Liberalizing Trade and Investment and Ensuring Japan’s Competitiveness
2. Japan’s trade investment and competitiveness: Current situation
2011-2012 JIIA Research Project: Policies Needed to Ensure Japan’s International Competitiveness
exchange rate by the difference of the price escalation rate between two countries. It is at a level around 120.
This real effective exchange rate is an estimate by BIS based on the consumer price index, and is therefore not suitable for looking at the competitiveness of the traded goods industry, although it does give a clue. In other words, improved productivity and lower factor prices denominated in international currency are both factors for strengthening the competitiveness of Japanese industries.
In the framework of the long-term macro economy, improved productivity lowers export prices and increases exports unless the savings-investment balance changes significantly (i.e., as long as the current account is stable to an extent). However, this leads to a tendency for a strong yen in the long term and increases imports, therefore maintaining the balance of current account at a certain level. The real effective rate provides an index that indicates competitiveness based on the long-term macro movements. However, the published indices noted above are consumer prices, not export and import prices, and due to data constraints are therefore limited. (They are used, knowing the limitations, based on the view that price decrease as a result of improved productivity usually extends over export goods as well as consumer goods, thus real effective exchange rate deflated by consumer prices shows competitiveness to some extent.) Japan’s export prices tend to have a smaller increase (or tend to decrease) compared to consumer prices, hence it is unlikely that the real effective exchange rate significantly exceeds 100. In other words, in terms of the phenomenon, companies have managed the tendency of a strong yen by improving productivity. In a macro perspective, however, it is more accurate to say that the improved productivity has created a corresponding increase in the strength of the yen. It is important to understand the long-term relationship in which improved productivity in Japan’s export industry has led to long-term real term strength in the currency, as a result of which the nation can purchase cheaper imported goods, enabling the nation to enjoy a more abundant lifestyle.
It can be said from Figure１that Japan’s traded commodity industry has made considerable long-term effort to improve productivity compared to trading partner countries. However, there is no guarantee that the long-term equilibrium will always hold. Export companies’ earnings will be disproportionately squeezed if the monetary policy is conducted with a leaning toward deflation, leading to oversupply in a macro perspective, and the yen is nominally appreciated somewhat speculatively as of lately regardless of the competitiveness of the Japanese economy. Should this situation continue for more than a certain period, even those companies which are competitive and
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able to operate in the country may end up closing operations or moving abroad. This point requires further discussion from the viewpoint of macroeconomic policy.
Let us move on to look at Japan’s balance of international payments in the longer term (Table 1).
Table 1: Japan’s balance of international payments
Source: Bank of Japan
Looking at the movements since around 1980, the trade balance has been in surplus, current balance has been in surplus and capital balance has been in deficit. It can be said that Japan has had typically trade-led growth. As seen in Figure 1, improved productivity strengthened competitiveness, which has led this growth in exports. At the same time, imports also increased.
This is a matter of course when the savings-investment balance (in surplus) is at a certain percentage of GDP. The current account surplus as a percentage of GDP is about 3%, thus Japan is a country with a large trade surplus.
I would like to draw attention to two points concerning the tendency in the balance of international payments. First of all, the gross level of exports and imports as a percentage of GDP is 8-12% for exports and 5-11% for imports. The level is on the increase year after year, but the total of exports and imports has not reached 24%. Amongst the OECD countries, however, it is only the U.S. for which this index is lower than Japan (according to OECD statistics). In other
2011-2012 JIIA Research Project: Policies Needed to Ensure Japan’s International Competitiveness
words, Japan has maintained sizable surpluses in trade and current balances, but the amount of trade itself is small. The gravity model, which is often used to determine the amount of trade (between two countries), presupposes that a country’s amount of trade (including domestic buying and selling as well as international trading) is proportionate to nominal GDP, which provides a good explanation. The ratio of international trade and domestic buying and selling (trade) is said to be determined by the relative transaction cost, and the transaction cost depends on the distance between the seller and the buyer. In countries such as European nations, which are in close proximity with each other and small in size, the ratio of trade as a percentage of domestic transactions is high. It is the opposite in the U.S. In the case of Japan, the ratio of trade should be relatively high, but the ratio is very low in reality. This is probably because Japan is still characterized by a somewhat closed economic structure and a high cost of international trade.
Particularly, the low ratio of imports may be due to non-tariff barriers as well as customs duties.
Next, there is the increasing income balance surplus as a recent trend. This reflects the accumulation of foreign assets and flow back of investment returns, which has become more apparent in recent years as a result of a return of capital surplus for the longer term. On the other hand, the household savings rate has decreased due to Japan’s aging population, and the budget deficit is growing. As a result, the current account surplus has started to show a downward trend in terms of savings-investment balance. When a decrease in current account surplus and increase in income balance surplus occur simultaneously, the trade balance surplus decreases inevitably (or turns into a deficit). When the policy purpose is to strengthen competitiveness in order to increase exports (and thus increase employment), these external conditions become strong constraints. That is, if the tendency for trade surplus decrease is to continue, restricting imports will result in downward pressure on exports (by way of increase in the real exchange rate). Therefore, in order to achieve an increase in exports, it is necessary to achieve an increase in imports at the same time.
Attempting to increase exports while keeping the import market closed will not achieve a sustainable increase. Export industries, in general, are growth industries with comparative advantage in the country, and therefore the inability for these industries to grow will have an adverse effect on the nation’s affluence and employment, which has important political implications.
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