* This is an English translation of Japanese original released on March 22, 2006

August 18, 2006
Bank of Japan
International Department

Click on ron0608a.pdf to download the full text.

I. Summary¹

A. Overview

Japan's balance of payments (BOP) in 2005 recorded a current account surplus of 18.0 trillion yen, a small decrease from the surplus of 18.6 trillion yen in 2004. The capital and financial account turned from a net inflow of 1.7 trillion yen in 2004 to a net outflow of 14.0 trillion yen in 2005². Reserve assets increased by 2.5 trillion yen, which was a smaller increase than the one recorded in 2004 (17.3 trillion yen). Highlights of developments in the BOP are as follows.

Figure 1: Balance of Payments
¹ Data for the whole of 2005, the second half of 2005, and the fourth quarter of 2005, as well as the figures and the tables are preliminary unless otherwise stated. Annual, semiannual, and quarterly data in this report, including the figures and the tables, are on a calendar-year basis unless otherwise stated.
² Figures until 2004 reflect changes made in the recording method of sea freight fares.

B. Highlights of Japan's BOP for 2005

1. A decrease in the surplus in the balance of goods

The surplus in the balance of goods decreased for the first time since 2001. An increase in exports, in particular to Asia and the United States, was more than offset by a sharp increase in imports, reflecting higher prices for mineral fuels (crude oil and partly refined oil).

2. An increase in the surplus in the balance of income

The surplus in the balance of income increased for the third consecutive year. Principal contributing factors were an increase in portfolio investment income reflecting an increase in outstanding amounts of outward investment in bonds and notes, and higher U.S. interest rates. As a result, the surplus in the balance of income exceeded the surplus in the balance of goods for the first time since 1985, the first year for which comparable historical time series data are available.

3. A shift to net outflow in the capital and financial account

The capital and financial account recorded a net outflow for the first time in three years, and the level of outflow was the highest since 1998. This was mainly due to an increase in net outflow of direct investment, an increase in outward portfolio investment (outward investment in bonds and notes), and a shift to net outflow in other investment (repayment of funds brought in for conversion to the yen).

Table 1: Japan's Balance of Payments

Notes:
1. Goods and services reflect changes made in the method of recording sea freight fares.
2. Negative figures represent capital outflow.
3. Figures for portfolio investment and other investment exclude securities lending transactions.
4. Negative figures in "Changes in reserve assets" represent increase in reserve assets.