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Recent Features of Japan's Balance of Payments
Balance of Payments Statistics Division
International Department
June 2007
A conspicuous feature of Japan's balance of payments in recent years was the increase in the surplus in the balance of income. Income is one of the items of the current account and mainly consists of interest earnings on bonds and notes, dividends, and retained earnings of foreign subsidiaries of Japanese companies. Another major item of the current account is trade in "goods and services."1 In 2006, the income surplus was about 13.7 trillion yen, making up 69 percent of the total current account surplus. The goods and services surplus was 7.3 trillion yen, about half the amount of the income surplus.
1 Apart from "goods and services" and "income," current account items include "current transfers," which comprise transfers such as workers' remittances and contributions to international organizations.
Figure: Increase in Income Surplus
The expansion of the share of the income surplus means that the structure of the current account surplus has changed. In 2006, the ratio of the current account surplus to nominal GDP was 3.9 percent (Figure), close to the level of the mid-1980s, when there was serious trade friction between Japan and the United States. At that time, the size of Japan's current account surplus was regarded as an indicator of the trade imbalance between the two countries, given that the surplus in trade of goods, i.e., the trade surplus, accounted for more than 90 percent of Japan's current account surplus. However, in 2006, the trade surplus relative to nominal GDP was only 1.9 percent, which was far smaller than the 4.4 percent in the mid-1980s. Consequently, it is no longer appropriate today to view the current account surplus as an indicator of trade imbalances.2
2 The situation in China is, however, different from that in Japan. The size of the current account surplus is regarded as an indicator of a trade imbalance between China and other countries, since the trade surplus accounts for around 90 percent of China's current account surplus.
At 118 billion U.S. dollars, Japan's surplus in the income account in 2006 was the largest among the Group of Seven (G-7) countries. Moreover, it was more than twice as large as the next biggest income account surplus, that of the United Kingdom at 42 billion U.S. dollars. Similarly, relative to nominal GDP, Japan's surplus in 2006, at 2.7 percent, was considerably larger than that of the United Kingdom (1.8 percent) and France and Germany (around 1 percent) (Table 1). The United States, Italy, and Canada all recorded a deficit in the income account balance.
Table 1: Balance of Income Relative to Nominal GDP (2006)
The reason for the increase in Japan's current account surplus is the accumulation of external financial assets. At year-end 2006, Japan recorded net assets of 215 trillion yen (1.8 trillion U.S. dollars) in its international investment position. The amount of Japan's net external financial assets has been the largest in the world for sixteen years. It is important to note here that external financial assets in the international investment position differ from foreign exchange reserves. External financial assets cover all assets held by both the public and private sector, whereas official foreign exchange reserves are only those external financial assets held by the monetary authority. In terms of foreign exchange reserves, Japan has recently been overtaken by China, which at year-end 2006 held 1,066 billion U.S. dollars compared with Japan's 895 billion U.S. dollars. Yet, as mentioned above, Japan's net external financial assets (1.8 trillion U.S. dollars) have remained the largest in the world, far exceeding China's (0.7 trillion U.S. dollars at year-end 2006).
Among net external financial assets, the largest component was net portfolio investment, which consists of investments in bonds, notes, and equities, and totaled 69 trillion yen. This was followed by net foreign direct investment with 41 trillion yen. Reflecting the fact that net portfolio investment and net foreign direct investment represent the largest positions in the international investment position, income from the two -- 10.5 trillion yen and 3.0 trillion yen respectively -- made up the two major components of the income account surplus.
The dominant role of portfolio investment income in the composition of the income account surplus in Japan is in sharp contrast with other countries. The United Kingdom, for example, another nation with a large income surplus, derives the majority of this surplus from direct investment income.
Regarding outward portfolio investment, a notable trend is the increase in investment in foreign equities through investment trusts. In 2006, purchases of foreign equities by investment trusts amounted to 3.4 trillion yen -- an increase of 60 percent over the previous year -- that was driven by individual investors' growing appetite for investing abroad. In the search for high returns, purchases of Asian stocks by investment trusts have been particularly large.
The increase in direct investment income represents another major trend. Particularly direct investment income from Asia has been on an upward trend (Table 2). In fact, in recent years it has been substantially larger than the direct investment income from the European Union and has also surpassed that from the United States, where many leading Japanese manufacturers are operating large-scale production sites. These patterns derive from the increasing foreign direct investment in Asia by Japanese firms seeking to capitalize on the growth of the Asian economy and the strong performance of the subsidiaries of Japanese companies there. The major sources of direct investment income from Asia are Thailand (240 billion yen), China (230 billion yen), and Singapore (213 billion yen).
Table 2: Direct Investment Income
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