- Quake, tsunami hit exports; Thai floods hit production
- Sluggish growth could cause trade deficit to linger
- Deficit could have worrying implications for current account balance
- Full-year surplus for 2011 expected to be 2.2% of GDP, lowest since 2001
Japan has posted an annual trade deficit for the first time since 1980 after a year of struggling to adjust to a strong yen, a eurozone crisis and the impact of natural disasters.
The Y2.49tn ($32bn) trade deficit represents a dramatic shift from the big surpluses that Japan has sustained over much of the past 50 years.
Some analysts see it is an understandable blip. After the earthquake and tsunami last March, exports of cars and electronics were hit by damaged plants and infrastructure. In the latter half of the year, floods in Thailand knocked out more Japanese production capacity, while overall shipments were hurt by a strengthening yen, up 17% against the euro over that period.
Throughout, the shutdown of nuclear power facilities caused Japan to be more reliant on expensive fossil-fuel imports.
"The trade deficit is unlikely to continue widening unless crude prices continue to trend upward," said Masaki Kuwahara, an economist at Nomura in Tokyo.
The monthly trade data seems to support that theory. Between January and March Japan posted a trade surplus of Y357bn. Exports during that period were Y16.4tn, 2.4 per cent higher than a year earlier.
But others argue that the trade deficit could linger, thanks to sluggish growth in Japan's trading partners, a persistent decline in its terms of trade, a measure of the price of imports against exports, and a sustained rise in the yen.
The Bank of Japan on Tuesday acknowledged "heavy strain" in global financial markets by downgrading its growth forecasts for this fiscal year and next, while keeping its key interest rate at virtually zero.
If the trade account remains in deficit, it could have worrying implications for the country's current account balance -- the sum of trade and investment balances, representing Japan's overall surplus of cash.
Many fear that if the trade deficit continues to widen, the investment surplus could be insufficient to cancel it out, leading to an overall deficit on the current account.
Such a development would have huge implications for bond and foreign-exchange markets, as Japan would become a net capital importer. The fiscal deficit, on the margin, would be financed by foreigners.
Japan's current account surplus shrunk to Y139bn ($1.8bn), the smallest since the post-Lehman shock.
The full-year surplus for 2011 is expected to be 2.2% of GDP, the lowest since 2001.
Masaaki Kanno, chief economist at JPMorgan in Tokyo, expects a "persistent" current-account deficit to open up as soon as 2015, arguing that a decline in Japan's rate of net saving, caused by demographic changes, was obscured until 2007 by a surge in global growth and a weak yen. Ominously for the government, much of the rest of the analyst community seems to differ only on the timing of Japan's move to a current-account deficit.
That puts the political debate over raising the level of consumption tax -- the centerpiece of fiscal reform efforts by Yoshihiko Noda, the prime minister -- into much sharper relief.
Jun Azumi, the finance minister, told parliament on Tuesday that allowing the nation's finances to deteriorate would present a "significant risk to stable economic growth."