By Miyoko Ishigami
Tokyo, Feb 5 (KUNA) -- Japan is expected to increase oil imports from the Gulf States, Kuwait China Investment Company (KCIC) said Sunday.
"As long as the nuclear reactors remain shut and there is no alternative source of energy in the short-run, energy imports are forecasted to rise further," KCIC said in its weekly analysis.
"This could lead to a significant surge in oil exports from the GCC, as Japan tries to keep up with energy demand, creating a deeper deficit," it said. After 31 years, Japan's annual trade deficit made a comeback in 2011, following a dismal performance throughout most of that year.
In March, the country was hit by three devastating disasters -- an earthquake, a tsunami and a nuclear meltdown. This had a knock-on effect on exports as industrial production suffered a major setback, the company said.
The demand for imported energy surged as its nuclear reactors, which provided 30 percent of the country's energy, were shut down. In the last part of the year, exports suffered several blows again -- waning global demand, a stronger yen and heavy flooding in Thailand disrupting its manufacturing supply chain.
The loss in competitiveness to countries like South Korea, China and the US, where it is becoming relatively cheaper to produce goods, as well as the relocation of Japanese production plants abroad, are also having a negative impact on the trade balance' it said.
Japanese firms are increasingly relocating abroad due to two main detriments: high corporate tax levels and an appreciating yen, which are eroding production profits.
According to KCIC, JP Morgan predicts that in 2014, 76 percent of Japanese car firms will be situated overseas, up from 49 percent in 2003. This could further deteriorate the trade balance if the country starts importing cars from abroad.
Also, if profits are repatriated, this could further strengthen the yen, making exports even more expensive. A trade deficit in Japan can have serious repercussions on its ability to refinance its huge public debt, especially for a country that is almost purely export led, sad KCIC.
Over 10 years up to 2010, half of Japan's real GDP growth was accounted for by net exports. a deteriorating trade balance in Japan could be indicative of a decline in global momentum in the medium term.
If the trade deficit persists in 2012 and the current account surplus continues to shrink, Japan could go from being a steady provider of capital to a net borrower of capital. Japan's debt-to-GDP ratio stands at 206 percent in 2011, second only to Greece.
However, unlike its European counterparts, Japan's bond yields are among the lowest in the world mostly due to its traditionally large current account surplus and willing domestic investors, who already own around 95 percent of Japan's sovereign debt.
So if the current account balance does continue to deteriorate, then the government may be forced to turn to foreign investors to help refinance their debt. Foreign investors may demand higher yields however, and this could put the nation's debt levels in greater jeopardy.
Thus, if Japan is to avert a looming current account deficit, against a backdrop of waning demand, it needs to bolster its budget by reducing expenditures and by increasing consumer tax levies.
KCIC was founded in 2005 with a capital of KD 80 million by an Amiri Decree with a mandate to develop investment opportunities in Asia towards building an Asia focused asset management company. The public company employs a team of specialists in markets in Asia and currently manages assets in excess of USD 600 million.
Key shareholders include the Kuwait Investment Authority, the Sovereign Wealth Fund of Kuwait, National Investment Company, one of the leading investment banks in the Middle East, and Al Ghanim Industries, one of the largest conglomerates in the Middle East. (end) mk.asa KUNA 051216 Feb 12NNNN