What happens if Japan runs a trade deficit

Edward posted this in a comment to the previous post:

"Those who argue that Japan can simply keep eating its own debt indefinitely are right until and unless the economy can no longer run an external trade surplus.

Theoretically, as population ages, this point will be reached, since productivity will fall with rising workforce median age. So we know there is an outer limit somewhere, although we have no idea at this point where that limit is.

Once Japan has a trade deficit it will all be over pretty quickly, since then of course they will have to attract funds to finance the deficit, and this is where things will start to get pretty tricky."

Japanese workers take pay cuts to stay employed

On December 27, Bloomberg reported that "Japanese workers´ willingness to accept wage cuts to safeguard their jobs is lowering prices and deepening deflation". This assertion was attributed to Hisashi Yamada, chief senior economist at the Japan Research Institute in Tokyo. Yamada also asserted that

"Japan´s jobless rate would be around 10 percent, compared with the current 5.1 percent, if companies had fired workers rather than cut pay since Japan fell into a recession in 2008. "

The monthly average wage in Japan has fallen to 315,294 yen, the lowest level since the government started tracking the data in 1990. Assuming an exchange rate of 90 yen to the dollar, that is roughly $3,500 per month, or $42,000 per year.

Presumably Japan's employers are reducing labor cost to offset the effects of a stronger yen versus the dollar and price competition from Chinese goods on profitability.

One effect that the falling wage levels will have is to reduce the ability of Japanese households to put savings into government debt. This will add some volatility to the prices for Japan's government debt.

Falling wage levels also will make it more difficult for Japan to reduce its dependence on exports as the primary source of GDP growth.