Land of the Rising Deficit

Japan is experiencing its first current account deficit for 13 years - it is the result of a sharp fall in investment income from her overseas assets and also the contraction in global trade.

The transformation of the Japanese trade account from perennial surplus to deficit has happened in a matter of months and it is one of those data charts that makes you sit up and take notice and realise to an even sharper degree the way in which the global recession is changing the pattern and balance of trade in the world economy. Countries such as Germany, South Korea and Japan which for years have been staple examples in the economics classroom of economies with strong competitive advantages in the global trading system are now moving into deep recession, hit harder by the worst contraction in global output and trade for over sixty years.

Part of the reason for Japan’s first current account deficit for 13 years is the steep fall in net investment income - the strong yen, plus falling interest rates and weaker dividends from Japanese subsidiaries located overseas cut net investment income in January 2009 to $10bn, two-thirds last year’s amount.

And our accompanying chart showing the monthly value of Japanese exports and imports of goods and services dramatically illustrates the impact of the global recession on her traded goods sectors. Japanese exports plunged 46.3% year-on-year to 3.28 trillion yen in January while imports declined 31.7% to 4.13 trillion yen in the month - as a result, a trade deficit came at 844.4 billion yen.

Industrial output has collapsed back to levels last seen in the 1970s - all in the space of a couple of quarters. Where will the floor be?

The pain is being felt in the domestic economy. The Times reports that:

“A record proportion of the population is now on welfare and some estimates suggest that unemployment may rise from its present 4.4 per cent to as much as 10 per cent by the end of this year.”