No. 33 — August 25, 2000

 

Weekly Review

JAPAN REPORTS BIGGER SPRING CURRENT ACCOUNT SURPLUS
--- by Douglas Ostrom

The current account surplus, the broadest measure of Japan's chronic trade imbalance, rose again in the April-June period after contracting in each of 1999's four quarters, although the increase was a scant 2.3 percent (see Table 1). Moreover, for the second straight quarter, the gain occurred despite a decline in the customs-clearance trade imbalance (see JEI Report No. 30B, August 4, 2000).

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

11,856

8,647

3,209

-1,164

1,717

-358

3,404

II (p)

12,217

8,866

3,351

-1,287

1,456

-191

3,328

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; 2000: I, ¥107.1; and 2000: II, ¥106.6.

Source: Bank of Japan

The principal difference between the two yardsticks is that the current account statistics include trade in services and investment income. Customarily, the services balance, perennially in deficit, is larger than net investment income, always in surplus, resulting in a current account surplus that is smaller than its trade counterpart. In recent years, particularly in the first two quarters of those years, net investment income has risen relative to the deficit in services, sometimes by enough to make the current account surplus larger than the gap between goods exports and imports. This past spring, net investment fell from its year-earlier level but not by as much as the services deficit dropped, lifting the current account surplus despite a smaller trade imbalance.

The decline in investment income was a modest surprise in light of Japan's enormous and upward-trending current account surplus, which typically generates more IOUs to Japanese businesses, individuals and the government. An increase in net assets implies rising returns, other factors equal. However, given that most investment income is earned in dollars, the 13.4 percent appreciation of the yen in the second quarter compared to a year earlier had the effect of wiping out the gain in investment income measured in yen.

The even greater drop in the services shortfall came in the face of steady net payments for passenger transportation and travel, the main reasons why this gap is perpetual. The cause was a reduction in the already-small deficit in other services. Demand for many of them is denominated in dollars, but it is insensitive to changes in the exchange rate. With the yen's run-up, the value of these services declined.

For the fifth straight quarter, an increase in reserve assets in the spring equaled more than half the current account surplus (see Table 2). In the past, analysts proposed that this growth was the result of intervention in the foreign exchange market by the Bank of Japan or other central banks on Tokyo's behalf. Probably because its purpose is better served by keeping speculators guessing, BOJ seldom, if ever, confirmed the intervention reports.

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

3,404

-2,041

-489

1,207

-2,082

II (p)

3,328

-2,167

-100

762

-1,823

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; 2000: I, ¥107.1; and 2000: II, ¥106.6.

Source: Bank of Japan

Since the April 1 start of the current fiscal year, however, Tokyo has adhered to new International Monetary Fund guidelines regarding foreign exchange positions. Accordingly, it disclosed information August 8 on interventions during the second quarter, identifying one major instance. In connection with the release of the modestly optimistic results of BOJ's April tankan (short-term business survey) (see JEI Report No. 14B, April 7, 2000), the central bank bought dollars April 3 to the tune of ¥1.4 trillion ($12.7 billion at ¥110=$1.00), presumably to stem the rise of the yen against the U.S. currency. That intervention apparently accounted for the lion's share of the April-June period's ¥1.8 trillion ($16.4 billion) rise in foreign exchange reserves.

A net investment outflow of ¥2.2 trillion ($20 billion), which was fairly close to the January-March figure, represented a further offset to the current account surplus. However, the composition of the flows behind the spring number was strikingly different. In the latest quarter, net overseas direct investment soared to ¥1.1 trillion ($10 billion), in part because foreigners actually disinvested in Japan. This pullback suggests that the recent surge of foreign interest in Japanese markets might be ebbing. Outbound portfolio investment also jumped in the second quarter, reaching a net ¥4.2 trillion ($38.2 billion). Wall Street traders, always nervous about the volume of Japanese investment in U.S. stocks and bonds, no doubt were happy about this development.

Of course, if the net outbound investment flow was relatively constant between the first and second quarters of this year and if direct and portfolio investment was up in the spring, something had to decrease. The answer, as so often is the case with Japan's current account data, is found under "other investment flows." This catchall category swung from a ¥4.8 trillion ($43.6 billion) outflow in the January-March period to a ¥3.1 trillion ($28.2 billion) inflow during the following three months. Most of the shift marked the end of a stretch of time when Japanese financial institutions cut short-term borrowing overseas. Such debt increased by ¥730 billion ($6.6 billion) in the spring, signaling a return to the more normal situation in which the expansion of these liabilities has the effect of trimming the overall net investment outflow. If nothing else, this result is further evidence that the perceived international creditworthiness of Japanese banks continues to improve.

On balance, however, the April-June current account data point to a Japanese economy that is in slow-growth mode. Despite BOJ's relatively modest April currency market intervention, the yen has managed to hold quite steady in recent months. One interpretation is that perceptions of the health of the world's second-largest economy probably are fairly constant. The yen's second-quarter average value against the dollar of ¥106.6=$1.00 was virtually identical to the January-March figure of ¥107.1 and the mid-August range of ¥108 to ¥109.

Notwithstanding their longtime aversion to currency fluctuations, in the current circumstances, Japanese policymakers might appreciate the vote of confidence in the economy that a stronger yen would imply. If speculators thought that significant growth lay ahead, they would bid up interest rates on Japanese securities, attracting foreign investment and pushing the yen even higher.

That clearly is not happening to a significant degree. Partly as a result, Japan's current account surplus is unlikely to change much. For the balance of this year, any movement in it probably will be dominated by the effects of the yen's strong appreciation in 1999. Under the surface, however, the capital flow offsets to the current account surplus will continue to point to some important changes occurring in Japan's financial sector.

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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