JAPAN: Trade deficit portends long-term shifts

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1 1 of 5 11/6/2012 8:15 PM Back to previous page document 1 of 1 JAPAN: Trade deficit portends long-term shifts JAPAN: Trade deficit portends long-term shifts2012,, Oxford Analytica Ltd, Oxford, United Kingdom, Oxford. Find a copy /fmt:kev:mtx:journal&genre=unknown&sid=proq:proq%3aoxresearch& atitle=japan%3a+trade+deficit+portends+long-term+shifts& title=oxresearch+daily+brief+service&issn=&date= &volume=&issue=&spage=1& au=&isbn=&jtitle=oxresearch+daily+brief+service&btitle= Abstract (summary) Japan's current account. Japan's 30-year run of trade surpluses vanished last year as a string of adverse events affected Japan's exporters and attracted imports. This is partly a result of short-term forces acting on imports and exports, such as prices, exchange rates, disasters, and faster or slower growth in other countries, but it is also a portent of longer-lasting changes in the Japanese economy. Full text SUBJECT:Japan's current account. SIGNIFICANCE:Japan's 30-year run of trade surpluses vanished last year as a string of adverse events affected Japan's exporters and attracted imports. This is partly a result of short-term forces acting on imports and exports, such as prices, exchange rates, disasters, and faster or slower growth in other countries, but it is also a portent of longer-lasting changes in the Japanese economy. ANALYSIS: Impacts. Slower growth requires less investment, which increases business saving and boosts the current account. Low capital returns will motivate persistent financial outflows and support current account surpluses for many years.

2 2 of 5 11/6/2012 8:15 PM Exports are unconstrained, but net savings and financial flows as well as the income balance limit the trade balance. Japan's trade balance of goods and services showed a deficit of 4.2 trillion yen (52.3 billion dollars, or 0.8% of GDP) in 2011 on a GDP basis; the narrower goods balance was in deficit by 1.6 trillion yen (0.3% of GDP). The last time Japan experienced a merchandise trade deficit was in 1963 (1980 for the broader goods and services balance). Unique events conspired to produce the 2011 outcome: The March 11 earthquake and tsunami severely disrupted production of automobiles and electronics through direct damage to key suppliers. Significant efforts of reconstruction and substitution allowed production to recover by late summer (see JAPAN: Motor industry adapts to pre-empt supply shocks - August 4, 2011). The disaster at the Fukushima plants led to the shutdown of most of Japan's remaining nuclear power capacity, which previously generated some 30% of its electricity. To compensate for the lost power, operators increased output at conventional power plants, reactivated old ones, and brought in new capacity -- particularly smaller generators operating on liquefied natural gas. Foreign fuel sources added to Japan's import bills. Severe floods in Thailand began in late July and lasted for much of the rest of the year. Flooding stopped production at key Japanese auto and electronics plants that were links in integrated supply networks. The loss of parts caused production to halt at final production lines within Japan. Triple-entry bookkeeping. To project whether 2011's results were a one-off affair or illustrative of deeper trends, it is necessary to consider trade as part of three different accounting frameworks: Trade is part of the current account, comprising both trade and income balances. The current account is equal to the negative of the capital and financial account of the balance of payments. (The so-called capital portion is small and can be ignored here.) Both the current and financial accounts are equal to the country's net savings: the difference between savings and investment by households, companies, and government. Current account. View Image - The current account balance, comprising trade and income flows, reflects the difference between a country's production and its aggregate consumption. When there is a current account surplus, the economy possesses both unconsumed output and the savings to finance the sale of this excess to other countries. Japan's trade surplus has drifted down from its 1986 peak. The surplus itself caused this trend because each year's surplus is matched by Japanese financial investments in foreign economies: a trade surplus in Japan means that foreigners do not earn enough yen to fully pay for their imports, which must be financed by some form of IOU representing financial outflows from Japan.

3 3 of 5 11/6/2012 8:15 PM Japan's 30-year accumulation of foreign assets grew to be worth 7.3 trillion dollars View Image - in September 2011; its net holdings (excluding foreign assets in Japan) were 3.2 trillion dollars. Net foreign investments yielded a growing stream of interest and dividend income, adding up to 3% of GDP in These earnings can be thought of as competing with exports for foreign exchange, pushing up the yen's value. Since income flows into and out of the country are based on accumulated investments made over previous decades, they are independent of current trade flows. Consequently, for a given level of the current account, the trade balance is hostage to international income payments. A possible model for Japan is the United Kingdom's experience before 1915, when it had the highest productivity and standard of living among the world's economies. It also ran a trade deficit and, simultaneously, a current account surplus for the better part of a century. Savings balances. An economy with positive net savings possesses resources that can be invested abroad. Households were the traditional source of Japanese savings. In the 1970s, this amounted to one-quarter of disposable income. However, a combination of slower growth and an ageing society pushed down the renowned savings rates from 11% of GDP in the 1970s toward 2% in recent years. Households financed corporate investment during the miracle growth years. View Image - Economic deceleration led to declining business investment. Since 1996, Japanese businesses have been net savers. Slower growth also pushed the government into perennial deficits as revenues failed to keep up with government spending ( see JAPAN: Government debt defies international markets - January 25, 2012). Financial balances. As a whole, 30 years of capital outflows and the accompanying trade surpluses suggest that the explanation should be found in stable forces, relatively independent of short-term effects. Japan started to experience net capital outflows around the time that returns to investment in Japan fell below those in other countries. The particular form of the investments does not explain the continued financial outflows. Japanese outward-bound foreign direct investment, for example, shot up 200 billion dollars in 2004 and fell 300 billion two years later, leaving barely a trace in the current account. No single financial rivulet alone can explain the tide that is rushing from Japan. CONCLUSION: Without dramatic change in Japan's corporate governance, returns View Image - to investment will remain lower than in other developed countries, creating powerful incentives for capital to leave Japan and generating current account surpluses. Japan's ageing population produces opposing tendencies: households are reducing their savings, negatively affecting the current account surplus. However, slower growth implies reduced business investment, increased business saving, and a positive effect on the current account. There is little evidence of the current account surplus disappearing, but rising income from foreign assets will tend to reduce the trade surplus, even as the current account surplus persists.

4 4 of 5 11/6/2012 8:15 PM Indexing (details) Subject Location Classification Identifier / keyword Title Publication title Pages Economic conditions; Capital movement; Foreign investment; International trade Japan, Asia-Pacific region 9179: Asia & the Pacific, 1300: International trade & foreign investment, 1110: Economic conditions & forecasts Japan, Asia-Pacific region, Economic conditions, Capital movement, Foreign investment, International trade JAPAN: Trade deficit portends long-term shifts OxResearch Daily Brief Service n/a Publication year 2012 Publication date Feb 23, 2012 Year 2012 Publisher Place of publication Country of publication Journal subject Source type Language of publication Document type Oxford Analytica Ltd Oxford United Kingdom BUSINESS AND ECONOMICS Reports English News ProQuest document ID Document URL Copyright //search.proquest.com/docview / ?accountid=12702 Copyright Oxford Analytica Ltd No publication or distribution is permitted without the express consent of Oxford Analytica. Last updated Database OxResearch

5 5 of 5 11/6/2012 8:15 PM Bibliography Citation style: HARVARD JAPAN: Trade deficit portends long-term shifts2012,, Oxford Analytica Ltd, Oxford, United Kingdom, Oxford. Copyright 2012 ProQuest LLC. All rights reserved. Terms and Conditions