chrislbecker.com

The Japanese current account surplus dropped 63% y/y in May to JPY 215 billion, to the lowest level since 1985, the Finance Ministry reported last night. Consensus expected a surplus of JPY 493 billion.

As the Japanese current account surplus shrinks, it means the economy as a whole 1) has fewer resources to recycle into US Treasuries, and 2) that fewer resources will be available to absorb domestic debt issuance. I have written about the Japanese fiscal train wreck before.

There is another important point to take-home here. The reason Japan was able to keep interest rates near zero for decades without collapsing the currency, is because it ran a current account surplus with the rest of the world. This meant demand for JPY assets were strong, keeping the currency strong, interest rates low, and price inflation in check.

Now, however, the global boom has turned to bust, and this means the world can’t gobble up newly printed JPY like it did before. Demand for JPY will decline markedly once Japan begins to consistently run trade and current account deficits.

The Bank of Japan will need to print even greater amounts than before of JPY to buy government debt to make up for this loss of external demand for it. It is at this point where the Japanese ‘deflation’ turns to an interest rate, currency, and very high (or hyper-) inflation crisis.