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Japan's current account woes throw spotlight on economic risks

A "Don't Walk" traffic signal is seen in front of the national flag hoisted on the headquarters of Bank of Japan in Tokyo February 8, 2012.
A "Don't Walk" traffic signal is seen in front of the national flag hoisted on the headquarters of Bank of Japan in Tokyo February 8, 2012.

By Stanley White

TOKYO (Reuters) - Japan posted its smallest current account surplus on record last year, throwing the spotlight back on Tokyo's ability to service its huge debt and exposing a danger point in an economy starting to find its feet after years of underperformance.

The world's third-biggest economy sped past many of its Group of seven counterparts in 2013 spurred by an aggressive mix of fiscal and monetary expansionary policies.

But a deteriorating external position has cast a shadow on the recovery as policy makers worry that the economy may falter if exports do not regain momentum.

"The government doesn't seem to be placing much emphasis on fiscal discipline," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"This makes the combination of rising debt and a weak current account balance an uncomfortable prospect."

The Ministry of Finance data on Monday also showed the current account balance for December slid to the largest deficit on record as exporters have failed to reap the benefits of a weak currency.

At the same time the energy import bill has risen sharply as Japan's nuclear power plants are idled following the Fukushima nuclear accident three years ago.

For 2013, Japan's current account recorded a 3.3 trillion yen surplus, the data showed. This was the smallest surplus in comparable data available from 1985.

The narrowing surplus is a concern especially as the nation's huge debt continues to raise servicing costs.

In a sign of Japan's looming fiscal pain, government debt rose to a record 1,017 trillion yen last year, the finance ministry said on Monday. It cemented Japan's ranking as the most indebted country in the industrialized world.

In the past, many economists argued that high debts would not trigger a crisis, because Japan's ample current account surplus made it a net creditor to the world.

Now that the current account surplus is deteriorating, this could draw unwanted attention to the debt pile and on Japan's ability to service it.

Years of fiscal stimulus to revive a stagnant economy and surging social welfare costs for a rapidly ageing population have saddled Japan with the worst ratio of government debt to gross domestic product.

Increased welfare costs forced Prime Minister Shinzo Abe to go ahead with a scheduled two-stage sales tax hike from April this year, which is seen as a necessary first step in fixing Japan's tattered finances.

Analysts don't see an imminent threat of a debt crisis. Yields on Japanese government bonds are very low, with the JGB market still dominated by Japanese savers and institutions rather than by fickle foreigners who would demand higher yields.

And the Bank of Japan continues to buy massive amounts of JGBs as part of its quantitative easing program launched in April last year to beat deflation and spark 2 percent inflation in less than 2 years.

SLUGGISH EXPORTS

Many policy makers expected a falling yen would push up exports and support the economy but lackluster external demand and declining competitiveness have hampered the trade sector.

The uneven recovery may prompt officials to consider other options to keep economic growth on track, some analysts say.

"Gains in exports are weaker than I expected, reflecting declining competitiveness," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.

"The current account can remain in surplus, but the surplus will be small. This is an economic headwind that could place pressure on the government and the BOJ to respond."

Last year imports rose 15.4 percent versus a 9.0 percent gain in exports, the MOF data showed.

In December, the current account deficit stood at a record 638.6 billion yen ($6.25 billion), against a median forecast for 707.7 billion yen.

The yen has fallen around 23 percent versus the dollar since late 2012, spurred by the Abe government's stimulus policies.

Many in the government also expected the yen's fall to boost exports, but this has largely failed to materialize as Japanese companies are producing more goods outside of the country.

Moreover, Japanese companies have been losing market share to rivals from South Korea and other countries.

In the short run, the economy is likely to boom until at least March as consumers rush to beat the sales tax hike, and many analysts agree with the BOJ's view that the pain from the higher tax will be temporary.

However, weak exports could mean that the rebound is slower than some economists anticipate.

($1 = 102.2150 Japanese yen)

(Reporting by Stanley White; Editing by Shri Navaratnam)

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