Japan Enters a New Era of Trade Deficits

“European talking heads have reassured us on an hourly basis that the worst of the debt crisis is over. But the Japanese trade deficit, a measure of reality, not words, tells a different story about the crisis in Europe. And about troubles coming to a boil in China.

But neither issue can be resolved by Prime Minister Shinzo Abe’s plan to decapitate the yen.

Trade deficits aren’t the end of the world for Japan. But they’re the end of an era. Since the mid-1980s, Japan has booked large annual trade surpluses, to the total and ineffectual aggravation of US presidents and lawmakers.

The surpluses helped fund Japan’s budget deficits without having to rely on foreign investors. Now, these deficits have become a mountain of debt over twice the size of GDP, unequalled in the developed world.

But in 2011, that seemingly endless string of surpluses, on which the Japanese economy had become dependent, broke. Instead there was a deficit of ¥2.56 trillion, small by US standards. It was ascribed to the earthquake and tsunami, fuel imports, etc. A temporary blip.

In 2012, the monthly trade deficits got worse, and over the last six months, they occurred in an uninterrupted sequence to reach ¥6.93 trillion ($78 billion), almost tripling from 2011. An all-time record.

Yet, even during the campaign late last year, Shinzo Abe, now prime minister, vowed to toss all fiscal restraints overboard and pile even more deficit spending on that mountain of debt that had been funded by the now evaporated trade surpluses. So the cabinet just approved another round of stimulus spending, $117 billion, the largest since the financial crisis. It will be up to the Bank of Japan to print enough yen and mop up the red ink….”

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