Japan Swings To Record...

Japan's current account balance swung to its largest deficit on record in January, with the income surplus tumbling about a third from a year earlier, adding more weight to an already falling yen.

The first deficit in 13 years came as the global financial crisis dried up demand for Japanese exports and, combined with a strong yen at the time, shrank the profits from overseas investments, including subsidiaries of its major manufacturers.

"The supply-demand dynamics have changed, and the current account balance indicates further yen weakness," said Kimihiko Tomita, head of foreign exchange at State Street Bank & Trust Co.

"This is big news, because we are not used to trading the yen in an environment of current account deficits."

The yen has slipped 11 percent since hitting a 13-year peak against the dollar in January as Japan's economy grapples with diving exports and its worst recession in the postwar era.

The contraction in Japan's main export markets is pushing industrial giants such as Toyota Motor Corp and Sony Corp deep into the red, prompting job and production cuts and setting the economy on course for its longest recession in modern times.

"We expect a further deterioration in the current account balance," said Akira Maekawa, senior economist at UBS.

"We have seen the declines in exports, and now we see the income balance declining because the global financial crisis is cutting earnings on overseas investments. This is a bad development for an export-oriented economy."

Japan's current account balance fell to a deficit of 172.8 billion yen ($1.8 billion) in January, government data showed.

It was the first deficit since January 1996 and much deeper than the 15.3 billion yen median forecast from analysts polled by Reuters.

The income surplus slipped 31.5 percent from a year earlier, due to lower interest rates and dividend payments from overseas. A stronger yen in January also reduced the value of income from overseas investments, a finance ministry official said.

Only 10 months ago, Japan enjoyed a record income monthly surplus of 1.96 trillion yen thanks to large dividend and interest payments.

Other data on Monday showed bank lending rose in February from a year earlier while commercial paper issuance fell, although less than in January, reflecting a slight easing in gummed up financial markets that have forced companies to borrow from banks.

While there may be some signs of easing tension in the country's credit markets, declining export and income revenues will weigh on the economy for months to come.

The current account helped the dollar rise about half a yen to 98.39 yen while Tokyo's benchmark Nikkei stock average fell 0.8 percent as fears for the future of General Motors took their toll on Japanese rivals.

Japan's income surplus shrank 31.5 percent in January from a year earlier due to lower interest rates and dividend payments from overseas, a Ministry of Finance official told reporters.

A stronger yen also reduced the value of income from overseas investments, he said.

Liberalised tax rules on the repatriation of profits, expected to take effect in April, are likely to tempt some companies to keep some profits overseas for now but analysts played down this influence.

"The main focus for Japanese companies at the moment is to secure liquidity whether it may be operations at home or overseas," said Osamu Takashima, market analyst at Bank of Tokyo-Mitsubishi UFJ.

With Japanese share prices hovering just above 26-year lows and the country's key export industries suffering from an unprecedented downturn due to the global slump, the government and the central bank are under pressure to boost domestic consumption and spur corporate lending.

The balance of outstanding loans held by Japanese banks rose 3.5 percent in February from a year earlier, after a 3.6 percent increase the previous month.

Outstanding Japanese commercial paper held by banks fell 6.1 percent in February from a year earlier after a 10.1 percent drop in January.

(Reuters)

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