No. 5 — February 4, 2000


Weekly Review

--- by Douglas Ostrom

The yawning gap between Japan's exports and imports finally is narrowing again. Reversing two years of increases, the country's customs-clearance trade surplus contracted 11.7 percent in 1999. The rate of decline picked up over the course of the year, with the fourth-quarter imbalance plunging 19.3 percent from its position in the same period of 1998 (see Table 1). Regional imbalances and data adjusted for price and currency changes confirmed the pattern of reduction.

This development presumably was welcome news to internationalists on both sides of the Pacific who worry that Japan's large and persistent trade imbalance provides ammunition for those in the United States and elsewhere who favor trade restrictions on the grounds that Japan and certain other nations take unfair advantage of the world's most open economy. For that matter, internationalists would grasp at any straw in the wind at a time when the global trade regime appears to be under increasing assault, as exemplified by the protests at the abortive World Trade Organization meetings in Seattle late last year (see JEI Report No. 46B, December 10, 1999) and again during the late January discussions of global movers and shakers in Davos, Switzerland.

The data shown in Table 1 obscure a number of important factors that tend to make the turnaround in Japan's trade position more impressive. The 14.9 percent appreciation of the yen in 1999 hid increases in both exports and imports. The 6.1 percent decline in overseas sales and the 4 percent drop in purchases from abroad become gains of 2.2 percent and 9.5 percent, respectively, when the effects of currency and price fluctuations are eliminated.

With such adjustments, Japan's 1999 trade figures become part of a familiar but important story. The perception that the economy was in the early stages of a recovery that would increase demand for investment funds led to a run-up in the yen's value beginning in late 1998 (see JEI Report No. 3B, January 21, 2000). This appreciation made exports less competitive in world markets and imports a better buy in Japan. In the expanding global economy, however, exports managed some growth, although Japanese producers probably lost market share to companies in countries whose currencies were weaker. The stronger yen also helped imports to expand faster than the economy, which many experts believe probably managed a price-adjusted gain of just under 1 percent last year.

Japan's regional trade relationships changed a little in 1999. The revival of East Asian economies led to relatively strong increases in exports to some countries, while the growth in imports that did take place reflected the impact of the depreciation of regional currencies against the yen (see following article). By contrast, sales to the United States declined by almost as much as aggregate exports (see Table 2), suggesting the likelihood that the volume of shipments to this country was fairly flat despite the robust economy, which expanded 4 percent in real terms, according to preliminary data. Japan's imports from the United States were off a sharp 13.1 percent. This contraction implies that purchases dropped even in real terms and that U.S. firms ceded ground to rivals whose yen-denominated sales declined far less. Japan's third major regional trading partner, Western Europe, bought 10.1 percent less while posting a comparatively modest 4.3 percent drop in sales.

The global fourth-quarter figures accented the trends in the annual trade data. Exports expressed in yen were up marginally in the last three months of 1999 despite the ongoing appreciation of that currency; imports rose fairly strongly. In volume terms, shipments abroad increased 8.9 percent from the year-earlier level, while purchases soared 16.5 percent. As with the year as a whole, Japan's two-way trade with the United States tended to be more sluggish than its transactions with other countries.

Japan's 1999 trade data suggest, albeit very tentatively, that the economy at long last is doing what Washington has repeatedly urged — that is, absorbing a higher volume of imports, although the origin of those extra purchases tends not to be the United States. Moreover, Japan is likely to import even more in coming months, reflecting the lagged effects of a strong yen. Further declines in the trade surplus are quite possible as a result.

The ups and downs of Japan's trade surplus raise the question of the extent of political fallout in Washington and in other capitals. In the past, an expanding Japanese surplus, the trend from 1997 until early last year, might have been expected to increase trade tensions and to prompt calls on Capitol Hill to "do something." That has not happened. Consequently, the drop in Japan's overall trade surplus in 1999 and in the bilateral gap in the fourth quarter — and the prospect that the declines will continue — are unlikely to have the corollary effect of easing frustrations, internationalists' hopes notwithstanding.

In fact, the events in Seattle and Davos raise the possibility that threats to the existing world trading order are on the upswing. The fears expressed on these two occasions were independent of any worries about Japan's trade surplus or even about the health of the American economy, which remains robust. They might be a consequence of a prosperity that gives people the luxury of having a broad range of concerns that normally would be secondary to paycheck issues.

While not a specific target, Japan certainly would be affected if world trade became more restricted. Tokyo could find itself in a new and troubling situation, vulnerable to shifting international public opinion concerning trade but unable to do much to shape that thinking through policies that influence Japan's enormous surplus. The nation's trade officials tend to be professional worrywarts who rest slightly easier when Japan's trade gap narrows. In the current environment, however, they might not have even that comfort.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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