Japan, World's 2nd-Largest Economy, Reports Rare Trade Deficit

By Blaine Harden
Washington Post Foreign Service
Saturday, September 27, 2008

TOKYO, Sept. 26 -- Japan, a nation that rode exports to become the world's second-largest economy, posted a highly unusual trade deficit in August.

It was an alarm signal for the country's already shrinking economy and yet another worrisome indicator for troubled global markets. The August figure was Japan's first monthly trade deficit in 26 years, excluding the atypical month of January, when exports here always drop for the holidays.

Exports to the United States dropped 21.8 percent from a year ago, the steepest monthly decline on record, the government said. Japan's trade surplus with the United States has fallen for 12 consecutive months.

The government attributed the trade deficit to a short-term imbalance: falling car exports and higher energy costs. Four of Japan's five largest carmakers said this week that global demand was falling, especially in the United States. At the same time, the cost of imported oil and coal soared to record highs.

"I expect it will only be a temporary phenomenon and believe that the Japanese economy has not been seriously ill," Kaoru Yosano, the economy minister, told the Kyodo news agency.

Others are not so confident. The Japanese economy shrank in the second quarter at the fastest rate in seven years. Rising fuel and food prices have pushed inflation to the highest rate in a decade. Exports, the primary engine of growth in the economy, contributed nothing to growth in the second quarter of the year -- and have apparently fallen since then.

If a Japanese trade deficit persists, it would also hurt the U.S. economy, said Shumpei Takemori, an economics professor at Tokyo's Keio University.

He said that a prolonged trade deficit would stall capital accumulation here and limit the vast amount of money that the Japanese have for decades pumped into U.S. Treasury bonds and other dollar-based accounts.

Japan's aging population -- and the declining earnings and savings of retiring baby boomers -- is certain to be another drag on the long-term capacity of Japan to invest abroad, he said.

The Japanese government, however, will continue to invest in the United States, officials say.

Japan has far too much invested in the American economy, at this point, to risk upsetting it by slowing down its investments or withdrawing money, two government officials said in recent days. Such steps could drive down the value of the dollar, endangering the value of Japan's foreign assets that remained there. About $860 billion of a $1 trillion reserve that is controlled by the Bank of Japan and the Finance Ministry is invested in U.S. government securities, most of it in Treasury bonds.

Unlike China, Singapore and other cash-rich countries, Japan has rejected the creation of a sovereign wealth fund -- and of moving its money to regions of the world where it can maximize investment returns.

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