Japan Fiscal Budget 2017: The QE To Infinity Experiment

| About: WisdomTree Japan (DXJ)

Summary

Japan posts trade surplus and current account surplus.

Japan's budget deficit predicted to increase slightly on higher expenditures.

Japan tax revenue predicted to be stable.

Japan's interest payments drop significantly due to lower interest rates.

Japan keeps base money target at 80 trillion yen.

The Ministry of Finance Japan has released a draft budget for 2017 and that report on the fiscal situation can be found here. I'll summarize my findings in this article.

First, let's focus on the trade and current account deficit in Japan. Both have been deteriorating rapidly in 2013, but since 2014 things have improved. Both the trade deficit and current account deficit have turned into surpluses.

The latest current account number in October 2016 was a surplus of 1720 billion yen. The reason for this is because the U.S. stock market has been on a tear and Japan's current account has benefited from this (see chart below from tradingeconomics).

The trade balance has improved, because import costs for oil and gas have been low (34% of total Japanese imports is energy). The latest November trade surplus figure came in at 153 billion yen (see chart below from tradingeconomics). This number is likely to improve as Japan's nuclear reactors are starting to come online in 2017-2018.

If we then move on to the budget deficits, there is a bit of light at the end of the tunnel. The deficit to outlay ratio (which gives the likelihood for hyperinflation) has come down from a peak of 62% to 41%, which is a huge improvement, but we are still in hyperinflationary territory (ratio above 40% is hyperinflationary) (see chart below from Correlation Economics).

The chart below (created by Correlation Economics) illustrates that the government has cut back on spending (red chart) and the budget deficits have come down as a result (green chart). Spending is estimated at 97 trillion yen in 2017. It also shows how tax revenues in Japan (blue chart) have gone up due to a rising Japanese stock market. Tax revenues are expected to come in at 58 billion yen this year, the highest since 1991. This rise in tax revenues has decreased the budget deficits in Japan. The trend has improved, but the budget deficit still tends to move upwards.

Finally, let's have a look at the monetary policy and interest payments on government debt. As you know, the Bank of Japan is now implementing an unlimited bond buying scheme. In November, 2016, the central bank of Japan announced it will buy whatever amount of bonds to keep the 10 year bond yield at 0%. The yen has crashed since that announcement (see chart below from Yahoo Finance). This effect will be exacerbated as global bond yields are rising as we speak.

Because bond yields are so low, interest payments are set to be very low for fiscal 2017 (9.16 trillion yen). The interest payments as a percentage of tax revenue will drop to 15.87%.

If we take a look at the Japanese central bank balance sheet, we can see that the Bank of Japan started to increase their asset purchases in 2013. The central bank bought approximately $600 billion in assets in both 2013 and 2014, which is 10% of its GDP (see chart below from the Financial Times). They increased the pace to $730 billion in 2015. For 2016 and onwards the Bank of Japan kept its base money target at 80 trillion yen.

Conclusion:

The massive money printing from the Bank of Japan was started in 2013 and has continued ever since. It effectively increased tax revenues through a higher stock market and deficits turned into surpluses. It did bring in a lower yield environment to spur economic growth. The 10 year bond yield is kept at 0% through an unlimited buying program announced in November 2016 and interest payments have gone down because of that. But it also had adverse consequences. The yen plunged ever since that November announcement and the Japan stock market didn't go up significantly accounted for a weaker yen. When you bear in mind that global bond yields are moving up, Japan could be getting into a lot of trouble if it wants to keep bond yields where they are.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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