How is the latest published statistics in Japan showing a two-straight decline in the current account pointing towards the continued recovery plans under ‘Abenomics’?

During the early Asian trading hours on January 14, 2014, the Japanese government released its latest data on its current account balance for the month of November 2013 showing a deficit of Japanese Yen (JPY) 592.80 billion, versus the Reuters consensus estimates of approximately JPY 380.40 billion, and a prior figure of JPY 127.90 billion deficit. The spot USD/JPY quote as of 0815 hours (Hong Kong/Singapore time) was trading relatively unchanged at 103.14 – 103.17 (bid/ask), and the Nikkei 225 stock index was trading at 15,516.15, down approximately 397.00 to 400.00 points or 2.460 percent intraday.

A quarterly chart below shows the relative trends of the monthly current account balances for Japan is shown below:

Chart showing the current account trends in Japan - Jan 14 2014

Source: Thomson Reuters

Before illustrating the chart, some definitions are worth noting. The current account balance of every country is essentially measuring the balance of payments which the country is managing, namely three components are present in the current account balance, including the current account, the capital account, and the financial account. The current account measures the flows of goods and services, or trade flows and investment flows, including income, and expenditures. An outflow is recorded as a debit entry, while an inflow is recorded as a credit entry. Balance of payments (BOP) is a measure of the strengths and weaknesses of the country’s economy. If there is a prolonged deficit in the BOP account, it could lead to a downturn in the value of an individual country’s currency, while a surplus in the BOP could strengthen the country’s currency. The current account measure is an indicator of the overall financial health of the country’s economy. Although it is a backward-looking indicator, it forms an important part of the overall measure of the country’s gross domestic product (GDP), as trade flows do directly impact the country’s GDP measure.

Coming back to the discussion of the state of the current account balance in Japan, readers might notice from the chart that for the month of November 2013, it registers a worse than expected decline in the overall current account deficit, despite the record weakness in the Japanese Yen currency against major global currencies such as the United States. At the close of 2013, the Japanese Yen registered its biggest decline against the US Dollar, something like close to USD/JPY 104.00 to 105.00 levels before strengthening to the current 103.00 levels following last Friday (January 10, 2014) release of the disappointing US payroll figures for the month of December 2013.

With the recent strength shown in the Japanese Yen currency, coupled with the latest data showing a two-consecutive month of declines in the current account balances, the question remains as to whether ‘Abenomics’ as it is popularly termed by many when discussing of the various economic and structural reforms being introduced under current Prime Minister, Mr. Shinzo Abe, and his Cabinet team, is working? Readers might note that Prime Minister Abe took office at the beginning of the 2013, and based on the data shown above, after three straight quarters of surpluses shown in the current account balance, the data is now starting to show some potential signs of ‘cracks’ forming around the ongoing pace of ‘Abenomics’ reforms, and the so-called ‘Three Arrows’ (Fiscal, Monetary, and Structural reforms).

However, for most optimists regarding Japan’s ongoing economic reforms, this latest of current account data could be seen as a one-off phenomenon, and one should not be too concerned about. There are data points including consumer price inflation, a relative weakness in the Japanese Yen currency, and most Japanese people are expressing some signs of optimism over Japan’s economic future, but for many pessimists, this latest release of the current account data might be an indication of more worst things to come in 2014, particularly with the slow pace of wage inflation necessary in order to cope with the impending rise of the consumption taxes set to kick in April 2014 when the tax rate will hit 8.00 percent, from the current 5.00 percent, and by October 2015, a hike of 10.00 percent. In addition, the relative record of high fiscal deficits faced by the Japanese government which seemed to be showing no signs of a decline in terms of the debt to overall GDP ratios. The Nikkei 225 index registered its best performance in 2013 closing at a record of slightly above 16,000 levels, but starting in 2014, it is starting to show some exhaustion, and continues to retreat.

There could be risks that ‘Abenomics’ is a short-lived boost to the overall Japanese economy. The continuing trade deficits we’ve seen in the past continue to persist in 2013 despite the record weakness of the Japanese Yen currency, followed by a declining trend in the overall Japanese business confidence figures, where many business owners, including those coming from the small and medium enterprises (SMEs) have not expressed much optimism regarding capital expenditure plans, hiring, production, among others until the much anticipated corporate tax reforms become clear. The Prime Minster has since announced that he will be introducing the much anticipated set of structural reforms, including immigration reforms sometime in June 2014. However, between now till June 2014, there are still uncertainties over the success of those reforms as we need to get over the April 2014 consumption tax hikes. The Bank of Japan (BOJ) has so far been quite successful in raising its inflation expectations through the various series of bond purchases aimed at propping up the inflation levels, and lowering the Japanese Yen, but with the recent strength shown in the Japanese Yen currency, Governor Haruhiko Kuroda might have more tasks at hand to manage around, including how to ensure the relative weakness of Japanese Yen currency will help to boost consumption and production spending growth.

In summary, I believe that the pace of ‘Abenomics’ remains intact, and Prime Minster Abe is unlikely to reverse course, but with the recent releases of economic data showing somewhat of a pessimistic outlook, it remains to be seen whether ‘Abenomics’ is the right antidote to bring Japan out of the economic doldrums as seen in the past decades of economic slowdowns dating back to the early 1990s.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc