No. 21 — May 26, 2000

 

Weekly Review

JAPAN'S CURRENT ACCOUNT SURPLUS RISES DESPITE DIP IN TRADE SURPLUS
--- by Douglas Ostrom

The latest quarterly numbers for the broadest measure of Japan's trade, the current account, hint at a potentially dramatic change in the nation's external position. According to data that the Ministry of Finance released in mid-May, the current account surplus climbed 15.2 percent in the January-March period, even though the trade balance dropped 5.5 percent (see Table 1). For those accustomed to thinking of the current account surplus and the trade gap as synonymous, this result appears puzzling. In fact, though, it is consistent with predicted long-term trends. If the pattern persists, Japan in the medium term could import more every year than it exports.

Table 1: Japan's Balance of Payments, 1995-2000

(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

45,795

31,779

14,016

-6,151

5,696

-1,387

12,174

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

-349

3,550

II

12,284

8,161

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

3,734

-1,711

1,482

-262

3,244

IV

11,811

8,446

3,365

-1,508

1,136

-251

2,743

2000

I (p)

11,842

8,576

3,266

-1,222

1,707

-368

3,382

Note: The following exchange rates, expressed as yen per dollar, may be used for purposes of conversion: 1995, ¥94.1; 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; 1999: IV, ¥104.6 ; and 2000: I, ¥107.1.

Source: Bank of Japan

In contrast to the trade imbalance, which indicates the difference between exported and imported goods, the current account represents the combination of trade in services, net investment income and current transfer payments with merchandise trade. Japan almost always has a big deficit in services, reflecting in large measure expenditures by Japanese tourists abroad, but with rare exception, it runs a surplus in investment income as a result primarily of returns on fixed income and equity investments abroad. Because current transfers usually are minimal, Japan's current account surplus generally is smaller than the trade imbalance if net income is smaller than the deficit in services. It is larger if the reverse holds.

Typically, net investment income does not offset the deficit in services, making the current account smaller than the trade deficit. However, a big gain in imports in the first quarter of 2000 outpaced the rather robust growth of exports and trimmed the trade surplus, while a strong increase in investment income easily topped a smaller services deficit. As a consequence, the current account surplus exceeded the trade surplus for the first time since the third quarter of 1998.

Economists expect to see this outcome more often in the future. As long as Japan has a current account surplus, the nation accumulates IOUs in one form or another. Assuming that these IOUs are invested profitably — a big if — income should increase from a combination of compound interest and continuing additions to principal. Hence, investment income much larger than the deficit in services — as happened in the first quarter — eventually could become routine. In fact, income could become so large that individuals and businesses in Japan might choose to repatriate more and more of their money. In that case, the income flowing back to Japan would create an important source of demand for yen. As such demand rose, the yen would appreciate, leading, in turn, to lower exports and higher imports.

This logic implies that the link between the current account surplus and the decline in the trade surplus will become tighter in the future. In fact, in less than a decade, Japan's trade surplus could become a deficit (see JEI Report No. 45A, December 8, 1995). To analysts used to an unbroken string of surpluses dating back to 1964, chronic trade deficits would be a truly new development.

Of course, this state of affairs will not develop smoothly. In recent years, for example, Japanese companies and individuals have invested badly abroad, opting out of the heavy exposure to American equity markets that would have generated handsome gains. Returns on foreign direct investments also have been spotty. In some years, the yen's appreciation has meant lower returns in terms of the Japanese currency even when dollar yields have risen.

Moreover, although numerous improvements have been made in recent years, Japan's current account statistics still suffer from severe measurement problems. The data shown in Table 2 reflect the significant impact of a single adjustment. Since the release of the current account numbers for 1999 three months ago (see JEI Report No. 8B, February 25, 2000), Tokyo discovered an additional ¥2.8 trillion ($25.5 billion at ¥110=$1.00) in outbound money market investments made in the first quarter of last year. This correction moved the amount from the errors and omissions column to the investment flows category, thereby reversing the signs of the initially reported figures. Thus, in contrast to the earlier small but unusual net investment inflow of ¥71 billion ($645.5 million), the statistics reveal a relatively normal ¥2.7 trillion ($24.5 billion) net outflow. In terms of long-term current account trends, this revision implies that in coming years, investment income will exceed the previously anticipated levels by billions of yen annually.

Table 2: Japan Current Account Offsets, 1995-2000

(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

12,174

-3,487

-1,909

2,018

-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

-2,711

-831

1,694

-1,087

II

3,253

270

-410

-57

-3,056

III

3,244

92

-578

36

-2,794

IV

2,743

-1,138

-90

346

-1,860

2000

I (p)

3,382

-1,862

-489

1,051

-2,082

Note: The following exchange rates, expressed as yen per dollar, may be used for purposes of conversion: 1995, ¥94.1; 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; 1999: IV, ¥104.6 ; and 2000: I, ¥107.1.

Source: Bank of Japan

 

Of course, sometimes the adjustments go the other way. In any case, fluctuating currencies and measurement problems — not to mention business cycles — render difficult a precise forecast of when Japan will experience trade deficits year in and year out. However, the arithmetic of the current account, together with the assumption that it will remain in surplus, makes this eventuality all but certain over a period of a decade or more.

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

*** JEI Report will not be published June 2, 2000 because of the Memorial Day holiday. ***
*** The Next Issue will be dated June 9, 2000 ***
 

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