By Tetsushi Kajimoto

TOKYO (Reuters) -Japan’s current account surplus fell sharply in December after a record rise the prior month, finance ministry data showed on Wednesday, highlighting the impact of persistent trade deficits and a weak yen on the country’s once-solid balance of payments.

The yen’s slide over the past year has bumped up the cost of imports, including commodities and oil that were already on the rise due to the Ukraine war, putting immense pressure on Japan’s overall current and trade accounts.

The current account surplus stood at 33.4 billion yen ($255.51 million) in December, down steeply from a surplus of 1.8 trillion yen the previous month that was driven by income gains from securities investments and hefty Japanese investments overseas.

The latest figure marked a decline of 334 billion yen from a year earlier and undershot economists’ median estimates for 98.4 billion yen surplus in a Reuters poll.

Japan’s current account surpluses have long been regarded as a sign of export might and a source of confidence in the safe-haven yen, but the account has occasionally fallen into the red on a monthly basis in recent years partly as a weaker yen has boosted the costs of imports.

While the cost of imports rise as the yen weakens, the attendant boost to exports that become cheaper to foreign buyers has not been as great due to firms shifting production abroad – a consequence of a previously strong yen making exports pricey.

Some analysts expect Japan’s balance of payments position to improve by the end of this year, as the downward pressure on the yen eases in line with an expected pause to the U.S. Federal Reserve’s monetary tightening streak.

“The current account will bottom out this year as energy prices level off and the U.S. rate hikes hit the ceiling, putting downward pressure on the dollar and reviving a strong yen,” said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities.

There is some worry in financial markets that Japan’s hefty public debt and a dwindling current account surplus could entrench weakness in the yen over the long run. The yen was down nearly 20% against the dollar last year, mainly weighed down by the Bank of Japan’s commitment to its ultra-easy policy even as other central banks including the Fed embarked on aggressive interest rate increases.

“Japan’s dire public debt could weigh on the yen currency in the long run although such risk as capital flight is unlikely to materialise anytime soon,” Maruyama said.

The primary income surplus, which includes direct investments, and interest payments and dividends from past investments overseas, hit 1.8 trillion yen, making it the largest amount for the month of December since comparable data became available in 1985.

For the whole of 2022, the current account surplus fell the most on record — by 10.1 trillion yen from the previous year — to reach 11.4 trillion yen. A weak yen and rises in energy prices took their toll, resulting in record trade deficits, although this shortfall was offset by a record amount of primary income gains.

($1 = 132.2500 yen)