Higher Rates for Japanese Debt?

February 02, 2012 | Lili Park, Vice President, Client Service

This week’s Chart of the Week chronicles Japan’s trade deficit over the last five years. In the graph, the red line represents Japan’s month-end trade balance, while the charcoal line is the 100-day moving average of the trade balance. Most important in the chart is that Japan logged its first annual trade deficit in more than 30 years for 2011, as measured by the aggregation of month end trade deficits (note that although month-end trade deficits were larger in late 2008 and early 2009, the total trade balance for each of those years was actually positive). The 2011 trade deficit of 2.49 trillion yen (approximately $32 billion) is due at least in part to the March earthquake and tsunami, which paralyzed production/exports and provoked a surge of costly fuel imports to cover for the loss of nuclear power. Shortly after the March 2011 earthquake devastation, Japanese exports – the leading engine of Japan’s economic growth the last six years – declined 12.0% in April, and continued to decline in May. Furthermore, a persistently strong yen contributed to the reduction of total exports by 2.7% since last year while imports surged by 12%.

In terms of market impact, the emergence of a trade deficit in Japan leaves to question how much longer the country can fund its gross national debt, currently just under 230% of GDP, without reliance on foreign investors. If exports continue to fall and imports rise, the need for foreign investment will increase. However, foreign investors are unlikely to accept the low yields of the past, so a rise in rates for Japanese debt would seem probable.