maandag 5 januari 2015

Ministry of Finance Japan Issues 2015 Budget: The Trend Is Actually Improving

Japan has been in the news a lot in 2014 because of its deteriorating fiscal situation. The Ministry of Finance Japan has approved the 2015 budget and a new report on the fiscal situation can be found here. I'll summarize my findings in this article.

First, let's focus on the trade and current account deficit in Japan. Both have been deteriorating rapidly in 2013, but since 2014 something has changed. The yen (FXY) has been plunging in 2014 (see chart below from Yahoo), just like it did in 2013 and that suggests that we would see large current account deficits and budget deficits going forward, but the opposite is happening.

The latest current account number in October 2014 was a surplus of 833.4 billion yen. The reason for this is because Japan's pension funds (which are the largest in the world with more than $1 trillion in assets) invested heavily in overseas stocks and they are planning to increase this exposure to 25% of their fund. As we all know, the U.S. stock market has been on a tear and Japan's current account has benefited from this (see chart below from tradingeconomics).

Exports are on the rise but haven't improved a lot if you account for a weaker yen (the yen plunged 20% in 2014 while exports rose only 10%). The trade balance is still negative, but somewhat improving because import costs for oil and gas have declined in 2014 (34% of total Japanese imports is energy). The latest November trade deficit figure came in at 891.9 billion yen (see chart below from tradingeconomics). This number is likely to improve as Japan's nuclear reactors are starting to come online in 2015.

To continue reading the analysis on budget and interest payments, go here.

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