In a prior piece this year, I proclaimed Japan to be my favored candidate to be the black swan of 2012. By this I mean that a financial accident in Japan that would create massive havoc in the world markets seems even more likely to me than something originating in Europe.
The reason is precisely because all eyes (and efforts) are focused on Europe, leaving Japan out of focus and unattended, so to speak. This is practically a requirement for a crisis spot; crises never seem to arise in the place everybody is already watching. Japan is nicely out of focus and therefore a good place for us to keep our eyes trained upon.
In the most recent podcast with Mish, we discussed the fact that Japan had recently posted its largest first half trade deficit in history. Then Mish asked if Japan's current account had slipped into negative territory yet, as that event will accelerate the pace at which Japan's looming structural insolvency will arrive.
While discussing the current account, a normally obscure economic term, seems a bit wonkish, it is really quite important. So let's start there, with a definition as a refresher for myself and perhaps an introduction for others.
The Current Account
As is true of your personal economic situation, a country's financial health can be measured by the total balance of payments that are entering and leaving the borders. Broadly speaking, if more money is leaving than entering, then a country's economic health is thought to be weak and possibly deteriorating.
The reason we care about the current account (CA) for Japan is that a country with a positive CA is a net lender to the world, whereas a country with a negative CA is a net borrower. For decades Japan has been a very important net lender to the world, specifically the US, where it holds a hoard of Treasury notes that are worth nearly a trillion dollars.
How is the CA measured? The formula is CA = (exports) – (imports) + (net income abroad) + (net current transfers).
- Exports and imports each include both goods and services. We're all familiar with those.
- Net income abroad measures interest payments and salaries paid to a country less those paid by a country.
by a1sinclairaol-com 
