Large current account surplus not a thing of the past

Surging import prices and depressed services exports have shrunk down Japan’s current account surplus to near zero over the past year. However, we expect a large surplus to return over the next couple of years as earnings from overseas assets rise and exports rise faster than imports which have been unusually strong relative to domestic demand. That may put some upwards pressure on the yen, but our view is that interest rate differentials rather than the terms of trade have recently been the key determinant of the exchange rate. And with the spread between US and Japanese yields to widen further, the yen may weaken further against the dollar.