Here is another data point to add to the list. Bloomberg reports Japan’s Current-Account Surplus Shrinks 63% As Machine Orders Drop.
Japan’s current-account surplus was the smallest in May since at least 1985 and machinery orders fell the most in more than five years, adding to signs a slump in demand is threatening the nation’s rebound.Explanation of Current Account
The excess in the widest measure of the nation’s trade shrank 63 percent from a year earlier to 215.1 billion yen ($2.7 billion), the Ministry of Finance said in Tokyo today.
Machinery orders, an indicator of capital spending, fell 14.8 percent in May from the previous month, the Cabinet Office said, the biggest drop since comparable data were made available in 2005.
For those unfamiliar with the term Current Account Wikipedia offers this explanation:
In economics, the current account is one of the two primary components of the balance of payments, the other being capital account. It is the sum of the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.Why This Is Important
The current account balance is one of two major measures of the nature of a country's foreign trade (the other being the net capital outflow). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.
The balance of trade is the difference between a nation's exports of goods and services and its imports of goods and services, if all financial transfers, investments and other components are ignored. A nation is said to have a trade deficit if it is importing more than it exports.
Positive net sales abroad generally contributes to a current account surplus; negative net sales abroad generally contributes to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports. This however is not always the case with secluded economies such as that of Australia featuring an income deficit larger than its trade surplus.
Japan's balance of trade is already negative, but the important point is the overall current-account of which trade is a part.
If Japan's current-account was negative, Japan would depend on foreign capital to make up the deficit. Will foreigners fund Japan at 0% interest rates?
I think not.
Bug In Search of Window
Japan has debt-to-GDP ratio of 220% and rising. As of July 9, the Yield on 10-year Japanese Bonds is .80%.
A mere rise of 2 percentage points would consume all Japanese revenues just to pay interest on the national debt.
Moreover, Japan's demographics are such that pension plans are now, for the first time as of last year, net sellers of bonds, not net buyers. For details, please see World's Largest Pension Fund Needs to Sell Japanese Bonds; Japan's Demographic Time Bomb Officially Goes Off
As John Mauldin commented in his book Endgame, "Japan is like a bug in search of a window." If you have not yet picked up a copy, please do so. It's a good read.
Once Japan's current account balance goes negative in a sustained way (and I believe that will indeed happen), the bug will have found the window.
Mike "Mish" Shedlock
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