Japan's Balance of Payments for 2003*
May 21, 2004
Bank of Japan
International Department
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I. Summary
A. Overview
Japan's balance of payments (BOP) in 2003 shows that the current account recorded a surplus of 15.8 trillion yen, increased from a surplus of 14.1 trillion yen in 2002; the capital and financial account turned to a net inflow of 8.1 trillion yen from a net outflow of 8.5 trillion yen, caused mainly by a significant net inflow in the financial account; reserve assets increased by 21.5 trillion yen, which was much larger than the increase in 2002 (5.8 trillion yen); and errors and omissions recorded a debit of 2.4 trillion yen.
B. Highlights of Japan's BOP for 2003
1. An increase in surplus in the balance of goods
The surplus in the balance of goods increased due to strong exports to Asia. Two background factors to the strength can be pointed out. First, Asian economies, especially China, kept their strength throughout 2003, except for a period when severe acute respiratory syndrome (SARS) broke out in the region. Second, an economic recovery in the United States and the expansion of global demand for digital appliances caused increases in production in Asia. Exports of a wide range of items of goods increased; these included IT-related machine parts, machine tools, construction machinery, and material handling machines. The increase of the latter two reflected an expansion of demand for infrastructure building in China in preparation for the coming Beijing Olympic Games and Shanghai World Exposition, etc. Meanwhile, exports to the United States decreased because of the expansion of production by local production bases of Japan's manufacturers such as automobile makers.
2. A decrease in deficit in all major items in services
The deficit in the balance of services decreased, reflecting a decrease in deficits in the balance of all major items, i.e., travel, transportation, and other services. The deficits in the balance of travel and passengers for air transport, a sub-component of transportation, decreased significantly because the number of Japanese travelers overseas plunged mainly due to the effects of SARS. The balance of royalties and license fees, a sub-component of other services, turned to a surplus for the first time, reflecting increases in receipts of royalties from overseas subsidiaries of Japanese manufacturers such as automobile companies.
3. A record-high net outflow (purchases) of outward investment (assets) in bonds and notes
Net outflow of outward investment (assets) in bonds and notes, a sub-component of portfolio investment, recorded a historical peak of 18.4 trillion yen, far exceeding the previous peak of 11.3 trillion yen in 2001. This was mainly because investors, who usually raised foreign currency for outward investment by converting their yen, purchased foreign bonds very actively. Specifically, (1) life insurance companies increased their position in foreign bonds with hedging currency risk, (2) securities companies underwrote a large amount of foreign bonds for retail sales, and (3) investment trusts increased investment in foreign bonds reflecting steady sales of monthly-distribution-type funds that mainly invested in foreign bonds. Meanwhile, net purchases (outflow) at banks, which ordinarily invested by borrowing foreign currency, remained almost unchanged from the previous year.
4. A significant net inflow (purchases) of inward investment (liabilities) in equities
Net inflow of inward investment (liabilities) in equities, a sub-component of portfolio investment, recorded significant net purchases of 9.8 trillion yen in 2003 from net sales (outflow) in 2002. This was the second historical high as a net inflow, behind only that of 11.4 trillion yen in 1999. Two background factors can be pointed out for the significant net purchases. First, pension funds and investment trusts in the United States and Europe actively invested in Japanese equities that were adopted in the stock indices. These attitudes reflected the expectation that the Japanese economy would recover and, consequently, Japanese stock prices would rise as a whole. Second, hedge funds invested in equities of banks and high-tech related companies reflecting appreciation in values of equities held by banks. Appreciation in prices of U.S. semiconductor-related companies also stimulated hedge funds' appetite for equities of Japanese IT-related companies.
5. A turn to a net inflow from a net outflow in the capital and financial account
The capital and financial account recorded a net inflow for the first time since 1985, when Japan's BOP statistics based on the fifth edition of the Balance of Payments Manual (BPM5) became available. The inflows were recorded under other investment and portfolio investment, mainly due to investment by nonresidents using surplus funds resulting from an increase in reserve assets.
