Japan’s trade balance fell into the red for the first time in 31 years in 2011.
The situation has much to do with a slowdown in exports after plants of automakers and manufacturers of electronic and other products were hit by the March 11 Great East Japan Earthquake and tsunami. At the same time, imports of fuel used in thermal power plants surged as a result of the accident at Fukushima No.1 nuclear power plant. Such temporary factors are only part of the picture. If the yen remains strong against other key currencies and accelerates the trend for manufacturers to move production sites overseas, trade deficits could continue.
The government is desperate to stem the trend by expanding subsidies to businesses that build factories in Japan and offering other incentive programs. In order to protect employment, stopgap measures to keep businesses in Japan appear indispensable. But the situation shows that Japan is at a crossroads as a trading nation driven by manufacturing and exports.
What needs to be watched more carefully than the trade balance is the current account balance.
The current account includes profits earned by service transactions and investments. In 2010, the surplus of the current account stood at slightly more than 17 trillion yen ($221 billion). Last year, too, it is estimated to have recorded a surplus of about 10 trillion yen, offsetting trade deficits.
Japan covers more than 90 percent of its huge amount of government bonds with domestic funds supported by a current account surplus.
The key factor is a surplus in the income account because of the large amounts of interest and other income from Japan’s holdings of overseas securities and earnings from the establishment of overseas subsidiaries and corporate buyouts. The size of current account surplus topped that of trade surplus in 2005 and came to slightly less than 12 trillion yen in 2010.
There is a theory that a nation’s external balance and its level of development are correlated.
A nation starts out as “immature debtor country” whose balances of trade and income are both in the red. Then, its trade balance moves into the black. After its income balance also goes into the black, it becomes “mature creditor country” whose trade balance once again falls into the red, the theory goes.
In the case of Japan, the trade surplus swelled in the late 1960s when it was undergoing a period of high economic growth. In the 1980s, its income balance also logged a surplus. Now that its trade balance has fallen into the red, could this mean that it is finally becoming a “mature creditor country?”
While saddled with a huge budget deficit, birthrates are declining and the aging of society continues. If Japan’s current account also falls into the red, creating “twin deficits,” the nation could come to a standstill.
We need to effectively use the surplus of income balance for reinvestments both at home and abroad to reinvigorate the Japanese economy. We should also protect jobs in Japan and maintain a current account surplus to create a positive cycle.
There are no magical tricks. The government is being urged to advance deregulation centering on agriculture, energy and the environment, health and nursing care to boost domestic demand. It should also push for corporate investment, including the acquisition of other companies. Research and development of new technology and the development of human resources also need to be bolstered.
We should seize the opportunity of the trade deficit to reconsider what needs to be done to reinvigorate the economy.
--The Asahi Shimbun, Jan. 27
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