How did the Japanese economy lose its competitiveness

Japan in the trade deficit: (yet) no notice

For the first time since 1980, Japan had to show a trade deficit for 2011. Preliminary estimates for the size of the deficit are $ 32 billion, about 0.5% of gross domestic product (GDP). While there were rapidly rising oil prices on the import side and ailing exports in the aftermath of a sharp recession in the world economy, the most important factors responsible for the current deficit are quickly identified: supply bottlenecks for some export goods as a result of the Fukushima disaster, declining price competitiveness as a result of Appreciation of the yen and increasing imports of energetic raw materials, among other things as a result of the catastrophe.

The Japanese central bank governor Shirakawa emphasizes the exceptional situation in his country after the disaster and neither sees the trade deficit as long-term, nor does he fear an impact on a country's current account, which is decisive for a country's international net claims or debt position. In fact, this is still clearly in the plus. The main reason for this is the still high net income from foreign investments in the credit, portfolio and direct investment sectors. Japan is one of the largest international net creditors in the world; an often neglected fact in contrast to the unprecedented high internal debt of Japan. His domestic savings thus far exceed his domestic investments. The latest projections by the International Monetary Fund (IMF) cast the central bank governor's optimism in a somewhat weaker light. As early as September 2011, the IMF projections saw a trade balance that was just about balanced for the whole of 2011, a slight recovery to 0.5% of GDP in 2012 and an average minus of 0.2% for the years 2013 to 2016. Measured against the long-term Trend value of + 1.5% over the years 1989 to 2004 and a peak value of + 1.9% (2007), the trend is clearly downward. Japan's trade debts will be reduced in the longer term, trade debts will be paid off in real terms. The country's share of world industrial goods exports halved from 12% in the mid-1990s to 6% now.

The fastest aging economy in the world shows what is in store for other aging mature industrialized countries, including the Federal Republic: the attractiveness of one's own production location for exports is slowly declining, while at the same time the demand for goods and, above all, services that the can no longer provide its own location instead of competing imports, either for natural reasons (raw materials) or price-related (finished goods and services). Japan's competitiveness problem is also exacerbated by a traditional weakness in internationally tradable services, which is likely to be the most dynamically growing sector in the world economy in the future. Japan's share of statistically recorded world service exports has fallen from 6% to below 4% since the mid-1990s. In addition to the weak structural change in the Japanese economy, the continuous real appreciation of the currency also contributed to this picture. Among other things, this was a consequence of the low interest rate policy and the associated high attractiveness of the Japanese yen as a debt currency (“carry trade”). The innovative strength of some of Japan's traditional export focuses, such as the automotive sector, has also suffered. The times when Japanese automobiles put pressure on European and American locations are long gone. Who still thinks back to the time between 1992 and 1999 in the EU, when the communitarisation of EU trade policy towards Japanese car imports and thus the abandonment of national, quantitative import restrictions in countries such as Italy, Spain or France were the subject of fierce political disputes between EU Partners were? If one could calculate Japanese exports on a value-added basis and thus determine how high the import content of Japanese finished goods exports is, the trade deficit would have been visible for a long time. Japanese companies are global sourcing companies par excellence, especially in Asia, Factory Asia. Their FDI is also the source of the high positive net factor income, which means that Japan's annual current account surplus is estimated at 2.5% to 2.8% of GDP through 2016; so the projections of the IMF. These net factor incomes have been increasing in the last decades, from 0.8% (1989 to 1996) to 1.5% (1997 to 2004). This also fits the picture that the domestic product of Japan has been growing faster than the domestic product for a long time. It is not Japan's location that creates more value, but Japan's capital and work in the world.

So if Japan will slowly have to grapple with a permanent trade balance deficit in the future, factor incomes will receive even greater attention than before, since they are (in addition to the quantitatively insignificant transfer payments) the decisive determining factor for the current account balance and thus also for debt sustainability of the country with its citizens and with international creditors. The country has two problems to master. First, a continuous appreciation of the Japanese currency devalues ​​its currency reserves in national currency. This is important because Japan has a classic "currency mismatch problem": low returns on international dollar investments and high liabilities in domestic currency. Japanese life insurance companies can tell you a thing or two about it. At the same time, the continuous revaluation exacerbates the trade deficit, depresses the competitiveness of the Japanese location and forces Japanese companies to produce abroad. This leads to the second problem. Can Japanese companies continue to generate such high returns abroad that, for example, the pensions of the Japanese population can be financed? Will companies want to evade the tougher taxation imposed by the state in order to remain competitive, and thus finally relocate their economic focus abroad? Can they generate sufficient innovations to arm themselves against takeover by non-Japanese companies and thus the loss of technological leadership?

Japan is not a small, resource-rich country that can passively invest its income from raw materials in the medium term. It lives crucially from the innovative strength of its global companies. If the innovative strength declines, the internationally achievable returns on risky investments will fall, and then the factor income from abroad will also decline. At the same time, foreign companies operating in Japan could no longer reinvest their profits in the country, but repatriate them. If domestic creditors would then demand risk surcharges for their claims against the Japanese state, the country's current account could end up in the red and Japan could become a net debtor to the rest of the world. It's not that far yet. The trade deficit is not yet a warning sign of the aging economy, but an indication of the importance of the difference between Japanese domestic and domestic product. A current account deficit, on the other hand, would be a warning sign and would give the world a new open flank in the sovereign debt problem.

Rolf J. Langhammer
Kiel Institute for the World Economy
[email protected]