The Japanese trade surplus Why it can’t be cut

Press, 14 December 1977, Page 26

The Japanese trade surplus Why it can’t be cut

By

KENTARO KOSHIBA

in the “Japan Times Weekly”

The Japanese Government is having a hard time saying no to the tough United States demand that Japan accept a current-account deficit in its balance of international payments. The current account, involving mainly the exchange of goods and services, indicates the nation’s over-all trade position, particularly the balance of exports and imports. The account is, of course, running a huge surplus — $6.5 billion , in fiscal 1977 by an official estimate but a far larger sum by private projections. Some background information might be helpful in understanding where Japan stands with respect to the current account and why the United States is asking this country to accept a deficit. In the Government’s original forecast announced in January, Japan was to run a $7OO million deficit in fiscal 1977. That was a dramatic reversal from a $4.7 billion surplus recorded in fiscal 1976. Here is how the projected account broke down: a $7.3 billion surplus in merchandise trade, a $7.6 billion deficit in “invisible trade” (e.g.. tourism, shipping) and a $4OO million' deficit in “transfer payments” (e.g., free economic aid, remittances, donations). The projected $7OO million deficit had a very important meaning for Japan — and for the United States. It meant that Japan was prepared to expand its economy — at an inflation-adjusted annual rate of 6.7 per cent — not by mounting an export drive but by stimulating its domestic demand. The January .forecast put the annual rate of increase of exports at 12 per cent and that of imports at 16 per

cent. That still left a sizable trade surplus of $7.3 billion. But this much surplus was absolutely necessary, or so the Government argued, in order to cover the invisible trade deficit. So it appeared Japan was off to a good start. But the scenario went awry as exports expanded far more rapidly than imports, generating a large surplus month after month. The main reason is that domestic demand was simply too weak to provide the needed thrust to attain the targeted economic growth. So massive quantities of Japanese products continued to flow into foreign markets, particularly the United States and Western Europe. But the export drive had a predictable effect. It caused widespread resentment in industries threatened with rising unemployment and gave rise to protectionist sentiments in the countries involved. So, in September, when a programme to reflate the economy was worked out, the Government revised the trade figures to keep them in line with reality. The $7OO million currentaccount deficit was now changed to a $6.5 billion surplus. The change reflected, of course, a bulging trade surplus that was then estimated at $l4 billion. Thus, the Government confirmed, in effect, that its earlier policy of putting greater emphasis on domestic consumption than on exports was no longer working effectively. It is not that the policy has been abandoned. Yet what has happened tends to create the impression, particularly abroad, that the Government is not serious about correcting the wide trade gap that has developed. To make matters worse.

the current-account surplu:. is still growing and is expected to continue, though at a decelerating pace, in the next few years unless something drastic is done to encourage imports and curb exports. In the first seven months of this fiscal year (AprilOctober), the surplus had already reached about $6.28 or close to the $6.58 target for the w’hole of this fiscal year. So much for the background story. To sum up, the United States Government is asking Japan to go back to where it started—namely, a policy of economic expansion geared to domestic consumption by risking a currentaccount deficit. It is precisely in this context that Washington requested recently, through a White House negotiator in Tokyo, that Japan reflate its economy by 7.8 per cent in fiscal 1978. But officials have reacted negatively to the request that Japan bring the current account into the red as soon as possible. It is impossible to determine, they said, whether the surplus trend will be reversed because imponderables are always involved in balance-of-payments forecasts (obviously, they have learned a lesson from what happened between January and September). As for the other request -—that Japan should reflate more rapidly—officials at the Ministry of International Trade and Industry are reportedly in favour of a 7:8 per cent growth rate. It remains to be seen, however, whether such a high grow*' l ,-ate can be achieved without inviting more inflation. There is also a limit to the Government’s ability to spend, given its enormous budget deficit.