May 12,2014,10.00JST

Current account deficit hits another record

The current account deficit of Japan hit the new record in March 2014. After seasonal adjustments, the trade deficit grew to the new historical record of 1.89 trillion yen.  The current account deficit, a sum of trade, service and income balance, also hit the new historical record of 783 billion. Previously, 583 billion yen in January 2014 was the largest. 

In our view, the gap between the weak external demand and the robust domestic demand lies at the heart of the deterioration in Japan's external balance. Despite the weakness in yen, Japanese exporters are not using the advantage to bolster their export volume. On the other hand, imports are continuing to expand, reflecting the robust domestic demand. Weaker yen is also inflating the nominal value of imported energy. 

Japan's current account deficit also indicates that Japanese economy may be reaching its production limit. Abenomics policies have succeeded in stimulating demand, but it has done little to increase its supply capacity. In our view, the deficit will likely continue until Japan falls back into a recession. The sales tax hike in April most likely chilled the domestic demand and we expect the current account balance to improve in April as import pressure eases. However, if the negative effects from the sales tax hike proves to be temporary, the likely improvement in the current account balance will also be temporary. The chances are increasing that the current account deficit we are observing is becoming structural. 


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