current-account surpluses may be ending

Japan's economy

Rebalancing act

Mar 5th 2009
From The Economist print edition

A long era of current-account surpluses may be ending

JAPANESE households used to be among the world’s biggest savers and, as a result, the country ran a massive trade surplus. But no longer. They now save less of their income than American households, and Japan’s trade balance moved into deficit last year (see top chart). A long-overdue—and painful—economic rebalancing is under way.

The slump in global demand and a strengthening yen have crushed Japan’s exports. In the six months to January, it had an annualised trade deficit of ¥4 trillion ($39 billion), compared with a surplus of almost ¥11 trillion a year earlier. Japan’s foreign-investment income is also shrinking, thanks to lower dividends and interest rates. As a result, its total current-account surplus plunged to only ¥125 billion in December, 92% less than a year ago. Figures due on March 9th may even show a deficit in January. Most economists still expect a surplus for the year as a whole, but a much reduced one of perhaps 1% of GDP, down from a peak of 4.8% in 2007.

Japan has had a current-account surplus in every year since 1981, because of a surfeit of domestic saving over investment. However, the saving rate of households has fallen from 18% of income in 1980 to an estimated 1% last year (see bottom chart). It may have edged up slightly over the past few months, but it is almost certainly lower than in America, where the saving rate jumped to 5% in January as falling wealth and tighter credit caused consumers to pull back.

The fall in saving is exactly what the “life-cycle hypothesis” would predict. People like to smooth consumption over their lifetimes, so during their working years they spend less than they earn and accumulate wealth, which they then draw down once they retire. The more retired folk there are relative to the number of workers, the lower the saving rate will be. The ratio of Japanese aged over 65 to those of working age rose from 14% in 1980 to an estimated 34% in 2008. It is forecast to increase to 49% by 2020.

The decline in the household saving rate and the current-account surplus would seem to be connected. But Japan’s saving rate has been falling for years, so why did the external surplus still loom large until last year? The current-account balance is the gap between domestic investment and total saving—including that by companies and the government as well as households. Since 1990 Japanese firms have swung from being big borrowers to big savers as they have sought to repay debts. A large reduction in the government’s budget deficit, from 8% of GDP in 2003 to 2% in 2007, also offset lower household saving. Meanwhile, since 1990, investment has fallen from 32% to 23% of GDP. As a result, the surplus of saving over investment remained large until recently.

As the population continues to age, household saving will decline further and may even go negative as the retired live off their large stash of financial assets. If investment rates do not change, Japan will move into current-account deficit.

Japan’s excess saving has long been viewed as bad for its own economic health as well as for the rest of the world, so its disappearance might seem good news. It would be if the shrinking surplus had been caused by a surge in domestic spending, rather than a collapse in exports.

Despite some pick-up in consumption in recent years, Japan’s growth has still been far too dependent on exports. Net exports accounted for over one-third of GDP growth in the five years to 2007. Adding in exporters’ investment might push up that figure to half. Japan’s failure to wean itself off exports sooner means that it now faces a more painful adjustment. The impact on the rest of the world, meanwhile, will not be nearly as beneficial as the headline figures suggest.