According to Japan’s preliminary 2023 balance of payments statistics released by the Ministry of Finance, the current account balance, which indicates Japan’s power to earn through external transactions, posted a surplus of more than 20.6 trillion yen.
Among current account balance components, the trade balance, which is calculated by subtracting imports of goods from exports, showed a deficit of 6.6 trillion yen, while the travel balance as part of the services trade balance scored a surplus of 3.4 trillion yen partly due to an increase in the number of foreign travelers to Japan. In addition, the primary income balance, which includes interest and dividends earned from overseas investments, posted a substantial surplus of 34.5 trillion yen. The structure of Japan's balance of payments that had once featured massive earnings through automobile and electrical appliance exports has substantially changed as the income balance surplus has replaced the trade balance surplus to dominate the current account surplus.
Japan’s current situation does not necessarily represent any new development stage
In fact, electrical appliance trade recorded the first ever import excess. As factors behind the trade deficit that has existed in recent years, the Ministry of Finance cited the absence of any major contributor to a surplus like the past automobile exports, the overseas transfer of production bases, and dependence on imports of basic resources. According to the balance of payments development stage theory, Japan is now positioned as a mature creditor country that takes advantage of a primary income balance surplus through growing overseas assets to maintain a current account surplus, even with the trade deficit taking hold.
However, the current situation in Japan does not necessarily indicate that Japan has entered a new stage of development.
The services trade balance includes a digital services trade deficit of 5.5 trillion yen. Payments from Japanese companies and individuals to foreign information technology companies have ballooned. The deficit may further increase if the digitalization of the economy, including the development of generative artificial intelligence, progresses without growth of internationally competitive Japanese IT companies.
While the direct investment income balance as a component of the primary income balance posted a surplus of 20.6 trillion yen, a half of dividend and other payments to Japanese companies were reportedly retained as internal reserves in their overseas subsidiaries. These companies have failed to take advantage of their overseas earnings for expanding domestic investment to contribute to Japan’s economic growth.
Japan's economic challenges unveiled
If economic growth remains low, wages may stagnate. Cash reserves are required for individuals to invest overseas through a small investment tax exemption system known as NISA (Nippon Individual Savings Account). Many workers get their investment money from their wages. This could widen the gap between large corporations and wealthy individuals who have already accumulated funds and can secure high incomes from overseas and workers who find it difficult to do so.
If the international competitiveness of Japanese firms continues to stagnate as indicated by the import excess for electrical appliances and IT-related products, Japan may fail to cover the trade balance deficit with a primary income balance surplus. Japan’s current account may plunge into deficit. In this case, Japan may become a country that eats up or liquidates its overseas assets under the balance of payments development stage theory.
This will be a serious problem for Japan’s public finance. Until now, there has been a view that Japan's national strength will be rated high enough to allow the market and investors to have confidence in Japanese government bonds as long as the private sector makes sufficient profits from overseas investment as indicated by the current account surplus, even with the government running a massive budget deficit. On the other hand, if the Japanese private sector loses the power to earn from overseas investments, confidence in Japanese government bonds may be affected.
The structure of the current account balance thus suggests challenges for the Japanese economy due to its difficulties in improving its export power or promoting digitalization and failure to take advantage of earnings from overseas investment for growth, all the while considering itself a manufacturing powerhouse.
>> Original text in Japanese
* Translated by RIETI.
April 20, 2024 Weekly Toyo Keizai
