Japan logged its first annual trade deficit in more than 30 years in 2011, raising questions about how much longer it can fund its huge public debt with domestic savings alone.
Chief cabinet secretary, Osamu Fujimura, says the deficit was caused by higher fuel import costs, combined with slowing global growth and the yen’s strength, which hit exports.
And with 50 of Japan’s 54 nuclear plants still shut due to safety concerns, economists expect Japan to log further deficits going ahead.
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But Societe Generale economist, Takuji Okubo, says surpluses will return, once demand returns from the United States and Europe:
“It’s not that that we expect United States and Europe continue to suffer a weak growth for forever. Yes, they have a huge structural problem, but it should be solved, given time. So, I would expect Japanese exports should regain its strength in a few years time.”
At present, Japan’s current account is in surplus, as profit and capital gains inflows outweigh the trade deficit.
But this is not seen as sustainable in the longer term.
Running a current account deficit would spell trouble for Japan, as it means it cannot pay the cost of financing its huge public debt of $10 trillion, without overseas funds.
Okubo thinks a recovery in the global economy will be the main reason Tokyo will face financing problems:
“It is actually the recovery in overseas economy, which will increase overseas interest rates. So there will be a big gap between Japan’s and overseas interest rates. And then, I will expect that Japan’s household to start to invest abroad. So that will be a reallocation of their financial asset from yen to non-yen assets. And that I think will actually cause Japanese government to have problems financing itself.”
Either prospect will likely give added impetus to Prime Minister Yoshihiko Noda’s push to double Japan’s 5% sales tax in two stages by October 2015, to fund the bulging social security costs of a fast-aging society.