On-going recovery in external demand to support steady surplus over near term
By Harumi Taguchi, Principal Economist at IHS Markit
Key Points:
- Japan’s current account surplus rose 18.2% year on year (y/y) to JPY2.8 trillion (USD25 billion) on a non-seasonally adjusted basis and also increased by 75.5% from the previous month to JPY2.2 trillion on a seasonally adjusted basis. Although the seasonally adjusted surplus surged to the highest level since October 2007 due to trade partners’ Lunar New Year holidays, the trend has not changed because the average surplus for January and February (JPY 1.7 trillion) was just slightly higher than the monthly average in 2016.
- The y/y increase in the current-account surplus reflected a surge in the trade balance thanks to a 12.0% y/y rise in exports outpacing a 0.3% y/y rise in imports. This offset weakness in the service and primary income balances.
- The service balance recorded deficit because of a softer surplus in the travel balance in line with declines in receipts from visitors from abroad and higher payments by residents in abroad. Primary income softened largely because of declines in income from portfolio investments, which offset an increase in income from direct investment.
IHS Markit Views:
Japan’s current account is likely to remain in surplus over the near term even though the drop-out of the seasonal effect from trade partners’ Lunar New Year holidays will soften the surplus. The recent correction for yen’s depreciation will reduce upside in exports of goods and services, as well as receipts from foreign currency assets, to some extent, but the ongoing recovery in external demand and weak domestic demand will help the trade surplus.
Recovery in the global economy also supports improvement in overseas operations and income from overseas investment. That said, geopolitical risks, trade friction and safe-haven yen appreciation could easily erode Japans’ trade surplus as well as the current-account surplus.