By Brian Bremner
With its anemic growth, crumbling domestic companies, and mountain of bank debt, Japan has been the sad joke of the global economy for years. But not in one regard. Year after year during its decade-long slide, the country has run up a huge current-account surplus. That's the broadest measure of all the money a country brings in from abroad through trade, service, and investment flows. In Japan's case, a quarter century of exporting Toyotas (TM) and Sony (SNE) gadgets, plus years of buying U.S. government securities, have brought a surplus of roughly $1.6 trillion. For Japan, the world champion exporter, the surplus is a source of national pride.
But what if Japan's global export machine falters? These days, the Japanese press is chock full of dire predictions that Japan--gasp!--could turn into a net importer of goods and services later this decade and become dependent on foreign capital to pay for the foreign wares it covets. In other words, it will become just like that other global debt-head, the U.S.
In Tokyo, this development is explosive news, with editorialists worrying that the one remaining pillar of the storied Japanese economic system is crumbling. It's easy to see why the Japanese are obsessing over this dry trade data. Figures released July 12 show that the surplus for May declined a staggering 46% from a year ago. Despite the yen's 12% depreciation against the dollar over the past year, Japanese exports are down 5.8% year-on-year to Asia through May, down 15% to the U.S., and down 11.4% to Europe. Meanwhile, even though Morgan Stanley forecasts that the overall economy will contract 0.8% in 2001, import volumes into Japan will clock nearly 5% growth. The fear is that if it has to borrow abroad to pay for this stuff, Japan will have to offer the gaijin ever-higher rates--which will smother the already weak economy.
Scary scenario. But in this case, at least, the Japanese should calm down. The data do indeed show a seismic shift in the Japanese economy. But the decline in the surplus may actually indicate that Japanese companies are finally getting serious about adopting global business practices. The surge in Japan's imports---and the subsequent decline in exports--stem from the move by Japanese companies to shift manufacturing overseas. Thus, the imports the Japanese buy are not just low-end goods like the straw mats that have helped touch off Japan-China trade sanctions, but sophisticated items like high-powered lenses destined for Canon digital cameras, and liquid crystal displays for NEC mobile phones. "Japanese consumer-electronics companies are now turning to Chinese and Taiwanese for all sorts of contract manufacturing," says Tatsuo Yamasaki, the Finance Ministry's international finance director.
MORE OUTSOURCING. Japan's manufacturers are going offshore to flee an expensive labor force. A personal computer that costs $1,800 to make in Japan only costs $1,140 to contract out in Taiwan and reship back to Tokyo for sale. That's why top computer makers such as Fujitsu Ltd. and Toshiba Corp. have announced plans to triple their outsourcing work in the next several years, from the current 10% of production to 30%. Says Merrill Lynch & Co. senior economist Jesper Koll: "Companies will increasingly focus on importing back into Japan goods manufactured in low-cost Asia." Given this surge in imports and outsourcing, it is not surprising that Koll projects Japan's current-account surplus will be sliced in half, to $54 billion, by yearend, compared with 2000 (table). And the forces pushing the surplus down will assert their influence even after Japan's economy recovers.
There's nothing intrinsically wrong with this development. Japanese companies need to outsource to stay competitive. Companies should focus the efforts of their well-paid, well-trained Japanese workers on making more complex products like high-end liquid crystal display panels, digital TVs, and sophisticated flash memory chips. Other work- ers must move into faster growing sectors like information technology and health care. This shift occurred in the U.S. and, by and large, produced a much healthier economy. Japan should let China, which is already home to one-fifth of Japanese consumer electronics parts and component plants, handle the job of producing cheap goods.
On top of that, the rise in imports lowers the cost of living for Japan's hard-pressed consumers. Since stepped-up deregulation has encouraged a flood of imports, Japanese shoppers can now buy $15 dress shirts imported from China instead of $50 shirts made locally. Consumers now spend 2% less of their income on clothing and food than they did last decade. Even top bureaucrats, once masters at erecting import barriers, welcome the flood of overseas goods. Yoshinobu Nisaka, deputy director-general for international trade policy at the Economy, Trade, & Investment Ministry, recalls that in the early 1990s he ran into great bureaucratic resistance to his import promotion efforts. Now, "we can enjoy good, cheap products from Asia, the U.S., and Europe," he says. Besides, as seniors become more numerous in Japan's rapidly aging society and learn to live on fixed incomes, they will need cheaper goods and services. To prevent living standards from plummeting, the government has to let imports in.
TREASURE TROVE. But what about the fear that the surpluses will turn into deficits---and that the need for foreign capital to finance the trade deficit will send Japan's long-term bond yields soaring? Well, the prospect of being held captive by foreign lenders is largely a fiction. That's because Japan has its own, almost bottomless source of capital overseas: the earnings from thousands of Japanese plants abroad as well as the payout from the huge investment in U.S. Treasuries and European bonds. These big returns provide a ready source of funds that the Japanese can invest back home.
Income from these investments feeds into the current-account numbers, too, so overall, Japan will still likely enjoy a surplus. The upshot: "Japan will not enjoy trade surpluses like it has in the past. [But] this will help [boost] global trade," says Yukio Shohtoku, managing director for overseas business at Mitsubishi Electric Corp. In the process, maybe Japan will turn its vast talents to fixing the rest of its troubled economy. Bremner covers Japanese finance from Tokyo.