JAPAN’S BOP ANALYSIS
By Aslı AKDAŞ
GENERAL ANALYSIS ABOUT THE ECONOMY:
The general public tends to know little about the balance of payments (BOP), recognizing only that more exports mean a surplus while more imports create a deficit. However, the BOP reflects a country’s economy and industrial structure like a mirror. And Japan’s balance of payments has undergone considerable change over the last 20 years. First, with very few exceptions, Japan’s trade balance has remained consistently in the black for the last 40 years. Surplus increased in the 1980s, and because a surplus for Japan means a deficit for trading partners, serious trade friction problems arose with the US and Europe. The trade balance is the difference between exports and imports of goods, and Japan’s massive surplus over that period was the fruit of exports of consumer durables such as cars and consumer electronics. The 1980s marked the height of Japan’s manufacturing. However, having peaked around 1990, Japan’s trade surplus subsequently experienced a gradual decline as the manufacturing industry stopped exporting from Japan and instead shifted its plants offshore to engage in local production. The direct cause for the shift was the need to avoid trade friction, but producing locally soon opened manufacturers’ eyes to the merits of manufacturing close to local consumers. Yen appreciation as of the late 1980s too accelerated this shift to local production. Japan’simports depends on oil and most other resources and the manufacturing industry tends to be viewed as the key player in paying for these resources. But as we discussed before, Japan was experiencing a steady shift toward offshore manufacturing and this situation caused noticeable decreasing on domestic manufacturing. In the case of the newly developing Asian economies in particular, manufacturers simply cannot export finished products from Japan when high domestic wages make it impossible to make a profit. Fortunately, income account growth trend was emerging to cover the trade surplus decline. This income comprises the difference between the amount of money channeled back into Japan from profits made by operating plants and companies offshore, and the profit remitted offshore by foreign firms operating in Japan. It includes a massive amount of interest from deposits held by Japanese citizens in offshore banks and from foreign government bonds and corporate bonds issued by foreign firms. Because the income account is made up of the interest and dividends from financial assets held offshore by Japanese firms and Japanese citizens, it grows without the need for labor. The funds in this account amount to more than 10 trillion yen per annum. Japan has graduated from earning its way through manufacturing to living off asset management. Another important trend is the steady decline in the services account deficit and strong likelihood that this account will move into the black in the near future. While Japan’s services account includes a number of items that have maintained deficits for many years, such as offshore travel and international freight, it also contains trade in technology, which in itself runs a surplus of more than 1.5 trillion yen per annum. Comprising, for example, the supply of patents and knowhow to foreign firms, the trade in technology account proves that Japan is earning through technology. If New Growth Strategy elements such as tourism and medical care perform as hoped, they too will contribute substantially to a balance of payments surplus. The trade, income and services accounts together make up the current account balance. The current account balance is a key figure in determining whether a country is spending within or beyond its revenues and whether it is in debt. Calculated for the world as a whole, this figure will come out at zero, so while Japan does not always have to be in the black, a major deficit should also be avoided. If the Japanese economy is...
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