The Great Trade War : Japan : To Tokyo, Surplus in Trade Is Just Prudence : Country views overseas assets as a national pension fund for when productivity of the aging work force can’t keep up.

“(Wealth) consists not in having great possessions but in having few wants.”

--Epicurus

What do you do if you find yourself with an embarrassment of riches--say $132-billion-a-year’s worth? Well, if you’re Japan in the 1990s, you first pay off your debts, then sink money into blue-chip investments, and finally, maybe set aside some mad money for a nice vacation abroad.

To the rest of the world, Japan’s persistent and growing trade surplus may look like predatory economics. But in Tokyo’s view, it’s really neither unusual nor venal. It’s just a prudent approach to securing the future of Japan’s aging population.

It’s a conservative financial philosophy of which Epicurus would no doubt approve.

Trade surpluses are another way of saying Japan lives below its means by consuming far less than it produces. U.S. trade deficits reflect a nation living beyond its means, buying more than it makes.

Japan is saving for its future; America is mortgaging its.

From the Japanese perspective, the country’s trade surpluses end up as overseas assets that serve as a kind of national pension fund for that day, perhaps not too far off, when the productivity of its aging work force can’t keep up with younger, newly emerging economies of the world.

By the end of the decade the pension could be a large one.

Already Japan is the world’s largest creditor, with a net $385 billion in overseas assets. It earned $36 billion last year in interest, dividends and profits from overseas investments. If Japanese surpluses continue at their current pace, Kenneth Courtis, strategist at Deutsche Bank Group (Tokyo), estimates that Japan’s net overseas assets could easily climb to more than $1.5 trillion by the turn of the century. That’s about the size of the entire German economy.

The ability to control such huge amounts of cash will give Japan overwhelming clout in making decisions that affect our lives. “All of that money has to be recycled into the world economy,” says Courtis. “It will be recycled according to the strategic interests of Japanese companies.”

Japanese managers will help determine whether mortgage rates will fall in Germany or Canada; they’ll decide whether factories are built in Malaysia or Kentucky. Japan’s huge holdings of U.S. Treasury certificates give it enormous financial power. Although Japanese are not the major buyers of American bonds that they were in the 1980s, they could still shake U.S. markets by unloading some of their hundreds of billions of dollars in holdings.

Last month, Japan’s minister of international trade and industry warned that if America pushed the value of the dollar down too much, Tokyo might pull its money out of American bonds, forcing American interest rates higher. As Japan increases its purchases of American bonds again--as it has been doing in recent months--its financial muscle also grows.

Japan’s high savings rate is part of a larger national effort to pull the resource-poor nation up by its bootstraps, encouraging imports of low-value-added products such as raw materials while promoting exports of higher-value products. Last year, for example, Japan exported $330.9 billion worth of products, including $73 billion worth of cars and auto parts and $44 billion worth of office equipment and semiconductors. Meanwhile, it imported just $198.5 billion in goods--mostly raw materials such as chemicals and fuels.

Some of that $132-billion trade surplus went back overseas in the pockets of Japanese tourists who used it to buy Gucci handbags in Paris, spend honeymoons in Hawaii and pick up new wardrobes in Hong Kong. Last year, the Japanese spent a net $33 billion on transport and travel.

Exporters kept some of their overseas earnings in foreign currencies to reinvest in factories and property. But with the Japanese economy depressed, such “direct” investments came to just over $30 billion--only a third of what it was at its peak in 1989. Overseas investments by insurance companies and other institutional investors in stocks and bonds were also sharply down. Most of Japan’s export earnings were converted into yen and deposited in banks at home. Banks used much of Japan’s surpluses to pay off the $267 billion in net short-term debt accumulated during the roaring 1980s.

Why the caution?

The roaring ‘80s were a bust from Japan’s standpoint. Soaring land and stock prices at home encouraged the Japanese to go on an investment binge overseas. But just as the speculative bubble burst at home, investments overseas also soured.

Japanese investors discovered they had overpaid for everything from skyscrapers to Impressionist paintings and golf courses. Now they find they cannot sell many of their overseas assets. Even the hundreds of billions of dollars they invested in supposedly safe U.S. government bonds have plunged in worth as the value of the dollar has fallen compared to the yen. The subsidiary operations Japan established at great expense throughout America in the 1980s collectively lost about $3.5 billion in the year ended March, 1992.

As its debts are cleared and its economy recovers, however, Japan will once again rise on the world scene as a major investor. But this time it will be more careful.

Japanese companies will acquire small American high-tech firms that can help develop new growth areas for them. But you won’t see Japanese acquisitions on the scale of Matsushita’s purchase of MCA Inc., nor are you likely to see 1980s-style speculation in real estate.

When it comes to building new factories, Japan will turn increasingly to Asia. There, labor is cheaper and the market is growing faster. According to a survey by the Nihon Keizai Shimbun, a major business daily, Japanese investment will drop by 30% in the United States and Europe this year, while investment in Asia will rise by 9.2%.

A major determinant of how Japan spends its trade surpluses will be international pressure. As those surpluses increase--the figure will probably top $160 billion this year, economists estimate--Japan will be under increased pressure from its trade partners to help correct the imbalance.

Tokyo is trying to counter the criticism by increasing government spending at home, with the goal of boosting the Japanese market for imported goods and services. That spending will help modernize Japan but will have only a marginal impact on the trade imbalance. An economist recently calculated that a 50% growth in Japan’s economy would only cut its trade surplus in half.

The government also hopes to make its large surpluses more acceptable by lending more money to developing countries. Japan is planning to boost its foreign aid loans by 50% over the next five years to about $120 billion.

But Japanese economists say there is little the country can do--short of restructuring its entire economy--to substantially alter the balance of its trade. And an increasing number see little reason it should change. After all, they note, Britain and America maintained huge surpluses during their heyday.

Britain ran trade surpluses from 1851 to 1890, building up a huge base of assets overseas. Earnings from those assets enabled Britain to import more than it exported for 30 years before it was forced to begin selling off some of the assets.

America did the same from 1911 to 1940 and to a lesser extent from 1946 to 1970, when it ran significant trade surpluses with the rest of the world. For 10 years afterward, America was able to pay for its huge import costs (and defense spending) with returns from overseas investments.

With Japan’s population aging more rapidly than any other major industrialized nation, the time will eventually come when Japan, too, may have to start living off its overseas investments.

By then it may be Japan that is complaining loudly about its trade deficits with China.