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Japan's current-account surplus undergoing seismic shift

Intellectual property revenue up fivefold in a decade to 2.4tn yen surplus

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Workers inspect cars at a Honda manufacturing plant in Ontario, Canada, in 2015.   © Reuters

TOKYO -- Japan has maintained a current-account surplus for many years, but its trade profile is undergoing a profound change as its goods trade has receded while revenue from intellectual property has grown.

The country has an established reputation as an export-based economy that manufactures goods and ships them outside its shores, but income from overseas dividends and interest payments have grown to become key earners for Japan. In addition, exports of trademarks and advanced production know-how are also growing, increasing revenue from intellectual property usage fees, such as royalty payments, and becoming a new major source of cash.

Japan has consistently retained a surplus in terms of the current account, a comprehensive measure of trade between countries, which means it brings in more money than it spends.

The surplus in the trade of goods was the main contributor to the current-account surplus from the 1980s to 1990s, but the goods trade balance turned negative for four consecutive years since fiscal 2011.

In fiscal 2015, Japan's current-account surplus was 18 trillion yen ($153.7 billion). For the year, the services balance, which includes transactions of financial and insurance services, and patent-fee payments, was in deficit, but this was more than offset by some 20 trillion yen in net income, whose major component is dividends Japanese businesses received from their overseas subsidiaries.

The services balance was in deficit to the tune of some 1 trillion yen in fiscal 2015, but even this figure has actually improved by about 2.5 trillion yen from a decade ago. It is especially supported by gains in the travel balance, which turned from a deficit to a surplus over the same period to 1.2 trillion yen in fiscal 2015 thanks to the remarkable rise in foreign visitors to Japan.

Sea change

But an even bigger factor contributing to the significantly improved services balance is the growth of a surplus in intellectual property trade, which grew fivefold over the past 10 years to record 2.4 trillion yen in surplus.

The largest driver of the positive balance of payments for intellectual property usage fees, such as patent and royalty payments, in fiscal 2015 was transportation equipment manufacturers, including automakers, which earned 2.3 trillion yen in technology-related revenue, according to the Survey of Research and Development conducted by the Statistics Bureau.

As Japanese companies typically loan technical drawings and production technology to its overseas subsidiaries for use at their local plants, they earn stable revenues from patent fees and royalty payments from these companies. North America represents the largest share in the amount of such payments, at 54%.

Companies such as Toyota Motor and Honda Motor are thought to be two of the largest earners of such revenue, although they do not disclose these figures. But an industry insider said they typically earn 5% to 10% of the value of car shipments.

The segment that is earning the second-largest amount of such revenue is pharmaceutical companies, with a total of 477.1 billion yen.

Surprisingly, large drugmakers are not the largest gainers. For example, Takeda Pharmaceutical earned just 56.5 billion yen in intellectual property revenue in fiscal 2015. As Takeda loans the patent on its key anti-cancer drug Velcade to Johnson & Johnson from its U.S. subsidiary, revenue from the drug at the parent is relatively small. Astellas Pharma, another major Japanese drugmaker, also has a similar revenue structure, making its revenue somewhat small.

Instead, the pharmaceutical companies that earn larger revenue from intellectual property usage fees are medium-sized companies that take out patents in Japan and grant them directly to overseas entities. Ono Pharmaceutical's cancer treatment drug Opdivo and Shionogi's hypercholesterolemia treatment drug Crestor are two of the highest-earning drugs.

The third-largest earner of intellectual property revenue is the information and communication electronics equipment companies, including smartphone makers. They typically have plants in other parts of Asia and earn such revenue from them.

Kazuyoshi Nakata, a senior economist at Mitsubishi UFJ Research and Consulting, said about 70% of Japan's intellectual property-related revenue is earned by businesses from their overseas subsidiaries, and the figure can and should be expanded in other channels.

"Intellectual property revenue is increasingly replacing the amount of revenue earned through exports, and this trend is accelerating," Nakata said. "Japan should create more unique products that can be sold throughout the world."

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