Current account threat to Japan debt burden

According to the firm’s Japanese economist David Rea, the nation’s current account will probably turn negative later this decade following decades of surplus.

This will leave Japan a net importer of capital, making it harder for the government to finance its outsized deficit and net government debt burden, which is one of the world’s largest at well over 100 per cent of GDP.

Mr Rea said the country’s imports exceeded exports to the tune of ¥2.5 trillion (£20.7bn) in 2011, Japan’s first deficit since 1980.

“Although one year’s deficit is relatively unimportant, we expect it will be repeated over the coming years,” he added.

Three factors accounted for the deterioration in trade balance last year, according to Capital Economics: the earthquake in March, the ongoing sovereign debt crisis in Europe and yen strength.

Mr Rea said that in the medium term, Japan’s unfavourable demographics and the hollowing out of its industrial base will increase the gap between imports and exports further.

“A persistent trade deficit will reduce the size of Japan’s current account surplus, which is supported by the income earned on large holdings of overseas assets. On current trends, we expect the current account to swing into deficit later this decade,” he said.

Domestic investors already finance more than 90 per cent of Japan’s deficit, making it more secure given a dearth of other investment opportunities in the economically stagnant country.

However, yields on Japanese government bonds remain unattractively low for international investors due to decades of rock-bottom inflation and near-zero interest rates. Japanese government bonds become more appealing if the yen rises, but the yen has already hit a post-war high against the dollar in the last 12 months, reducing the chance of further rises.