No. 8 — February 25, 2000

 

Weekly Review

JAPAN'S CURRENT ACCOUNT SURPLUS CONTRACTED IN 1999 BUT NUMBERS STILL WORRISOME
--- by Douglas Ostrom

Japan's external imbalance in 1999 demonstrated an array of factors that affected the economy as it struggled to right itself after years of stagnation. The overall picture gleaned from the year's current account statistics is that of a recovering economy showing tentative signs of restructuring. However, Japanese investors appear to remain highly risk-averse when it comes to foreign investments, limiting the potential growth of investment income from abroad and arguably providing cause for concern about investor sentiment more generally.

The headline statistic, the current account surplus, shrank 22.7 percent in 1999, the result primarily of a drop in exports that outpaced the decline in imports (see Table 1). Both figures were down because Japan's trade data are presented in yen, which gained in value. In volume terms, which remove exchange rate and price changes, exports as well as imports rose last year, according to previously released customs-clearance trade statistics (see JEI Report No. 5B, February 4, 2000). The gain in exports despite the yen's strength was an indication of the economic robustness of Japan's trading partners. The increase in imports reflected some combination of the stronger Japanese currency and a tentative recovery.

Table 1: Japan's Balance of Payments, 1995-1999

(in billions of yen)

Exports f.o.b

Imports (f.o.b.)

Trade Balance

Services (net)

Income

Current Transfers

Current Account Balance

1995

¥40,260

¥27,915

¥12,344

¥-5,390

¥4,157

¥-725

¥10,386

1996

43,566

34,469

9,097

-6,779

5,818

-978

7,158

1997

49,519

37,209

12,310

-6,542

6,740

-1,071

11,436

1998

48,866

32,882

15,984

-6,455

7,401

-1,146

15,785

1999 (p)

45,769

31,715

14,054

-6,182

5,709

-1,384

12,197

1995

I

9,835

6,567

3,268

-1,276

1,126

-190

2,928

II

9,463

6,457

3,006

-1,241

958

-132

2,590

III

10,187

7,073

3,114

-1,395

1,049

-209

2,559

IV

10,776

7,819

2,957

-1,478

1,024

-194

2,309

1996

I

10,519

8,071

2,448

-1,533

1,417

-309

2,024

II

10,423

8,538

1,885

-1,678

1,583

-214

1,576

III

10,845

8,638

2,207

-1,766

1,503

-215

1,729

IV

11,779

9,222

2,557

-1,802

1,315

-240

1,829

1997

I

11,787

9,653

2,134

-1,616

1,905

-386

2,037

II

12,293

9,266

3,028

-1,637

1,767

-241

2,917

III

12,272

9,048

3,224

-1,747

1,521

-175

2,822

IV

13,166

9,242

3,924

-1,541

1,547

-270

3,660

1998

I

12,157

8,699

3,458

-1,431

1,872

-348

3,550

II

12,284

8,164

4,123

-1,678

1,647

-233

3,859

III

12,663

8,407

4,256

-1,693

2,145

-257

4,452

IV

11,763

7,616

4,147

-1,653

1,737

-307

3,924

1999

I

10,934

7,479

3,455

-1,395

1,536

-661

2,935

II

11,242

7,781

3,461

-1,536

1,541

-213

3,253

III

11,807

8,074

3,743

-1,711

1,482

-262

3,244

IV (p)

11,785

8,381

3,404

-1,540

1,150

-248

2,766

Note: The following exchange rates, expressed as yen per dollar, may be used for purposes of conversion: 1995, ¥94.4; 1996, ¥108.8; 1997, ¥121.0; 1998, ¥130.9; and 1999, ¥113.9. For the quarters shown: 1995: I, ¥96.0; 1995: II, ¥84.4; 1995: III, ¥94.0; 1995: IV, ¥101.5; 1996: I, ¥105.8; 1996: II, ¥107.6; 1996: III, ¥108.9; 1996: IV, ¥112.8; 1997: I, ¥121.2; 1997: II, ¥119.6; 1997: III, ¥117.9; 1997: IV, ¥125.3; 1998: I, ¥128.0; 1998:II, ¥135.7; 1998:III, ¥140.0; 1998: IV, ¥119.8; 1999: I, ¥116.5; 1999:II, ¥120.9 ; 1999:III, ¥113.6; and 1999: IV, ¥104.6.

Source: Bank of Japan

 

The more expensive yen also appeared to have artificially depressed Japan's chronic deficit on services as well as what had been a steadily expanding surplus in investment income, two components of the current account that are not included in the customs-clearance statistics. Services payments — such as those made by Japanese tourists abroad — and income receipts — for example, interest payments received on foreign bonds — typically are denominated in dollars.

The conversion of both sets of figures into yen implies a reduction even when the transaction volume remains the same. However, the drop in investment income at a time when overseas interest rates were stable and profits were increasing was surprising in light of a continuing net outbound capital flow. It suggests ongoing profitability problems at home or extreme aversion to risk on the part of Japanese investors with international portfolios. By itself, a larger net investment position abroad should have triggered an extension of the year-to-year increase in investment income that had started in 1994. That it did not hints that Japan is failing to reap the full benefits of repeatedly being the world's largest creditor.

Japan continued to add to its net investment position abroad in 1999, even if not at the heady rates of 1997 and 1998. By definition, a current account surplus equals net capital outflows (see Table 2). A jump last year in Tokyo's foreign exchange holdings largely offset the sharp fall in net private investment outflows. In fact, only in the fourth quarter did outflows exceed inflows.

Table 2: Japan Current Account Offsets, 1995-1999

(in billions of yen)

aaa aaa

Current Account Balance

Investment Flows

Capital Account

Errors & Omissions

Changes in Reserve Assets

1995

¥10,386

¥-6,061

¥-214

¥1,313

¥-5,424

1996

7,158

-2,993

-354

132

-3,942

1997

11,436

-14,347

-488

4,165

-766

1998

15,785

-15,408

-1,931

556

999

1999

12,197

-3,706

-1,909

2,214

-8,796

1995

I

2,928

-2,582

-102

1,237

-1,482

II

2,590

-1,712

-6

431

-1,304

III

2,559

684

-65

-866

-2,312

IV

2,309

-2,451

-42

510

-326

1996

I

2,024

1,263

-168

-799

-2,320

II

1,576

-764

-64

7

-755

III

1,729

-944

-80

-174

-530

IV

1,829

-2,548

-41

1,097

-337

1997

I

2,037

-3,866

-129

2,411

-454

II

2,917

-2,381

-78

-10

-448

III

2,889

-4,021

-92

1,724

-434

IV

3,660

-5,309

-52

1,132

569

1998

I

3,550

-3,399

-653

952

-450

II

3,859

-7,730

-112

1,588

2,397

III

4,452

-2,022

-1,000

-908

-522

IV

3,924

-2,257

-165

-1,076

-426

1999

I

2,935

71

-831

-1,088

-1,087

II

3,253

270

-410

-57

-3,056

III

3,244

92

-578

36

-2,794

IV (p)

2,766

-1,357

-90

541

-1,860

Note: The following exchange rates, expressed as yen per dollar, may be used for purposes of conversion: 1995, ¥94.4; 1996, ¥108.8; 1997, ¥121.0; 1998, ¥130.9; and 1999, ¥113.9. For the quarters shown: 1995: I, ¥96.0; 1995: II, ¥84.4; 1995: III, ¥94.0; 1995: IV, ¥101.5; 1996: I, ¥105.8; 1996: II, ¥107.6; 1996: III, ¥108.9; 1996: IV, ¥112.8; 1997: I, ¥121.2; 1997: II, ¥119.6; 1997: III, ¥117.9; 1997: IV, ¥125.3; 1998: I, ¥128.0; 1998:II, ¥135.7; 1998:III, ¥140.0; 1998: IV, ¥119.8; 1999: I, ¥116.5; 1999:II, ¥120.9; 1999:III, ¥113.6; and 1999: IV, ¥104.6.

Source: Bank of Japan

 

For the year, short-term inbound and outbound lending alike fell dramatically, probably reflecting the unwinding of both the asset and the liability position of Japanese banks. The lack of attraction was mutual. Not only are foreign institutions leery of their Japanese counterparts because of the latter's high-profile difficulties in recent years, but banks in Japan also have made reductions in overseas activities part of their restructuring plans. The return to a more typical pattern in 1999's fourth quarter could indicate that some aspects of the bank overhaul effort are nearly complete.

The investment flow components contained other good news for those hoping for a thoroughgoing revamping of Japan's economy. Inbound foreign direct investment more than tripled in 1999 to ¥1.4 trillion ($12.7 billion at ¥110=$1.00) from ¥417.9 billion ($3.8 billion). As such, the surge provided statistical documentation of the increasing role of foreign financial institutions, retailers and even manufacturers in Japan. The number loses some of its luster, however, in the context of a nearly ¥500 trillion ($4.5 trillion) economy and domestic capital spending that in the July-September 1999 quarter ran at an annual rate of ¥67.2 trillion ($610.9 billion). Moreover, despite the hoopla, last year's jump in inbound direct investment still was only slightly over half as large as Japanese firms' direct investment abroad, which equaled ¥2.6 trillion ($23.6 billion).

Portfolio investment flows captured by Japan's external payments data also painted a picture of an increasingly internationalized economy. Compared to a year earlier, Japanese investors nearly doubled to ¥3.7 trillion ($33.6 billion) their purchases of offshore equities in 1999. Foreigners were even more active in the Japanese market, acquiring ¥11.7 trillion ($106.4 billion) worth of Japanese stocks against only ¥1.8 trillion ($16.4 billion) in 1998. Japan's net debtor position in equities in 1999 despite its overall creditor status was another indication of the relatively risk-averse nature of Japanese investors.

The trends evident in Japan's external payments earlier in the year were apparent as well in the last three months of 1999. The current account surplus contracted 29.5 percent from the same period in 1998, its fourth straight quarterly decline, mainly in response to the continuing run-up in the value of the yen. Increases in foreign exchange reserves were smaller than the gains in the previous two quarters, probably because of less perceived need on the part of the central bank to offset upward pressure on the yen.

In recent weeks, in fact, the yen's appreciation appears to have reversed. After flirting with a level of ¥100=$1.00 earlier this year, the Japanese currency has moved into the ¥110=$1.00 range and beyond, closing at an even ¥111=$1.00 in New York February 18. Analysts interpreted the turnabout as stemming from investor anxiety over the news that Moody's Investors Service Inc., the American bond-rating agency, was considering another downgrade of Japanese government securities after the one it made in November 1998 (see JEI Report No. 44B, November 20, 1998). Apparently, experts at Moody's see the economic situation in Japan as far from settled and are worried about the still-rapid growth of the government's debt (see JEI Report No. 2A, January 14, 2000).

Of course, the current account statistics highlight one part of the opposite side of the balance sheet — the large and still-expanding stock of public and private overseas assets. The continued growth of these holdings could be a sign that institutional, corporate and individual investors see few good opportunities at home for their money despite a proliferation of investment options. The current account surplus expresses much the same idea by underscoring the deficiency of domestic demand. That balance shrank nonstop in 1999, raising the hope that demand was picking up, but by that criterion alone, the economy has a long way to go to recover fully. Based on other indicators as well as intuition, few analysts would dispute this assessment.

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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