Tuesday, January 14, 2014

Japan Hits Record Current Account Deficit

Just ten months ago, I opened a global trading account and began investing in Japanese stocks. I current own three Japanese small/microcaps: Tachibana Electech, Riken Keiki and Fujimak. If you want to read more about them, click on their respective labels on the right column.

I was luckily investing in the wake of multi-year lows for the Japanese stock market in 2012. Shinso Abe then began Abenomics. Abenomics' most drastic effect to me is the depreciation of the Yen. The Yen needs to depreciate to make Japanese companies profitable. But one year of Abenomics has brought a very bad downside. The Japanese current account hit an all time monthly low in November 2013. The following shows the monthly current account in units of ¥ 100M. The current account is the net outflow of a nation's currency versus the net inflow of foreign currencies. A positive number in the chart indicates a surplus — more outflows than inflows. Note the chart is very seasonal for reasons I don't yet fully understand.

The approximately ¥ 5 billion ($5 billion USD) outflow at the last point in the chart has gotten quite a bit of press lately. So, I gave it a closer look. I took five random months in the last five years and looked at the current account breakdown.

Units of 100M Yen

The huge swing between April and November of 2013 was due to 1) foreign profits repatriated to Japan and 2) a cheaper yen. And the difference between 2013 and 2010 was due to 1) cheaper yen and 2) nationwide nuclear power shutdown, which required oil imports to make up for the energy shortfall.

In any case, the Japanese foreign reserves stand at $1.3 trillion USD. So November results isn't even a rounding error. But, if this downtrend keeps up for a long long time, then the Japanese will have to make up for it somehow, maybe by restarting the nuclear plants, or by allowing more foreign investment. Otherwise, the yen could fall to a point of damaging the economy. But right now I am more relaxed after digging into the facts behind the headlines.

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