The US dollar rose against the yen as news emerged of a government report on Japan’s finances which has revealed that Tokyo will face increasing difficulties in paying for its commitments without recourse to debt.
The primary balance deficit, a measure of how well (or, as in this case, how badly) the Japanese government can pay its way via taxes and other revenues, will reach ¥23.2 trillion in 2020. The forecast suggests that Prime Minister Naoto Kan faces even greater challenges in his quest to create a primary balance surplus by the end of 2020. In order to remedy the shortfall, substantial tax-raising measures or spending cuts will need to be implemented, and this will garner significant opposition from the Japanese people. Japanese pride will be hurt somewhat by official confirmation that China has surpassed it as the world’s no.2 economy, but the continued growth of its larger neighbour will help to fuel that of the Japanese economy. However, fear of high inflation will mean that a further interest rate hike is on the cards in China, which may prompt another temporary shift back to the yen.