Japan ‘More Than Hollowing Out’ With 2011 Trade Gap: Economy

Japan’s first annual trade gap since 1980, driven by an energy-import surge as nuclear plants shut down and by a shift of manufacturing overseas, threatens to undermine the nation’s status as the world’s largest creditor.

A third straight monthly merchandise trade deficit in December capped an annual shortfall of 2.49 trillion yen ($32 billion), the finance ministry said in Tokyo today. The data reflect the impact of the record earthquake in March, which sparked a nuclear crisis that shut most reactors, as well as longer-term shifts such as Nissan Motor Co.’s decision to move some production to lower-cost Thailand.

“This is more than hollowing out -- the government hasn’t found any solutions to electricity and at this point I don’t see that we’re going to have nuclear power back again,” said Masaaki Kanno, chief economist in Tokyo at JPMorgan Securities Japan Co. The deficit will “expand in coming years,” he said.

Money flowing out through trade may erode investors’ confidence that Japan’s creditor status makes it a haven for investment, complicating the government’s efforts to manage the world’s largest public debt. Policy makers have said the country’s shrinking population means it will need to turn increasingly to foreign investors to buy its bonds.

Kanno, a former chief foreign-exchange dealer at Japan’s central bank, said that the current account, which includes trade and interest earnings on overseas holdings, could tip into deficit as soon as 2015. “The possibility of a steady increase in Japan’s yields stemming from fiscal concerns is bigger than the next tsunami or a big earthquake.”

Yen, Stocks

The Nikkei 225 Stock Average stayed higher after the figures as the yen weakened further from the postwar high that had risked accelerating the shift of exporters abroad.

The benchmark index closed 1.1 percent higher. The yen was at 77.87 per dollar as of 4:41 pm in Tokyo, 3.2 percent less than a high of 75.35 on Oct. 31.

Japan’s current-account surplus has meant that it hasn’t needed to rely on foreign capital to finance its budget deficits, unlike the U.S. Foreign buyers hold about less than 10 percent of the public debt, compared with almost half for the U.S. Yields on 10-year Japanese government bonds were at 1 percent, among the world’s lowest.

A legacy of years of trade surpluses has left Japan as largest net holder of external assets, a position it had for a 20th straight year in 2010, with a position of 251.5 trillion yen, according to the finance ministry. Figures for 2011 are due in May. China is second-largest, according to the ministry.

Deeper Drop

Exports dropped 8 percent in December from a year earlier, today’s report showed, compared with the 7.4 percent median estimate of 27 economists surveyed by Bloomberg News.

A global economic slowdown contributed to the decline. The International Monetary Fund yesterday cut its world growth forecast to 3.3 percent for 2012, from the 4 percent seen in September.

Elsewhere in Asia, The Bank of Thailand cut interest rates for a second straight meeting to help spur a recovery from the nation’s worst floods in almost 70 years and counter moderating external demand. The bank trimmed its one-day bond repurchase rate by a quarter of a percentage point to 3 percent, matching the forecasts of all 15 economists surveyed by Bloomberg News.

In Australia, consumer prices were unchanged in the fourth quarter from the previous three months, a report showed today. In Europe, a report may show Britain slipping closer to a double-dip recession. Gross domestic product fell 0.1 percent in the fourth quarter, the first decline in a year, according to the median of 33 forecasts in a Bloomberg News survey.

Power Hit

A tsunami engulfing much of Japan’s coastal northeast after the March 11 magnitude-9 temblor caused the worst catastrophe at a reactor since Chernobyl in 1986. Besides crippling the Fukushima Dai Ichi plant, the disaster sparked concerns about safety that have prompted the closure of most of the industry, in what was the world’s third-biggest nuclear power generator.

The morning of the quake, the country had 37 reactors generating 34,417 megawatts, according to data compiled by Bloomberg. As of Jan. 13, there were five operating with a capacity of 5,058 megawatts; Tokyo Electric Power Co. shut down an additional plant for regular maintenance yesterday.

Japan’s 10 regional utilities generated about 8 percent of electricity from nuclear power in December, according to data released by the Federation of Electric Power Companies. Nuclear power accounted for about 33 percent of total power generation in February 2011, according to the data.

‘Never Return’

“Even if the economy picks up, the balance will never return to the days of a 6 or 7 trillion yen surplus,” said Masayuki Kichikawa, chief economist at Merrill Lynch Japan Securities Co. in Tokyo. “Imports of liquid gas from developing countries will continue to increase, and I think the balance will hover near zero in the next couple years.”

Bank of Japan Governor Masaaki Shirakawa said yesterday the trade deficit “won’t become a firmly established trend” because it is driven by “temporary factors” such as increased energy demands after the earthquake.

The yen’s climb poses a longer-term threat. Toyota Motor Corp. Chief Executive Officer Akio Toyoda said this month the “ideal” exchange rate is 90. The currency has soared 16 percent in the past two years. Over five years, the appreciation has been 56 percent.

Honda’s Move

Honda Motor Co. picked Ohio for sole global production site for its high-performance hybrid Acura NSX, and will use a Mexican plant to make small cars. The two projects will give Honda the ability to produce its entire vehicle range, from cheapest to most expensive, within North America.

Nissan Motor Co., Japan’s second-biggest carmaker, shifted output of the March compact to Thailand from Oppama, Japan, in March 2010 to offset the effect of a strengthening yen, and to cut costs by basing production near suppliers. It boosted imports 86 percent to 50,269 last year from shipping the model back to Japan, according to the Japan Automobile Importers Association.

Elpida Memory Inc., the world’s third-largest chipmaker, announced in September that it plans to move almost half of its Hiroshima plant’s production to Taiwan.

The so-called hollowing out still leaves Japan for now with unemployment rates that are the envy of most advanced economies, with a jobless rate of 4.5 percent in December, about half the level of the U.S.

Fiscal Pressure

Even so, with the population declining since 2006, and a Cabinet Office report yesterday indicating a trend rate of economic growth of 1 percent in coming years, policy makers are under pressure to take steps that avert a crisis of confidence in the nation’s debt. The finance ministry said yesterday total outstanding borrowing will probably reach 985.4 trillion yen in the year ending March 2012, up 6.6 percent from a year earlier.

Prime Minister Yoshihiko Noda yesterday reiterated his call for opposition lawmakers to engage in talks on boosting the sales levy. The ruling Democratic Party of Japan wants parliamentary approval to raise the tax to 8 percent in April 2014 and then to 10 percent in October 2015, from 5 percent now.

Such a step won’t be sufficient, the Cabinet Office said yesterday. The primary budget deficit, which excludes the cost of servicing debt, will be the equivalent of 3.1 percent of gross domestic product for the year through March 2021, a projection that incorporated the tax measure.

Finance Minister Jun Azumi told lawmakers that letting public finances deteriorate further would present a “significant risk to stable economic growth” and that efforts to contain debt should be made “as soon as possible.”

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