Japan's Ministry of Finance has released a draft budget for 2020 and, in summary, it seems to point to economic growth.
Focusing on the important points, Japan had first seen deterioration in its trade deficit and current account deficit in 2013. Then in 2014, things improved with both the trade deficit and current account deficit turning into a surplus.
That said, the latest current account number in October was a surplus of 1820 billion yen. The reason is that the US stock market has been on a tear, and Japan's current account has benefited from this. Japan nowadays earns the bulk of its current account surplus from its income balance generated from its investment abroad.
On the other hand, the trade balance has improved because import costs for oil and gas have been low. The latest November trade deficit figure came in at 82 billion yen which has improved since Japan's nuclear reactors started to come on-line in 2017-2018. Since then, a deterioration has been seen again due to the trade war between the US and China. In fact, Japan is seeing less demand from China for its products.
Moving on to the budget deficits, an improvement can also be seen. The likelihood for hyperinflation to occur has come down from a peak of 62% to 39%.
This final number illustrates that the government has cut back on spending and the budget deficits have come down as a result. Spending is estimated at 102.7 trillion yen in 2020. In addition, tax revenues in Japan have gone up to an all-time high due to a rising Japanese stock market. Tax revenues are expected to come in at 63.5 billion yen this year, the highest since 1990. This rise in tax revenues has decreased the budget deficits in Japan.
On another note, the Bank of Japan is now implementing an unlimited bond buying program. In November 2016, the central bank of Japan announced it will buy any amount of bonds to keep the 10-year bond yield at 0% and are succeeding.
Due to bond yields being so low, interest payments are also set to be very low for fiscal 2020 around 8.4 trillion yen. That said, 2020 should also see a significant uptick in the interest payments probably due to higher projections in higher-maturity bond yields. Higher interest payments is an indication that the Japanese economy should grow, and the increasing tax revenues are evidence of this growth.
The Bank of Japan’s balance sheet saw asset purchasing increases of $600 billion per annum from 2013-2016 but have now decreased the pace to $300 billion per annum in 2019. This is an indication that the Bank of Japan is actually tapering, following the ECB and the Federal Reserve. This is reasonable, as the fiscal situation in Japan has improved markedly. Moreover, the Bank of Japan is expected to keep interest rates at 0% and continue to provide stimulus to maintain a 2% inflation rate.
Investors should expect Japanese government bonds to underperform as lower-maturity bonds will be capped at less than 0%, providing no return to bond holders.
This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.