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|Japan’s dwindling external surplus|
|Saturday, 04 December 2010 09:14|
For as long as I can remember, Japan has had a current account surplus. But, as the country’s population ages, this surplus is gradually disappearing.
Japan is a capital exporting country -- this is the counterpart to its current account surplus. The country’s savings exceed its investment requirements as the rapidly ageing population stashes away money for its retirement. But as population ageing progresses, Japanese retirees will start running down their savings (dissaving) to finance their lives in retirement. This will reach a point where the current account moves into deficit. The country will need to either sell off overseas investments and/or get foreigners to finance part of its investment and national debt.
Let’s have a look at the details of Japan’s international transactions.
Japan’s net foreign assets are worth some $2.9 trillion, with assets at $6.1 trillion and liabilities at $3.2 trillion. This is much higher than for any other country, including China. China tops the world for gross official foreign exchange reserves with $2.4 trillion, beating Japan into second place with its $1.0 trillion. But these reserves are held by governments and do not take account of private sector foreign assets or any liabilities.
Japan wins hands down for net foreign assets. China is way behind with $1.8 trillion, followed by Germany with $1.3 trillion, Hong Kong with $750 billion, Switzerland with $690 billion and Russia with $250 billion. As a proportion of GDP, Hong Kong leads the pack with 353%, followed by Switzerland with 131% and then comes Japan with 56%.
Who are the world’s biggest debtors? The US of course with $3.5 trillion in net debt. But the US has lots of both foreign assets ($23.3 trillion) – its enterprises have invested everywhere -- and foreign liabilities ($19.8 trillion). The world’s other leading countries as net debtors include Spain ($1.4 trillion), Australia ($700 billion), France ($516 billion) and Italy ($429 billion). Against GDP, the US debt position is not so bad, it only represents 24%. The big debtors are Spain with 94% of GDP, and Australia with 61%.
Back to Japan’s foreign assets. Where are they all invested? In factories in China? No, only 12% of Japan’s external assets are in the form of foreign direct investment. The rest is in portfolio investment (equities, debt securities, and so on) One-third of Japan’s stock of FDI is still in the US, with Europe and Asia accounting for about 15% each, and China a mere 5%.
Only 6% of Japan’s external liabilities are in the form of FDI. As any foreign resident of Tokyo will tell, the Japanese market is a very hard nut to crack, except for a few notable exceptions like IKEA and Starbucks. Again, most of external liabilities are in the form of portfolio investment.
The question is: how long can Japan’s big foreign asset position last? Quite a long time is the answer, but the Japanese current account will slowly move into deficit in the coming years, as Japan’s population gradually ages. And a current account deficit necessarily means a declining net asset position. In fact, Japan would be seeing current account deficits pretty soon, if it were not for its high level of corporate savings. Household savings are already pretty close to zero.
Digging into the figures a little is rather interesting. In recent years, Japan’s trade surplus has shrunk. Weak US markets will keep it shrunk for a while. And when the global economy picks up again, rising oil and other commodity prices will badly hit Japan’s trade balance. The main thing keeping the current account in surplus is “investment income”, that is, the earnings on Japan’s net external assets. The services account shows a small net deficit. There is hope that Chinese and Korean tourists might help push that into surplus. Nice idea. Only problem is that every time that China and Japan have a lovers’ tiff, the Chinese government tells its citizens to boycott Japan.
So please keep your eye on Japan’s external balance of payments. When the current account moves into deficit, we could see all sorts of things happen. Japan will then need to become a net importer of capital. This can occur in two ways -- selling off overseas investments and/or getting foreigners to finance part of its investment and national debt. Will banks and corporate investors be willing to sell off overseas investments at a time when the yen could weaken? Will China be willing to invest in Japan? If so, will China turn the capital taps on and off every time that they have a lovers’ tiff.
Japan is a country that detests uncertainty. And yet that is exactly what is on the program!
Japan’s Balance of Payments – Ministry of Finance
Reserves of Foreign Exchange and Gold. The World Factbook. Central Intelligence Agency.