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Economy

'Mature creditor nation' optimism threatens Japan economy

TOKYO -- Delusions about Japan's economy need to be corrected. The country's status as a creditor nation does not mean the deteriorating external account is nothing to worry about. Japan could be on a slippery slope to debtor nation because of its fast-growing trade deficits.

     Japan posted a record trade deficit of 2.79 trillion yen ($27.21 billion) in January. This followed the largest-ever trade deficit of 11.47 trillion yen last year. Another record trade deficit seems in the cards for Japan this year.

     The current account last year remained in the black, at 3.31 trillion yen. There is a good chance Japan's current account for this year will come in at around zero -- either a small surplus or a marginal dip into the red. The country has been running monthly current account deficits since October.

     Some call for calm, saying the problems are a symptom of the process of Japan growing into a mature creditor nation. That sounds fine, but what it really means is the country offsetting trade deficits with income balance surpluses. Such conditions are unsustainable if trade deficits continue growing and exceed income balance surpluses.

Red flags

Once a country is in debt, it must plug the hole with capital inflows from abroad or dip into overseas assets accumulated through years of generating current account surpluses.

     Economists say current account deficits are different from losses at companies. They like to claim that capital inflows counter current account deficits. The question, though, is whether inflows can be generated without problems.

     The U.S. is often used as an example. The country has managed to run current account deficits for a long time without major problems. Unlike the U.S., Japan is not the issuer of the key global currency.

     So-called "twin deficits" -- in fiscal and current accounts -- would have far more serious consequences for Japan than the U.S.

     Japan runs huge budget deficits, and the situation is only likely to get worse as its population grays. If its current account is producing surpluses, fiscal deficits can be plugged with domestic funds. Once the current account turns negative, the country will need funds from overseas to offset its budget shortfalls. This will likely put upward pressure on the cost of government debt, namely yields on Japanese government bonds.

Rose-tinted outlook

The best way to rehabilitate fiscal conditions is to boost economic growth and raise tax revenue. To keep the current account in the black, exports must be increased while imports are held down. This is easier said than done.

     Following the bankruptcy of Lehman Brothers in the U.S., and the earthquake and tsunami of 2011 in Japan, manufacturers have fled the country. Latest figures suggest Japanese automakers now produce 60% or more of their automobiles outside Japan. The consumer electronics industry has seen its aggregate domestic production capacity decline to less than 80% of the level a decade ago.

     Rising imports of smartphones and other goods have been identified as one of the factors behind Japan's growing trade deficits. Rising electricity costs and the halt of nuclear power stations make it difficult to convince Japanese companies to bring manufacturing operations back home. It would be a hard sell even if the yen depreciates further.

     Calling Japan a mature creditor nation may be soothing, but it is deluded. It is a short trip from here to being a country that has to sell off assets to survive. The country must maintain  its focus on the urgent task of resuscitating the economy.

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