An interesting comment of Japan’s current account in the latest IMF paper on China made me wondering and looking at the current account numbers more closely. If one takes a look at the current accounts components (in USD) from 1992 onwards, the results are as follows:

* Net transfers do not seem to be a major contributing factor.

  • The services deficit seems to be closing slowly, moving from around $40-50bn, to $20bn, probably highlighting some form of structural change. I do not believe that Japan will ever be able to completely balance the services account due to tourism and shipping (which act as deficit factors), although it looks like it won’t be playing any crucial expanding role in the future.
  • The goods balance is highly cyclical and shows a clear trend of slowly decreasing. Commodities prices should be playing a crucial role, especially in the post-Fukushima Japan (i ‘ve ommited the 2011 goods balance).
  • The income balance shows a clear, exponential trend, reaching a surplus of $176bn in 2011. If one takes a look at Japan’s flow of funds data (sheet 18), most of overseas assets are in the form of securities ($4.4tr), loans ($1tr) and FDI (close to $700bn), while net worth is more than $3tr.  It seems that Japan holds a high income asset that will finance its current account in the long-term (the exponential fit corresponds to an annual rate of more than 8%).

The chart below shows annual percent change in the value of imports and exports for Japan since 2000. It is quite clear that the spike in commodities prices in 20008 and the Fukushima accident have played a strong role. Another possible long-term factor might be Japanese companies movnig production lines to Japan (keeping the most technology intensive). That would move the composition of trade to intermediate goods (especially with China) and increase income (profits) inflows.

The same commodity import price push is evident in a chart from BoJ:

An important question of the current account components trend is the income distribution. The income surplus benefits might be concentrated in a small minority of the population threatening long-term internal consumption trends and available income for the majority of the Japanese people.

From a trading perspective, these trends should provide long-term support for a strong Yen.