August 18, 2006
International Department
Bank of Japan

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The international investment position (IIP) describes the balance sheet of the "stock" data of financial items (capital and financial account plus reserve assets) in the balance of payments ("flow" data) at a particular point. In the IIP, assets comprise the stock of external financial assets of residents in Japan (including offices of foreign companies and financial institutions in Japan), while liabilities comprise the stock of external financial liabilities of residents in Japan (assets, including equity securities, held in Japan by nonresidents). In order to present figures in the yen, the foreign currency amounts are converted at the exchange rate in effect at the year-end. The difference between assets and liabilities is the net IIP. At year-end 2005, Japan's assets exceeded liabilities, resulting in a net asset position.

^* Japan's international investment position (IIP) statistics were made public in Japanese on May 26, 2006, by the Ministry of Finance and the Bank of Japan as the Report on External Assets and Liabilities as of Year-End 2005. The regional breakdown is posted on the Bank of Japan's web site and is also available in the April 2006 issue of the Bank's Balance of Payments Monthly . Other figures are estimates by the Balance of Payments Statistics Section of the International Department of the Bank of Japan.
In line with the trend of discussions at the International Monetary Fund (IMF) on how to deal with securities lending transactions, figures from the end of 1996 (from the end of 2000 for regional figures) exclude securities lending transactions in this paper.

I. Summary

Japan's international investment position (IIP) (the outstanding amount of external financial assets of residents in Japan minus the outstanding amount of external financial liabilities of residents in Japan) recorded a net asset position of 180.7 trillion yen at year-end 2005. This represents a decrease of 5.1 trillion yen or 2.7 percent from the previous year-end, but marks the second highest level on record after the historical high set at year-end 2004.

The small decrease in the net asset position is largely due to the comparatively large increase in liabilities reflecting the substantial rise in Japanese stock prices, although assets also increased as a result of the current account surplus.

Comparison with other major countries suggests that Japan has been the country with the largest net asset position for the 15th consecutive year since year-end 1991.

The major trends for each component were as follows.

(1) Direct investment (direct investment assets: 45.6 trillion yen; direct investment liabilities: 11.9 trillion yen)

Direct investment assets increased for the second consecutive year, rising by 7.0 trillion yen or 18.2 percent from year-end 2004. This was primarily due to (a) an increase in direct investments in North America and Asia by Japanese companies in order to expand existing business, and (b) an increase in the yen-denominated value of assets reflecting the depreciation of the yen against the U.S. dollar. Direct investment liabilities also increased by 1.8 trillion yen or 17.9 percent, reflecting direct investment mainly from the European Union (EU) and Asia.

(2) Portfolio investment (assets: 249.5 trillion yen; liabilities: 182.0 trillion yen)   

Portfolio investment assets increased by 40.2 trillion yen or 19.2 percent from year-end 2004. This substantial increase was due to (a) an increase in investment by investment trusts in equity securities of emerging economies and real estate investment trusts (REITs), (b) an increase in investment by banks in bonds and notes, (c) an increase in the value of assets reflecting the depreciation of the yen against the U.S. dollar, and (d) an increase in the value of equity securities reflecting the rise in French and German stock prices. Portfolio investment liabilities also increased, by 61.9 trillion yen or 51.5 percent. This sharp increase was primarily due to (a) the continued purchase of Japanese equity securities by nonresident investors supported by a favorable outlook for the business performance of Japanese companies, and (b) an increase in the value of equity securities reflecting the rise in Japanese stock prices.

(3) Financial derivatives (assets: 3.1 trillion yen; liabilities: 3.9 trillion yen)

Both financial derivatives assets and liabilities increased from year-end 2004.

(4) Other investment (assets: 108.5 trillion yen; liabilities: 127.7 trillion yen)

Other investment assets increased by 10.8 trillion yen or 11.1 percent from year-end 2004, primarily due to the outflow of yen funds for the purchase of equity securities. Other investment liabilities also increased, by 11.0 trillion or 9.4 percent, marking the sixth consecutive year of increase. The increase is attributable to a rise in borrowing from banks' overseas branches through their interoffice accounts.

(5) Reserve assets (assets: 99.4 trillion yen)

Reserve assets rose for the seventh consecutive year, increasing by 11.7 trillion yen or 13.4 percent from year-end 2004. This was due to an increase in the value of assets reflecting the depreciation of the yen and an addition of interest accruing from bonds and notes to the reserve assets.