Japan’s Top Creditor Title at Risk as Surplus End Looms
A run of current-account surpluses that drove Japan’s net asset position to the largest in the world starting in 1991 is set to reverse, according to 10 of 16 economists in a Bloomberg News survey, with nine projecting sustained deficits by the end of 2020. Japan had net assets of 325 trillion yen ($3.2 trillion) at the end of 2013, with China in second place with 208 trillion yen, according to Japan’s finance ministry.
As an aging population draws down its savings, Japan will become more dependent on foreign creditors to finance its budget deficits and manage the world’s biggest debt burden. A swing to current-account deficits could augur a surge in bond yields as investors reassess the nation’s prospects, and clear the way for China to overtake it as the world’s biggest net creditor.
“Chances are high that China will surpass Japan as early as 2020 in the size of net overseas assets,” said Hidenori Suezawa, a financial market and fiscal analyst at SMBC Nikko Securities Inc. “The issue will be whether Japan can attract enough foreign capital to make up for the current-account deficits as countries like the U.S. do.”
Japan has posted a surplus on its current-account balance since 1973 on a quarterly basis, excluding a seven-quarter run of shortfalls in 1979 and 1980 caused by a surge in oil prices. Last year, the surplus shrank to the smallest since 1985, as a weaker yen inflated an energy import bill that soared after a nuclear disaster in March 2011.
Finance Minister Taro Aso last month pointed out risks the country would face should it register “twin deficits” in the current-account and budget: the proportion of the government’s debt held by foreign investors would rise, giving them a “large influence” on the market, he wrote in a May 27 submission to the Council on Economic and Fiscal Policy, which advises Prime Minister Shinzo Abe.
Aso said the government can’t delay a target to achieve a primary budget surplus by the fiscal year starting in April 2020 -- a goal he previously said would be “very difficult” to reach.
Government debt will rise to 935 trillion yen in fiscal 2020, equal to 169 percent of annual economic output, from 769 trillion yen this fiscal year, according to finance ministry projections.
The savings rate fell to 1.1 percent in 2012 from 9.7 percent in 1994, according to the Cabinet Office. The declines are likely to accelerate as more babyboomers retire, said Kyohei Morita, chief Japan economist at Barclays Plc. The population is projected to drop 2.7 percent to 124 million in 2020 from 127 million in 2012, according to the National Institute of Population and Social Security Research.
A current-account deficit driven by swelling public debt and falling household savings would lead to higher bond yields, said Eiji Ogawa, executive vice president for finance at Hitotsubashi University.
“Unless the government raises the sales tax to 20 percent or makes drastic reform on social welfare spending, this scenario is highly likely,” said Ogawa. “Higher interest rates will discourage domestic capital investment and spur the shift of production abroad, increasing the number of people unemployed.”
The yield on Japan’s benchmark 10-year government bond, now around 0.6 percent, could rise to 4 percent -- a level unseen since March 1995 -- should the current-account balance drop into deficit as public debt eclipses the nation’s savings, said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.
Income from investments overseas is likely to head off a fall into current-account deficits, said Nomura Securities Inc. economist Minoru Nogimori, who predicts surpluses will continue at least through 2020.
Japan’s overseas assets increased to 797 trillion yen as of the end of 2013, nearly doubling from 386 trillion yen in 2003, according to the finance ministry.
Koya Miyamae, an economist at SMBC Nikko Securities Inc., said concerns about the threat from a current-account deficit may be overblown.
The U.S. has run a shortfall every year since 1992 while posting average economic growth of 2.6 percent over the period, higher than an average 0.9 percent for Japan, he said. At the same time, the U.S. has been able to attract sufficient investment from abroad to make up for its current-account shortfall.
“The current account is just one picture,” said Miyamae, who forecasts the current account will be in deficit in 2020. “In the case of a country falling into a current-account deficit due to strong domestic demand or active private investment, what’s wrong with that?”
Still, countries with fiscal and current-account deficits tend to be hit harder than those with surpluses when the world is going through market turmoil, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. It will be important for Japan to attract long-term inward direct investment as it becomes more reliant on foreign creditors, Kanno said.
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