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Japan Current Account Logs Biggest Fall on Record

Japan's current account surplus shrank sharply last year to its smallest in 15 years as weak exports and surging fuel imports resulted in a rare trade deficit, raising worries about the country's declining ability to fund its huge public debt with domestic savings.

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The current account balance — a broad measure of trade and other flows — logged a surplus of 9.6289 trillion yen ($125 billion) in 2011, down 44 percent from the previous year, marking its biggest fall on record, although income from overseas investment still more than offset the trade deficit.

The decline in inflows has been heralded by earlier data that showed Japan posted its first trade deficit since 1980 last year as a devastating earthquake in March hurt exports and increased its reliance on fuel imports due to nuclear plant shutdowns.

"It is hard to consider that Japan will become a deficit in current account in medium term," said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Morgan Stanley Securities in Japan.

"But there is a risk if a yen sharply appreciates and the nation loses global competitiveness, the timing to become deficit country may come sooner than expected."

In December, the current account surplus tumbled 74.7 percent from a year earlier, roughly matching a median market forecast for a 71.9 percent decline and followed a 85.5 percent drop in November.

The surplus stood at 303.5 billion yen ($3.95 billion), against a median forecast for 336.9 billion yen, logging the 10th straight monthly fall.

Few market players expect Japan to immediately run a deficit in the current account, which includes trade and returns on the country's huge past investments abroad.

But funding problems may arise sooner than thought as Japan's fuel imports are likely to keep growing with only three of the country's' 54 nuclear reactors in operation while a global slowdown and the yen's persistent strength hamper recovery in exports, compounded by a rapidly aging population.

Were Japan to run a current account deficit, it would have to tap overseas markets for funding its huge public debt at already twice the size of its $5 trillion economy, possibly ending years of stable financing almost entirely at home at rates as low as 1 percent for 10-year bonds.

Prime Minister Yoshihiko Noda is pushing to double Japan's 5 percent sales tax in two stages by October 2015 to fund the bulging social security costs of a fast-aging society, warning Tokyo cannot remain indifferent to the debt crisis in Europe.

But passage of tax hike bills is far from assured with oppositions threatening to block legislation in parliament in hopes of forcing a general election.

Japan's sovereign debts are currently rated AA-, or three notches below the highest rating, by the three major global credit rating agencies.