Japan's energy shift can hasten end to easy borrowing

Japan's nuclear crisis may achieve what the global financial crisis and the euro zone debt debacle failed to accomplish - serve as a wake-up call for governments accustomed to borrowing at will and at minimum cost from their cash-rich citizens.
Economists have long warned that as Japan grows old it will eventually start running down its huge savings, forcing Tokyo at some point to finance more of its ballooning debt abroad at higher and less predictable rates. That point, however, had appeared distant enough to allow politicians to stick to business as usual.
The shift away from nuclear power in the wake of meltdowns at the Fukushima nuclear plant is set to drive up Japan's fuel import bill and wipe out its trade surpluses, turning off the tap on a major source of savings and changing that slow-motion dynamic. The ruling party's recent decision to delay a plan to double the 5 percent sales tax shows that the significance of such a shift in Japan's energy and trade balance has yet to sink in. But analysts have little doubt that the moment of reckoning has moved forward.
"The prospect of the current account surplus decreasing or going into deficit would shatter the firmly held belief in the market that government bonds are stable thanks to being almost entirely domestic owned," said Jun Ishii, chief fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
Thanks to its exports prowess, the world's third biggest economy for decades has racked up sizeable surpluses in its current account - a broad measure of trade and other flows - feeding a vast pool of savings that the government taps by selling bonds to domestic financial institutions. But a recent surge in Japan's fossil fuel imports has pushed trade into deficit, raising concern that Japan's current account can also slump into the red.
This could happen as soon as in early 2015 says Masaaki Kanno, chief economist at J.P. Morgan Securities Japan, who expects the nation to report in 2011 its first trade gap since 1963. Up to now many economists have assumed that Japan had another six or seven years before its fiscal and demographic trends reached a tipping point when public debt, already twice the size of the $5 trillion economy, would exceed savings.
Disappearing current account surpluses can bring forward that crunch time when Japan will have to tap overseas markets for funding. Today the world's third biggest economy covers nearly all of its financing needs at home at rates as low as 1 percent for 10-year bonds. "That crunch point, with a jump in yields, would make Japan's debt position instantly unsustainable," says George Worthington, chief Asia-Pacific economist at IFR Markets.
A sobering idea for the bond market is that Japan's recent surge in fossil fuel imports may become a longer term trend. Of the country's 54 nuclear reactors that before the disaster supplied about a third of its electricity, only six are running as the rest remain switched off after routine maintenance amid public safety concerns. The reactors still in operation are due to be shut down by May for the routine checks.