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Recent Developments of Japan's External Trade and Corporate Behavior *1

  • *1This is an English translation of the Japanese original released on August 27, 2007.

October 31, 2007
Research and Statistics Department
Bank of Japan

Click on ron0710a.pdf to download the full text.

Summary

1. Increases in exports (and net exports) have been a significant factor in the current economic expansion. This comes against the backdrop of two important developments in the external environment: (1) the global economy has continued to expand steadily with the engines of growth more broadly distributed worldwide, and (2) the increase in global trade has outpaced global economic growth. Another element in the external environment is that, in the foreign exchange market, the yen has tended to depreciate on a real effective basis.

2. Against the background of this external environment, Japan's exports and imports have exhibited some notable characteristics. Exports have diversified, both in terms of destinations and goods. Greater values have also been added to the contents of these goods. When import developments are also incorporated, we note that the trade of capital goods and IT-related goods has been expanding for both imports and exports, as trade with other East Asian economies has further deepened. In contrast, imports of raw materials have been sluggish, affected by the rise in international commodity prices and by the depreciation of the yen. Looking more broadly at external balances beyond exports and imports of goods, the deficit in balance on services has continued to narrow gradually and the surplus on balance on income has continued to expand; these developments have significantly contributed to the expansion in the current account surplus.

3. The above characteristics did not simply arise as a consequence of good luck, a favorable turn on the external environment; they may well have resulted from the efforts of Japanese firms to adapt to the growing trend of globalization. In recent years, Japanese firms have been keen on overseas markets with higher growth potential. They have endeavored to capture global demand by establishing appropriate supply chain networks, and have simultaneously stepped up overseas production. Moreover, with regard to domestic production, Japanese firms have made efforts to continue to add value to their products. Domestically, they have relied on advanced technological capabilities to produce higher-value added products, and this has resulted in an increase in exports. At the same time, Japanese firms have also made effective use of resources overseas, in particular, through the international division of labor with other East Asian economies. Profitability of overseas operations of Japanese firms has improved steadily. Profits earned overseas have been repatriated back to Japan, as seen in improvements in the balance on services and on income.

4. Japanese firms have thus dealt with globalization fairly well, and this has enabled the domestic economy to continue expanding over a long period of time. Globalization, however, also comes with a variety of competitive pressures, including those from the capital markets. Consequently, today's domestic economy tends to show features not readily observed in the past expansion, such as lackluster wage growth.

5. Attention should be paid to the possibility that the Japanese economy is now more susceptible to developments overseas, since it has become more closely linked to the global economy. With the population declining and increasingly aging, however, the Japanese economy needs to continue its efforts in capturing global demand in order to keep on generating income and to maintain its growth potential.

Notice

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Research and Statistics Department, Bank of Japan
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