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Article 1

Structural Changes & Prospects forJapan’s Current Account Balance
By Yoichi Matsubayashi

AuthorYoichi Matsubayashi

The Worsening of the Current Account Balance
The August preliminary figure of the current account balance
published in October 2022 by the Ministry of Finance was 589 trillion
yen, which is the lowest figure for August since 1985, whencomparisons first became possible. The largest factor behind theshrinking of the current account surplus is the expansion of the tradebalance deficit. The preliminary figure for August was a deficit of
2.49 trillion yen, which represents an increase in deficit of about 1
trillion yen compared to the same month in the previous year. The
main causes for this are the depreciation of the yen and the increasein import values caused by the soaring prices of resources, while thefact that export values are not increasing in spite of the depreciationof the yen is another factor. The current account balance gives anoverall indication of Japan’s external earning power, and it is anextremely important economic indicator not only of the short-termchanges in Japan’s economy, but also from the long-term viewpointof growth and development. Accordingly, in this paper I take anoverarching view of a relatively long span of changes in Japan’scurrent account balance, and look at the structural changes that havearisen from the first half of the 2010 decade. Also, I try to place
recent developments in the context of a longer time horizon of morethan a century. Through these kinds of consideration, we should be

able to survey future trends in the current account balance and lookat the prospects for the characteristics of Japan’s economy.

Trends in the Current Account Balance from theSecond Half of the 1990s
Chart 1 shows the current account balance from the first quarterof 1996 until the second quarter of 2022, and the trends in theelements that comprise it. The amount of surplus in the current
account balance has been increasing from the latter half of the 1990s
up until 2007. Some factors behind this increase are the facts thatthe trade balance was steady and had a tendency toward a surplus,
while the primary income balance (such as the interest and dividends
arising from foreign investment) was on an increasing trend. As aresult of the global finance crisis sparked by the Lehman Shock in
2008, international trade shrank drastically globally, then from 2008
to 2009 the trade balance worsened, and the current account balancealso dropped to the level below 2 trillion yen. Thereafter, although
the current account balance showed signs of improvement, as aresult of the 2011 Great East Japan Earthquake trade transactions
decreased, the trade balance moved to a deficit, and the current
account balance also decreased drastically. From mid-2014, there
was a move to a positive direction, but a dramatic expansion in the

CHART 1

Trends in current account balance
1985Q1 - 2022Q2¥100 million
80,00060,00040,00020,0000-20,000-40,000
Current account balance

Trade balance

Service balancePrimary income balance

Secondary income balance

1996Q1Q2Q3Q41997Q1Q2Q3Q41998Q1Q2Q3Q41999Q1Q2Q3Q42000Q1Q2Q3Q42001Q1Q2Q3Q42002Q1Q2Q3Q4
2003Q1Q2Q3Q4
2004Q1Q2Q3Q4
2005Q1Q2Q3Q42006Q1Q2Q3Q42007Q1Q2Q3Q42008Q1Q2Q3Q42009Q1Q2Q3Q42010Q1Q2Q3Q42011Q1Q2Q3Q42012Q1Q2Q3Q4
2013Q1Q2Q3Q4
2014Q1Q2Q3Q4
2015Q1Q2Q3Q4
2016Q1Q2Q3Q4
2017Q1Q2Q3Q4
2018Q1Q2Q3Q42019Q1Q2Q3Q42020Q1Q2Q3Q42021Q1Q2Q3Q42022Q1
Q2-60,000

Source: Balance of Payments Statistics, Ministry of Financehttps://www.jef.or.jp/journal/

Japan SPOTLIGHT • January / February 2023

37

trade surplus could not be felt, and from 2017 onwards the trend to
trade balance. Chart 2 and Chart 3 show the value, quantity and pricea decrease continued, with the deficit still being maintained.
indices of exports and imports, compared to the previous year. In
Meanwhile, the income balance has also steadily increased since theregard to the export value indices, there was a period from the latter
global financial crisis, with the increase being especially prominent
half of the 1990s to the latter half of the 2000s when the rate ofsince about 2012. Since around 2011, trends in the current accountincrease was above 10%, which was in accordance with the changes
balance reflect both the tendency to a worsening of the trade surplus
in the quantity exported. However, once the 2010s were entered,and the trend towards an increase in the income balance, in
there were hardly any cases of the export value amount exceeding
combination.
10%. The slowing of the increase in the export quantity also came to
Subsequently, the current account balance from 2021 on has
have only a slight connection with the export value, with the changes
steadily shrunk drastically, in particular because of the considerable
in the export value being brought about by changes in the export
worsening of the trade balance experienced. Moreover, although it
prices.
may not be clear in the graph, since the second half of the 1990s, theMeanwhile, the changes in the import value consistently have aservice balance deficit has shown atrend toward improvement. In
particular, once we entered the
CHART 2
2010s, the deficit dramatically
Changes in exports
decreased, and from 2016 to 2017(％)
we entered a state where a balance
30.00
of close to zero was achieved.
However, with the spread of the new
20.00
coronavirus from 2020, leading to
10.00
the curtailing of foreign tourists
entering Japan, the deficit has been
0.00
increasing.
From this viewpoint, there is a
-10.00strong possibility that the current
account balance of Japan gave rise-20.00to structural changes from around
Export value
Export quantity
2011 to 2012. Specifically, there are-30.00
Export pricethree points: 1) the steady-40.00worsening of the trade balance, 2)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
the dramatic increase in the primary
income balance, and 3) the
Source: Trade Statistics, Ministry of Financesustained improvement of the
CHART 3services balance. In order to deeply
Changes in imports
consider the structural changes of
the current account balance that(％)
occurred in the first half of the
30.00
2010s, it is essential to look closely
20.00
at each of its features. Below we
consider the state of the trade
10.00
balance and the income balance,
which showed particularly
0.00
substantial changes.

Changes in the Trade
BalanceIn order to look deeply at thecharacteristics of the structuralchanges in the trade balance, it isuseful to closely observe export andimport trends, which comprise the
38 Japan SPOTLIGHT • January / February 2023

-10.00-20.00-30.00-40.00

Import amount

Import value

Import price1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: Trade Statistics, Ministry of FinanceChanges in the Investment Balancestrong relationship with changes in import prices, with the rate ofincrease in the import quantity being generally steady, and nochanges being seen from the pivotal point of about 2010. Based on
the above observations, the structural changes in the trade balancethat arose in around 2011 constituted a major causal factor in thesoftening of the increase in the export value, in accordance with thesluggishness of the export quantity.
In 2011, following the Great East Japan Earthquake, there was acurtailing of the supply chains and the rapid appreciation of the yen.
Also, economic decline in countries continued after the global
financial crisis. Because of these factors, exports decreased
dramatically. However, another important element was that Japan’s
export competitiveness was on a decreasing trend, which began to
become considerably more pronounced in the 2010s.
In the 2013 White Paper on International Trade, Japan’s share of
the global export amount is calculated in detail. If we compare thevalues for 2000 and 2011, the figures are as follows: generalmachinery 11.5%→8.5%, automobiles 16.1%→11.9%,
electromechanical 12.8%→6.5%, and precision machinery
17.7%→9.1%, showing major drops in Japan’s share in machineryrelated areas. Furthermore, comparing trade specialization
coefficient, a substantial drop is seen in electromechanical0.41→0.17 and precision machinery 0.42→0.29. In these ways, inJapan in around 2011, along with various short-term factors such as
the Great East Japan Earthquake, the sudden high yen, and the global
economic recession, there was the multiplying effect of mid- andlong-term elements such as the trend toward a decrease in export
competitiveness. It is probable that the decrease in exports became
sustained and as a result the path towards a trend to a worsening of
the trade balance was followed.

Next I will look at the characteristics of the structural changes in
the investment balance. Chart 4 shows trends in the primary income
balance. As we saw in Chart 1, since the second half of the 1990s theinvestment balance has been on an increasing trend. Observing
closely, we can see that although for several years following the2008 Lehmann Shock, there was a deadening in growth, and fromaround 2012 it began to substantially increase. Moreover, from 2021
to the most recent time also, a dramatic increase has been seen; thishas its cause in the current rapid depreciation of the yen.
In order to analyze the causes behind the changes around 2021 inChart 4, we added security investment returns and direct investment
returns, which are both major structural factors in the income
balance. Until the Lehman Shock, securities investment income had
been gradually increasing but thereafter it changed to a decreasing
trend. Meanwhile, the direct investment income showed a consistentincrease, with the increase being prominent from around 2012. A
background factor to this is the activation of external investment
resulting from the drop in the expected profit of domestic capital,
and from the appreciation of the yen. Further, recently the ratio of
M&A in direct investment is beginning to increase. It is possible thatthe increase in profits following from the expansion in direct
investment is tied to the changes in the income balance from around2012.

Long-Term Trends in the Current Account Balance
We will now give an overview of the current account balance froma more long-term perspective. Chart 5 depicts Japan’s current
account balance as a percentage of GDP for more than a century,
from 1885 to 2021. Looking at the roughly 130 years inchronological order, they can be basically divided into three periods:

CHART 4

Trends in income balance¥100 million
90000
80000

Income balance

70000

Direct investment returns

Security investment returns

60000
50000
40000
30000
20000
10000
0

Q3

2022Q1Q32021Q1

Q3

2020Q1

Q3

2019Q1

Q3

2018Q1

Q3

2017Q1

Q3

2016Q1

Q3

2015Q1

Q3

2014Q1

Q3

2013Q1

Q3

2012Q1

Q3

2011Q1

Q3

2010Q1

Q3

2009Q1

Q3

2008Q1

Q3

2007Q1

Q3

2006Q1

Q3

2005Q1

Q3

2004Q1

Q3

2003Q1

Q3

2002Q1

Q3

2001Q1

Q3

2000Q1

Q3

1999Q1

Q3

1998Q1

1997Q1

1996Q1Q3-10000Source: Balance of Payments Statistics, Ministry of FinanceJapan SPOTLIGHT • January / February 2023

39

CHART 5

Long-term trends in accounts balance, 1885-2021
(％)
15

10

5

0

-5

-10

1885
1887
1889
1891
1893
1895
1897
1899
1901
1903
1905
1907
1909
1911
1913
1915
1917
1919
1921
1923
1925
1927
1929
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021

-15

Source: Ippei Yamazawa and Yuzo Yamamoto (1979), “Long-Term Statistics 14: Trade and Balance of Payments”, Toyo Keizai Inc., National Accounts, Cabinet Office1) the period from 1885 until the end of World War II, 2) the period
from the 1950s to the 1970s, and 3) the period from the 1980s until
the present.
In the period from 1885 until the end of World War II, several
substantial changes can be seen. Each of these was caused bymajor-scale wars or disasters. Specifically, these were: the current
accounts surplus resulting from the compensation received in the
Sino-Japan War (1894-1895) (transfer balance surplus); the current
accounts surplus coming from the increase in imports of military
items in the Russo-Japanese War (1904-1905); and the current
account deficit reflecting the drop in exports resulting from the Great
Kanto Earthquake (1923). However, excepting the occurrence of thedramatic external imbalance resulting from these kinds of
unforeseen events, although there have been many periods of deficit,
it cannot be said that a major imbalance has arisen.
We are unable to obtain GDP data for the period from 1945 to1954 due to the economic confusion following the war. From 1955
onwards, for some time no substantial imbalance can be seen, whilethe 1950s, 1960s, and 1970s all show a surplus of no more than
1%. Expressed differently, it can be surmised that the 30 years fromthe 1950s to the 1970s were a period of comparatively short-termchanges. Once we enter the 1980s, the situation changes
dramatically.
In 1980 the surplus was about 0.7% but in only seven years it
reached a level more than six times that, adding up to a high surplusof about 4.5% as a share of GDP. This trend rapidly decreased from1987 onwards, but the average value for the 1980s was 2.3%. In the
1990s also, the surplus tendency showed no changes, with theaverage value (2.3%) showing no difference from that of the 1980s.
The surplus trend continued in the 2000s, and at the peak (2007)
there was a surplus of about 4.8%, the highest level since the 1980s.
However, on entering the 2010s the situation changed considerably,with the surplus beginning to shrink. After the 2011 earthquake, we
40 Japan SPOTLIGHT • January / February 2023

see a trend towards an increase again, but from 2017 on, thedownward trend continues.
In regard to long-term trends in the current account balance, the“the balance of payments stages hypothesis” concept is well-known.
This hypothesis was advocated by Geoffrey Crowther and Charles
Kindleberger in the 1950s, and considers changes in the current
account balance associated with a country’s economic development
by means of the savings investment balance framework.
In Stage I (immature debtor country), since there is little
producible wealth in one’s own country and there is no option but toimport from other countries, the trade and service balances show adeficit. Further, since there are low income and insufficient savings,
it is necessary to procure the capital necessary for industrializationfrom overseas, so the interest payments on this capital increase, andthe income balance also goes into a deficit. Thereafter, as the tradeand service balances move to a surplus along with the developmentof industrialization, there is a transition to Stage II (mature debtor
country).
Through the increase in the acquisition of capital from overseas
resulting from economic development, the income balance deficit
expands. As economic development progresses further, imports
expand, the trade and services balance surpasses the income
balance deficit, and the accounts balance goes into a surplus,transitioning to Stage III (debt repayment country). Then themaintenance of the account balance surplus surpasses the external
assets, and the nation shifts to Stage IV, where the income balance
surplus is maintained (immature creditor country).
Although the income balance surplus is maintained, along with thematuring of the economy, imports from emerging market countries
begin to increase, and then the trade and services balance starts togradually decrease, leading to a shift to Stage V (mature creditor
country). Then, as this trend progresses further, the trade andservices balance surplus exceeds the income balance deficit, andTABLE
there is a transition to Stage VI (creditor
country), where the accounts balance has
The balance of payments stages hypothesis &the economy of Japanchanged to a surplus (Table).
The table depicts a summary of these
Trade and
CapitalStage of
IncomeAccounts
Stage
services(finance)
Economy of Japan
processes. In the 1984 Economic Whitedevelopment
balancebalancebalancebalance
Paper, the current account balance of JapanⅠ
Immature debtor
1868-1880↓↓↓↑
extending to over one century is classified
countryin accordance with the balance of payments
Ⅱ
Mature debtor
1881-1914↑↓↓↓↑
country
1955-1964
stages hypothesis. From 1970 to 1983,
Ⅲ
Debt
repayment
1919-1920↑↑↓↑↓
when the above White Paper was compiled,country
1965-1969
the Table indicates that Japan was anⅣ
Immature
1970-1983↑↑↑↑↓↓“immature debtor country”. In regard to acreditor country
transition to the Stage V mature creditor
Ⅴ
Mature creditor
2021
↓
↑↑
↑
↓
country
Trade and services
country, although the time of transition isbalance: -¥2.5 trillion
Income balance: + ¥18.0
not definitely determined, in the 2006
trillion
Economic White Paper it was forecast that
Current account balance:+ ¥15.4 trillion
Japan would likely transition to a fully
Capital balance: - ¥10.7
mature creditor nation.
trillion
Let us consider the state of the balanceⅥ
Creditor country↓↓↑↓↑of payments in 2021. As can be understood
Source: G. Crowther (1957), “Balance and Imbalance of Payments”, Harvard University, Cambridge, MA.
from the compilation in the Table, the trade
government bonds, we could hold the view that confidence inand services balance changed to a deficit, while the income balance
government bonds could also waver.
surplus exceeded it; a current account surplus arose, and Japan’s
There is also the opinion that, since close to 90% of Japan’s
economy was then in the vortex of being a mature creditor power.
government bonds are held by domestic investors, there is a low
Then, as I mentioned at the start of this paper, Japan’s immediate
possibility that confidence in them will drop. Nevertheless, there is acurrent account balance worsened considerably, and there wasneed for concern that, along with the growing dependence on
steadily growing concern that there might eventually be a deficit.
procurement of foreign funds in the flow aspect of moving to aThis state of affairs means a transition to the Stage VI creditor
deficit in the current account balance, private financial assets willcountry, in the stage theory of economic development. In such
shrink, and in the event that a situation is realized where changes incircumstances, the key as to whether or not a transition to Stage VI
the stock aspect of a closing in on the balance of the government
occurs is the trend toward an increase in the import amount and thedebt accelerate, the possibility of a drop in confidence is by no
expansion of the trend to a trade balance surplus, resulting from themeans small. In any event, before a drop in confidence becomes
lengthening of the soaring prices of resources. If the soaring of theapparent, it is essential that a solid strategy in regard to Japan’s
import mineral prices is not something transient, but rather aexternal earning power be developed.
sustained element, not only the trade and services balance of Japan’sJapan has an inherent advantage in manufacturing andeconomy but also the current account balance will change to atechnology. At the same time as “earning through investment”
deficit. At the same time, through the enduring of the deficit, there isutilizing the large amount of external assets that have been built up
the possibility of transitioning to a creditor country. This point isthrough past current account balances, the strategy of "making
highly significant, not only in regard to Japan’s current accountmoney with goods" should be combined with the creation of highbalance but also in overviewing Japan’s macro-economy as a whole.
value-added export products to restore industrial competitiveness.
Current Account Balance & Future of Japan’s
The most pressing issue for the Japanese economy today is to
Economydeeply conceive of the sources of earning power based on a longterm perspective, rather than to dwell on the fluctuations in the
As I said earlier, the current account balance has the meaning ofcurrent account balance.
being a comprehensive index of a country’s external earning power.
Accordingly, the beginning of a transition to a deficit in a country’s
current account balance has also begun to hold the possibility thatthe country’s overall economic power, and even confidence in its
currency, are undergoing changes. Here we can understand theconcept of confidence in a currency from the three aspects of price
Yoichi Matsubayashi, Ph.D., is a professor of the Graduate School ofstability, interest stability, and exchange rate stability. When we
Economics at Kobe University. His main subject is International Macroeconomics.
consider that the nearest asset to currency in a national economy isJapan SPOTLIGHT • January / February 2023

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