Japan’s trade switcheroo | FT Alphaville

Japan’s trade switcheroo

The WSJ has a gloomy piece about Japan’s economy, which is expected to report its first annual trade deficit since 1980 on Wednesday, (as well as missing its target date for balancing its budget).

The startling change is partly a result of one-time factors like the disastrous earthquake and tsunami last March, which destroyed factories, crippled supply chains and idled many of the country’s nuclear reactors. But the quake seems to have accelerated trends—like a decline in corporate competitiveness—that have been bubbling under the surface for years as the export superpower slowly transforms into a nation of pensioners.

It goes on to chronicle the loss of export-oriented manufacturing industries, together with the ageing population, as well as increases in the prices of commodities due to competition from emerging nations, and rising energy costs as much of the country’s nuclear power remains offline.

But analysts at SocGen say a trade deficit is not such a problem, however, because Japan’s current account balance is being kept in surplus by its net capital inflows. As a note to clients this week observed:

The overall picture of  Japan’s income balance is reassuring, however. At JPY 68 trillion at the end of 2010, Japan’s FDI assets abroad  were four times as much as that of foreigners’ FDI in Japan at JPY 18 trillion. Even if foreigners’ FDI keeps growing at 1.5 times faster than that of Japan’s FDI abroad, it would take more than 30 years to change their position.

Moreover, Japan’s security assets abroad at JPY 272 trillion at the end of 2010 were 1.8 times as much as that of foreigners’ security assets in Japan at JPY 152 trillion. Reassuringly, the former has consistently produced much higher yields than the latter. The day may come when Japanese financial assets start to produce higher yields than that of foreign financial assets, but this is unlikely to take place in the next decade.

Related links:
The myth of Japan’s failure – NYT
Spiked: Eamonn Fingleton – Spike Japan