Investment-driven Japan racks up big current-account surplus
Strong yen forces companies to reinvest money earned overseas
TOKYO -- Japan's current-account surplus is approaching levels last seen a decade ago as corporations reinvest in staggering amounts money earned from stocks and bonds abroad.
The current-account surplus climbed 13.1% to 20.19 trillion yen ($177 billion) for fiscal 2016, topping 20 trillion yen for the first time since fiscal 2007.
Where it's at
Standing out is the ballooning primary income surplus -- largely stemming from stock and bond investments overseas -- over the past nine years as a percentage of the current-account surplus. This made up close to 90% in fiscal 2016, up from less than 70% in fiscal 2007. Surging the most in that class are earnings generated by direct investments overseas, such as taking an equity stake in a company, with this figure growing 2.1 times to 7.45 trillion yen over the same period.
The global financial crisis triggered a steep appreciation by the yen, driving Japanese businesses to reinvest more of their foreign earnings abroad instead of bringing them back home. A record 3.96 trillion yen was generated this way -- more than 2.5 times the sum nine years earlier.
When the yen strengthened sharply, competitive advantage suffered domestically, and Japanese companies operating globally boosted their earning capacity overseas, according to Satoshi Osanai, senior economist at the Daiwa Institute of Research.
Japan's potential economic growth rate has languished near zero amid the shrinking population. So its corporate investment has migrated to the U.S., emerging Asian economies, and other regions with high growth potential. But this dynamic leaves the country's own workers and tax coffers out in the cold.
How may I be of service?
While Japanese corporations are growing more active overseas, the trade surplus is going the other way. It came to 13.68 trillion yen in fiscal 2007, or nearly 60% of the current-account surplus. The proportion has now shrunk to below 30%.
With companies shifting production overseas, Japanese exports have fallen. And imports are growing on fossil-fuel demand since the Fukushima nuclear disaster of 2011.
But the flood of tourists is improving the nation's service balance. The deficit amounted to 1.5 trillion yen last fiscal year, down 3.09 trillion yen since fiscal 2007. Particularly notable is the travel surplus, which hit a record 1.27 trillion yen as visitors to Japan spent more on such items as food and lodging than outbound travelers did in fiscal 2016, a reversal from the 1.96 trillion yen deficit of nine years earlier. Visitors to the country have roughly tripled over the period.
The global economic environment will likely affect future account balances. "If foreign demand remains strong, the current-account surplus will expand moderately," said Koya Miyamae, senior economist at SMBC Nikko Securities.
On the other hand, Washington is veering toward protectionism under President Donald Trump. Should this spark yet another round of yen appreciation, "it will increase the pressure on the surplus toward contraction," Miyamae said.