Japan Finds Its Balance of Trade Tipping--Again : $94.2-Billion Surplus a Result of Lower Oil Prices, Mushrooming Exports
Japan’s global trade balance, which until last June had been declining, is expanding again, wiping out hopes that a major reduction in black ink will occur this fiscal year.
Officials are blaming lower oil prices and the rush to beat a new petroleum import tax that was imposed Aug. 1 for blunting the pace of gains in the value of Japan’s imports in recent months. But exports, which have resumed double-digit growth, have far outstripped a decline in oil purchases, heralding a new round of expanding trade surpluses.
Both Japanese and American officials agree that Japan’s trade surplus, which amounted to $94.2 billion in fiscal 1987, has become so large that it destabilizes the world economy. In its bilateral relations, Japan has been under great political pressure to reduce its trade surpluses with nations that believe their economies are threatened by the massive imbalance.
Substantial Percentage of GNP
Economists now predict that any reduction in the surplus for fiscal 1988, which ends March 31, will be far smaller than last year’s decline of $7.9 billion. A few have even predicted that the global surplus will expand both this year and in fiscal 1989--although the bilateral surplus with the United States will fall this calendar year for the first time since 1979.
Exports also have resumed a role of contributing to gross national product. Between July and September, for the first time in four quarters, overseas demand for Japanese products and services accounted for nearly a fifth of GNP growth, contradicting Prime Minister Noboru Takeshita’s pledge to make Japan’s economy wholly reliant on domestic demand for growth.
“Japan’s external adjustment process appears to have stalled, and the nation’s trade surplus remains substantially larger than is desirable,” a report by the American investment bank, Morgan Stanley, stated last month.
The yen’s higher value, which makes imports cheaper but Japanese exports more expensive, has failed to erode Japan’s strong manufacturing base, according to an analysis by W. I. Carr, a London-based securities firm. “Japanese manufacturers have recovered a large part of their international competitiveness,” the analysis said.
Even Eishiro Saito, chairman of the powerful Keidanren (Federation of Economic Organizations), who formerly led cries of panic as the yen doubled in value against the dollar since 1985, is now predicting that Japanese businessmen can handle an even stronger yen.
“Japanese companies have adjusted structurally to absorb the merits of the strong yen,” Saito, who is also honorary chairman of Japan Steel, said late last month.
Now, the worry is that the earlier declines in the trade surplus will not resume.
Satoshi Sumita, governor of the Bank of Japan, warned Nov. 27 that imports might stop increasing as quickly as they did earlier in the year. “The recent widening of the trade surplus bears watching,” he said.
Already, economists have concluded that the government’s goal to cut the trade surplus to $81 billion in fiscal 1988 will not be achieved. Masaru Yoshitomi, director of the Economic Planning Agency’s research institute, predicted that it will reach $90 billion.
After declining to a monthly low for the year of $6.2 billion in June, the trade surplus increased to $7.2 billion in July, $7.5 billion in August, $7.8 billion in September and $8.5 billion in October. Exports grew 16.3% in July, 18.2% in August, 13.6% in September and 13.2% in October.
Decline in U.S. Imbalance
The new clouds in the trade outlook, however, contained a few silver linings.
The United States will enjoy the first decline in its bilateral deficit with Japan since 1979--although not enough to ease frictions with Washington, Japanese officials acknowledge. For the first nine months this year, Japan’s surplus with the United States was running at an annual rate of $51.3 billion, compared to $59.8 billion last year.
In addition, any softening of demand in the U.S. economy, the Morgan Stanley report said, would slow Japan’s exports and “probably result in a fairly rapid reduction in the bilateral (imbalance).”
Domestic growth also remains strong, offering hope that Japan, in the long run, will continue to provide an expanding market for imports from other Asian nations accustomed to selling mainly to the United States. Between July and September, the GNP shot up at an annual rate of 9.3%--with more than four-fifths of the growth coming from demand at home. For the fiscal year as whole, the economy is expected to expand by more than 5%, far above the government’s estimate of only 3.8%.
And, at least for this fiscal year, Japan’s current account surplus, which Prime Minister Takeshita pledged to reduce as a percentage of the GNP, is likely to come down.
The surplus in both trade and such nontrade transactions as tourism, shipping, and insurance reached a peak of 4.5% of the GNP in fiscal 1986, but is expected to fall to 2.5% of the GNP--”or about half way to the level of 1.5% of the GNP that would be ideal,” the Economic Planning Agency’s Yoshitomi predicted.
In the long run, however, the current account surplus, which had been declining through September, was also expected to grow as returns from overseas investments begin to flow in more heavily. In October, it registered its first year-to-year expansion in 10 months--to $7.4 billion, compared with $6.7 billion a year earlier.
Even the volume of Japan’s exports, which had remained stagnant for nearly three years, began growing in May. Gains have been spectacular for semiconductors, computers, general machinery, machine tools, business machinery, television sets and steel.
More Exports
Since June, exports of automobiles, in value terms, have also picked up speed.
Most of the gains have been in exports to Europe and Asia, Morgan Stanley noted.
For Japan’s surplus to decline, imports must expand at least twice as fast as exports--which they did through the first half of fiscal 1988, W. I. Carr noted. But by October, the gains in both seasonally adjusted exports and imports had evened out at 13% each--although imports of manufactured goods continued to climb 29.8%, according to the Ministry of International Trade and Industry.
Oil imports were still declining because of stockpiling before the new tax was imposed at the beginning of August. But while Japan’s oil bill fell by $600 million in October, its exports grew by $1.3 billion, compared to a year earlier.
“Japan’s trade structure is still far more responsive to outside demand than to internal demand,” the W. I. Carr report said.
Growing shipments of parts and machinery for factories that Japanese are building overseas were also contributing to the expansion of exports. Both Yoshitomi and the Long Term Credit Bank said overseas investment increases exports as manufacturers buy Japanese machinery and continue to use overseas the parts they had been procuring at home until local suppliers can be found.
W. I. Carr, however, was more pessimistic about the long-term effects of Japanese overseas manufacturing.
“Opening of manufacturing facilities abroad . . . will restrain exports somewhat,” the securities firm said, “although it is more likely that this, together with a further rise of the yen, will simply accelerate the shift toward the production of higher value-added goods in Japan.”
Stable exchange rates, W. I. Carr added, have made it possible for exporters to stop lowering prices, thus improving export profit margins.
Indeed, exporters have enjoyed a full year without any appreciation of the yen. The dollar still remains above its record low of 120.45 yen reached momentarily last Jan. 4 on the Tokyo foreign exchange market.
Rise in Domestic Investment
The key to reducing Japan’s trade surplus, W. I. Carr said, lies in increasing imports--and it predicted that domestic demand, which pulls in imports, will remain strong. But it also declared that “deregulation leading to further market opening is an essential requirement for keeping import growth high.”
A key to the future promises to emerge from a mammoth increase in investment now going on in manufacturing facilities at home. The Long Term Credit Bank predicted that such investment will increase by “a remarkable” 20.6% during this fiscal year, approaching levels of Japan’s boom years of the late 1960s.
A third of the new investment in manufacturing, the bank said, was designed to boost production capacity at home--which, in the past, usually meant more leeway to export, as well as to supply the domestic market.
The question is--what will happen this time?
