Elpida Memory Inc. indicated last year they will increase production abroad to combat losses from a strong yen.

Japanese authorities have signaled they are concerned about a further appreciation of the yen. The Finance Ministry said last month it plans to increase the funds available for currency intervention to 195 trillion yen.

To contact the reporter on this story: Eleanor Warnock in Tokyo at ewarnock@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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