In recent weeks I have received many curious E-mails about Japan all asking the same question – if net exports are positive and households saving are in decline, how come the budget deficit is so big? It is a good question and the answer relates to developing a good understanding of the components of the National Accounts and the way they interact. As I explain here, the private domestic sector is increasing its saving in Japan but it is all down to the corporations sitting on huge piles of retained earnings and reducing their investment. What these trends tell anyone who appreciates the way in which the macro sectors interact is that sustained budget deficits are required in Japan and any move to austerity would be disastrous.