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Recent Developments in the External Balance

  • *1The full text is on the November 1996 issue of the Quarterly Bulletin.

November 1996
Bank of Japan
Research and Statistics Department


Japan has continuously run a current-account surplus since fiscal 1981, though the rise of the surplus has fluctuated widely. The ratio of current-account surplus to GDP expanded rapidly in the first half of the 1980s, reaching 4.4 percent in fiscal 1986. It then declined to 1.3 percent in fiscal 1990, reflecting the appreciation of the yen after the Plaza Accord and the expansion of domestic demand. The current-account surplus expanded once again during the economic recession of 1991-93, but is now decreasing rapidly.

Since the trade account is by far the largest component of the current account, much of the movement in the latter can naturally be explained by the former. It is also notable that behind cyclical swings of the trade surplus, a fundamental change has taken place in the structure of exports and imports. The structural change since the 1980s is characterized, in particular, by (1) a shift in exports toward capital- and technology-intensive goods, such as capital goods and parts; (2) an increase in the share of manufactured goods in overall imports; and (3) a greater role played by East Asia as Japan's trading partner for both exports and imports.

The change in Japan's trade structure, in both exports and imports, can be attributed to the synergistic effect of (1) economic development in East Asia; (2) the yen's appreciation and the shift of production overseas by Japanese firms; and (3) the recent rapid expansion of information-related industries. In line with the increased supply capacity of East Asia, relatively more labor-intensive goods--namely, consumer goods and some capital goods--increased their share of Japan's imports, while Japan's exports shifted from consumer durables to capital goods, which are relatively more capital- and technology-intensive. The shift of production overseas by Japanese manufacturing firms, intensified by the changing environment of international competitiveness brought about by economic growth in East Asia and the yen's appreciation, not only accelerated the transition of Japan's exports from consumer goods to capital goods, but also played an important role in changing Japan's import structure by raising the share of manufactured goods. Also, the rapid expansion of information-related industries in recent years has contributed greatly to an increase in Japan's imports, by stimulating the progress of the reorganization of the international production system among the United States, Japan, and East Asia with respect to these industries.

The decline in the trade surplus has accelerated since mid-1995, largely reflecting developments in real exports and imports. Japan's exports have become more susceptible to business fixed investment by major trading partners as capital goods and parts now account for a major part of exports. Thus, an apparent stagnation of real exports since mid-1995 basically reflects a deceleration of business fixed investment by major trading partners, such as the United States and Asia. At the same time, however, it also reflects some industry-specific factors, such as a slackening of the worldwide market for electrical integrated circuits (ICs), and a buildup of excess inventory of Japanese motor vehicles in the United States. Meanwhile, the rapid increase in imports reflects (1) the recovery of Japan's domestic demand; (2) a sharp increase in domestic demand for information-related goods for which the manufacturing process is well-diversified across borders; and (3) medium-term cost-reduction strategies by Japanese firms--e.g., an expansion of so-called "reverse imports," in which they import the output of their overseas affiliates. These three factors are closely related to the change in trade structure mentioned above.

As for the outlook, the current-account surplus is expected to continue declining. However, the decline is likely to slow in comparison with the rapid pace observed from the second half of 1995 to the first half of 1996. This is because real exports, which have been more or less unchanged, are expected to increase moderately, whereas the high growth of real imports will likely decelerate somewhat. This outlook is broadly consistent with a rough empirical relation of the growth differential between the domestic and overseas economies, foreign exchange rates, and the current-account surplus.

The recent important changes in the economic environment--i.e., the development of the East Asian economies, the shift of Japanese firms' production overseas, and the rapid expansion of information-related industries--have through international trade also had a significant impact on Japan's industrial structure and economic conditions. The rapid decline in the external surplus is one of the reasons why the pace of the current recovery has been only moderate. However, the growth of East Asian economies also means that the market for Japanese firms is expanding. Moreover, while East Asian economies have become competitive in the production of relatively labor-intensive goods, Japanese manufacturing firms are adjusting to the reorganization of the international production system by shifting to the production of more capital- and technology-intensive goods. Also, increased production overseas by Japanese firms and progress in the reorganization of the international production system in information-related industries should not be taken simply as industrial "hollowing-out." Rather, it is in a sense a manifestation of expanding intra-industry trade, which is conducive to global economic expansion. From such a viewpoint, structural adjustment pressure does not necessarily mean that the competitiveness of Japanese manufacturing firms as a whole is weakening. Indeed, it is just an inevitable difficulty that arises as Japan's industrial structure reorganizes in line with its new comparative advantage. In these circumstances, an important task of economic policy is to unleash as much as possible the inherent dynamism of the market economy through various measures, including further deregulation, to support the smooth adjustment of the industrial structure.