How is Japan managing surplus current account balance when its trade balance turned negative?
Japan is a well-known manufacturing powerhouse that dominated the 20th century. Its electronic goods, automobiles and home appliance with high quality at affordable prices had engulfed the entire the world.
However, after the bubble burst in the 1990s and prolonged economic recession, South Korea and China rapidly developed and replaced some of Japan’s traditional manufacturing industry, such as petrochemicals and semiconductors. As a consequence, many Japanese manufacturing companies declined, thereby resulting in decreasing trade surplus in the 2000s.
Positive trade balance means that the value exports exceeds that of imports, while negative trade balance means that the value of imports exceeds that of exports. Usually, countries like to maintain positive exports as it boosts their GDP and earns money from abroad.
The chart below shows that Japan’s merchandise trade balance turned negative from 2011 to 2015, and again turned negative in 2018 after recording surplus for a while from 2016 to 2017.
Source: Capital IQ
What is surprising is that current account balance has never dipped below zero, maintaining surplus even with steep trade deficit since the 2000s. What is going on here?
Current account balance consists of four components: trade in goods, trade in services, investment incomes and transfer of payments. Among these items, transfer of payments takes very small portion as it is related to international aids.
Trade in services includes intangible services, such as insurance and legal services, while investment incomes include dividends, interest and migrants remittances from abroad.
While the exact breakdown of Japan’s current account balance was not available due to limited data, it can be inferred that Japan’s decreasing trade balance is offset by either increase in service trade or increase in investment incomes.
The chart below illustrates how much Japan has accumulated its foreign assets from the 1990s onwards. With a downturn in domestic market, the Japanese started purchasing assets abroad with their enormous amount of money they earned from trade surplus back in their heydays.
Source: World Bank
Note: Net foreign assets are the sum of foreign assets held by monetary authorities and deposit money banks, less their foreign liabilities. Data are in current local currency.
According to Asahi Shimbun, Japan’s net assets overseas are larger than any other nation for the 28th straight year. With 73,116 billion yen in asset in 2018, Japan is the largest debt lender and asset owner in the world.
Hence, the secret to Japan’s ability to maintain current account surplus in spite of trade deficit is the fact that Japan has so much investment abroad that its dividends, interest and other financial incomes, which are enough to make up for the trade deficit.
This is one of the reasons why Japanese yen is considered a safe asset, which I will explain further in a subsequent article. The other reason is that the inflation rate is so low in Japan that the value of yen does not get depreciated.
Does Japan have to worry about its declining trade surplus and manufacturing competitiveness? Perhaps it should.
Do Japanese have to worry about aging Japanese population? Definitely they should, as it is the fastest aging country in the world.
But does Japan have to worry about losing its status as one of the wealthiest countries and yen losing its international reserve currency? Not in the near future, because Japan still earns so much from the assets it owns overseas.
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