Japan current account deficit

Japan has fallen into a current account deficit. This decline is amazing when looked at in the longer term context of global imbalances. Japan has been a major exporter for decades and has built its economic engine on global growth. It has also been a capital exporter to the world through the flows into the US. This role did not change even with the "Lost Decade".

The steep decline is greater than anything that has been seen and reflect an important transition in the global economy. Exports declined 46% in January from the previous year. The income gained on foreign investments versus income outflows also closed significantly. The decline in the account was much larger than expected by most economists.

If Japan is not generating a surplus to be invested in, say, other parts of the world, capital flows will change radically and interest rates will have to adjust based on fiscal policy divergences.

Japan also announced that it would use its foreign exchange reserves to help cash strapped companies. This will help with dollar cash flow problems for exporters at the end of the year; however, this again changes the complexion of the global capital markets and the role of Japan. Foreign exchange reserves are usually held in US Treasuries with no credit risk.