S&P Japan Rating And Its Trade Deficit

Two bad things happened regarding Japan at almost the same time. It announced its largest monthly trade deficit ever, at $18.7 billion. And, S&P affirmed its long term AA- rating, but with a negative outlook. The two were not related, but they might as well have been.

S&P wrote

Japan’s sovereign ratings are constrained by the government’s weak policy foundations, large fiscal deficits, and high debt, as well as prolonged deflation and an aging and shrinking workforce.

The situation is more complicated than that. An onging high trade deficit will be based on high fuel imports, and weak exports which are due to some extent on low demand from China. Neither situation will get better soon. Japan’s nuclear power problem has made it more dependant on outside energy sources. That will be exacerbated by a rise in oil prices. Brent in now at $121 a barrel, and events in Iran may keep it there. S&P’s negative outlook will only be strengthened by this trouble.

The problem with the Japanese economy is additionally due to what appears to be a sharp slowing of the Chinese economy. This has likely affected Japanese business exports. Worse, damage done to China’s consumer base means Japan’s consumer products exports to China could stay low for quarters or even years. The Chinese have been savers and not consumers as far as most people remember. A drop in their chance to get higher wages, or to find jobs at all will be a growing problem. And, Japan cannot count on strong exports to EU nations to make up for the China weakness.

Japan’s S&P rating may not remain at AA- for long. The Asian nation’s trade situation will get worse, and it will be because of issues it cannot control.

Douglas A. McIntyre