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Analysis
Current account deficit heralds turning point for Japan

Current account deficit heralds turning point for Japan

World’s two biggest creditors may become capital importers in coming years 

by David Marsh

Mon 12 Mar 2012

Japan is at a turning point which world economic historians may look back at as a watershed for global capitalism. What happens when flows of Asian savings into western banks and capital markets dry up? Governor Zeti Akhtar Aziz, the veteran head of the Malaysian central bank, has been particularly forthright in her views that this will be a wake-up call for the West. Last week’s news that Japan recorded a Y437bn current account deficit in January, the biggest monthly shortfall since records began nearly 30 years ago, was a sign of how Japan may be shifting towards becoming a capital importer in coming years.

Japan will not be alone. There have been strong signs of an end to large current account surpluses in China as the Beijing authorities shift towards consumption-based domestic economic expansion away from export-fuelled growth.

The slowdown in funds overseas from the world’s two largest owners of foreign exchange reserves is actually a sign of a healthy rebalancing of the world economy. The counterparty is smaller current account deficits in the West as economies (particularly in Europe) tighten belts and try to rein back unsustainable borrowing.

But the knowledge that the two large Asian creditors may become capital importers at some stage in the next few years may sharpen German-style demands for more austerity in Europe and the US – just the opposite of what the world needs right now.

The shift in capital flows in Japan may have some positive side-effects. Business people in Tokyo say Japan is moving out of two decades of introspection, in which it became a great deal less international than in the fast-growth years after the Second World War. Larger and smaller companies alike are looking to overseas investment and acquisitions as a method of expansion. This means that, amid the sobriety of the earthquake anniversary commemorations, Tokyo is notable for a new spirit of chutzpah.

The transformation is driven by several interconnected factors. Anxiety about higher energy costs after a mooted shift away from nuclear power is prompting companies to seek less expensive manufacturing sites abroad. The need to rebuild supply chains abroad is also sparking the go-overseas reaction. Tougher competition on regional export market is exerting is toll on direct Japanese sales abroad. Above all the shock of the soaring yen (although it has softened in recent weeks, giving a much-needed fillip to the Nikkei index) has encouraged many denizens of Japanese industry to redraw their previously Japan-centric business plans. This is similar to action by German companies in the 1970s and 1980s to transfer manufacturing outside the country in response to the
higher D-Mark.

As German companies know well, a higher currency brings advantages as well as difficulties, for it allows hard money companies to make acquisitions much more cheaply. This is a benefit that Japanese groups mean to exploit to the full.

Belief that Japan will move towards a lasting current account deficit, which could lead to a new dependency on foreigners buying government bonds, has heightened speculation about an eventual fiscal crisis. This provides the background to the long-running dispute on whether the Government should raise consumption taxes to lower the budget deficit and rein back the debt-to-GDP ratio, now heading towards 250%. For the time being, though, no one’s panicking. The Government borrows 10 year money at 1%. The Bank of Japan has injected useful stimulus through extending its quantitative easing programme. Japan has known its fair share of pessimism over the past two decades. But now, after the upheavals and trials of the past 12 months, the pendulum is swinging back to greater confidence in the ability of Japan’s corporations and society to weather the challenges.

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