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Let the great rebalancing begin. Japan’s 13-year-old current account surplus morphed into a deficit in January, official data released on Monday showed. That follows South Korea, which likewise flipped into deficit in January.
In the annals of surprising outcomes, this ranks above the results of Sunday’s North Korean elections – but only just. As Americans buy less and save more, exporting countries are shipping less. Indeed, Japan is now importing more than it sells abroad: it racked up a nearly $9bn trade deficit in January, on a seasonally unadjusted basis. Downed tools at car plants and declining industrial production elsewhere suggest more of the same, although sluggish domestic demand will brake any surge of imports.
Trade, however, is just part of the picture. For the past two decades, Japan’s current account surplus has been boosted by foreign investment income. Last year this dwarfed the trade balance, making up almost the entire current account surplus. Sadly, that situation is now history. The strong yen, plus falling interest rates and squelched dividends, slashed net investment income in January to $10bn, two-thirds last year’s amount.
This is bad news for Japan. All else being equal, a trade deficit implies bigger credit risks and therefore a higher required yield on government bonds. The prospect that Tokyo will have to pay more when it plans to issue $1,400bn of government debt this year (including refinancing) will surely cause shivers in the Diet.
Worse, finding places to park it is becoming harder. Unusually, Japan has been able to recycle public debt domestically. But local investors are proving more fickle. They invested a net $22bn in overseas portfolios in January, while foreigners sold $15bn of Japanese assets.
As for global rebalancing, Asia has further to go. China’s current account surplus remains firmly in the black, while Thailand’s expanded in January. A sudden rise in Asian consumption also seems unlikely. Classically gloomy news from the global recession: Japan loses and the rest of the world doesn’t win.
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