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UPDATE 2 -Japan's current account woes throw spotlight on economic risks
February 10, 2014 / 1:30 AM / in 4 years

UPDATE 2 -Japan's current account woes throw spotlight on economic risks

* 2013 current account surplus shrinks to 3.3 trln yen
    * Weak external position exposes economic risks
    * Govt debt reaches record 1,017 trillion yen last year-MOF
    * Current account in December shows largest deficit on
    * Disappointing exports weighing on growth expectations

    By Stanley White
    TOKYO, Feb 10 (Reuters) - Japan posted its smallest current
account surplus on record last year, throwing the spotlight back
on Tokyo's ability to service its huge debt and exposing a
danger point in an economy starting to find its feet after years
of underperformance.
    The world's third-biggest economy sped past many of its
Group of seven counterparts in 2013 spurred by an aggressive mix
of fiscal and monetary expansionary policies.
    But a deteriorating external position has cast a shadow on
the recovery as policy makers worry that the economy may falter
if exports do not regain momentum.
    "The government doesn't seem to be placing much emphasis on
fiscal discipline," said Shuji Tonouchi, senior fixed income
strategist at Mitsubishi UFJ Morgan Stanley Securities.
    "This makes the combination of rising debt and a weak
current account balance an uncomfortable prospect."
    The Ministry of Finance data on Monday also showed the
current account balance for December slid to the largest deficit
on record as exporters have failed to reap the benefits of a
weak currency. 
    At the same time the energy import bill has risen sharply as
Japan's nuclear power plants are idled following the Fukushima
nuclear accident three years ago.
     For 2013, Japan's current account recorded a 3.3 trillion
yen surplus, the data showed. This was the smallest surplus in
comparable data available from 1985.
    The narrowing surplus is a concern especially as the
nation's huge debt continues to raise servicing costs.
     In a sign of Japan's looming fiscal pain, government debt
rose to a record 1,017 trillion yen last year, the finance
ministry said on Monday. It cemented Japan's ranking as the most
indebted country in the industrialised world.
    In the past, many economists argued that high debts would
not trigger a crisis, because Japan's ample current account
surplus made it a net creditor to the world.
    Now that the current account surplus is deteriorating, this
could draw unwanted attention to the debt pile and on Japan's
ability to service it.
    Years of fiscal stimulus to revive a stagnant economy and
surging social welfare costs for a rapidly ageing population
have saddled Japan with the worst ratio of government debt to
gross domestic product.
    Increased welfare costs forced Prime Minister Shinzo Abe to
go ahead with a scheduled two-stage sales tax hike from April
this year, which is seen as a necessary first step in fixing
Japan's tattered finances.
    Analysts don't see an imminent threat of a debt crisis.
Yields on Japanese government bonds are very low, with the JGB
market still dominated by Japanese savers and institutions
rather than by fickle foreigners who would demand higher yields.
    And the Bank of Japan continues to buy massive amounts of
JGBs as part of its quantitative easing programme launched in
April last year to beat deflation and spark 2 percent inflation
in less than 2 years.

    Many policy makers expected a falling yen would push up
exports and support the economy but lacklustre external demand
and declining competitiveness have hampered the trade sector.
    The uneven recovery may prompt officials to consider other
options to keep economic growth on track, some analysts say.
    "Gains in exports are weaker than I expected, reflecting
declining competitiveness," said Hiroaki Muto, senior economist
at Sumitomo Mitsui Asset Management Co.
    "The current account can remain in surplus, but the surplus
will be small. This is an economic headwind that could place
pressure on the government and the BOJ to respond."
    Last year imports rose 15.4 percent versus a 9.0 percent
gain in exports, the MOF data showed.
    In December, the current account deficit stood at a record
638.6 billion yen ($6.25 billion), against a median forecast for
707.7 billion yen.
    The yen has fallen around 23 percent versus the
dollar since late 2012, spurred by the Abe government's stimulus
     Many in the government also expected the yen's fall to
boost exports, but this has largely failed to materialise as
Japanese companies are producing more goods outside of the
    Moreover, Japanese companies have been losing market share
to rivals from South Korea and other countries.
    In the short run, the economy is likely to boom until at
least March as consumers rush to beat the sales tax hike, and
many analysts agree with the BOJ's view that the pain from the
higher tax will be temporary.
    However, weak exports could mean that the rebound is slower
than some economists anticipate.

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