By Harumi Taguchi, Principal Economist, IHS Global Insight
Key Points:
- Japan’s current account recorded a surplus of JPY1,415 billion (USD14 billion) in May but fell by 13.0% month-on-month (m/m) on a seasonally adjusted basis. The surplus also fell by 3.0% year-on-year (y/y) on non-seasonally adjusted basis for the first y/y decline since July 2014.
- The y/y decline largely reflected a narrower surplus for primary income, remaining the major source of the current account surplus. The primary income surplus fell by 1.3% m/m for a second consecutive month of declines, reflecting weakness in income from the direct investment.
- Improvement in the ‘goods and services’ partially offset the y/y decline on a non-seasonally adjusted basis, on account of weak imports and a continued increase in the number of overseas tourists. However, this upside weakened because the trade surplus narrowed 19.6% m/m (seasonally-adjusted basis) for a second consecutive month of declines, a stronger increase in imports (2.1% m/m) than exports (0.5% m/m), and the service account deficit widened due to an increase in payments for other services.
Outlook:
Although Japan’s current account is likely to be in surplus over the near term, recent yen strengthening and a softer outlook of the global economy following the Brexit vote could weigh on both exports and service income, particularly tourism, and hurts its current account surplus.
The primary balance will remain the major source of its current account surplus and the Bank of Japan’s negative interest rate policy will continue to encourage overseas investment. That said, weak external demand, as well as the downside from a rising yen, will sandbag earnings from overseas operations and income from foreign currency assets.