DWINDLING TRADE SURPLUS:
Structural Changes Point to an Enduring Trend

SEPTEMBER 24, 1996

Japan's surplus in trade during fiscal 1995 (April 1995 to March 1996) fell below 100 billion dollars for the first time since fiscal 1991, dipping to 96.2 billion dollars, according to trade figures released by the Ministry of Finance (customs clearance basis).

The surplus was down by 18.4% from the previous year.

Exports increased 7.7% over fiscal 1994 to 440.1 billion dollars (42.1 trillion yen, as calculated by the Ministry of Finance), with metal machinery and semiconductors jumping by 30% to 50%. But the move to offshore production among automakers produced a 10.5% drop in car exports, keeping export growth to below 10%.

Growth in imports far outpaced that in exports, though, posting a 18.4% leap to 343.9 billion dollars (33.0 trillion yen). Particularly high growth was registered by office equipment, such as personal computers (71.5%), and electronic components, including semiconductors (72.0%).

The surplus in trade began rising rapidly in fiscal 1991, peaking in fiscal 1993 at 121.8 billion dollars (13.1 trillion yen). It declined the following year to 117.9 billion dollars (11.8 trillion yen), and the downward trend has continued in fiscal 1995.

Structural factors are believed to be causing imports to increase faster than exports, and the surplus should shrink even further in the coming years.

Japan's surplus in the current account, too, has been dwindling in yen terms since fiscal 1992; the figure for fiscal 1995 was 9.5 trillion yen (95 billion dollars at 100 yen to the dollar), a drop of 23.8% from the preceding year. The rate of decline has been accelerating in fiscal 1996, moreover, and the respective figures for April and May were 45.2% and 46.4% lower than year-ago levels.

Leap in Manufactured Imports
There has been virtually unbroken growth in Japan's imports since the 1985 Plaza agreement on coordinated currency market intervention among the Group of Five nations. Imports have been growing particularly rapidly since fiscal 1994, increasing at a double-digit clip from year-ago levels.

Structural factors are thought to be behind this trend. In the face of the appreciating yen, Japanese corporations set up offshore manufacturing bases, mainly in Asia, leading to higher exports from these countries. In addition, foreign companies have enhanced their competitiveness, boosting their exports of low-priced manufactured goods.

Electrical appliance manufacturers--once Japan's leading exporters--began moving production bases abroad in the late 1980s. At the outset, most products were absorbed by local demand or exported to third countries, but by the start of the 1990s many of the goods produced by the transplants began being reimported into Japan.

The market for color television sets, which are not highly technology intensive, is already dominated by reimports and products of foreign manufacturers. The number of sets produced domestically in 1995 fell by 16.4% from the previous year, while the number of imports grew by 27.6%.

Recently, production has begun in Asia of higher added-value products, such as large-screen and wide-frame TV sets. At one time the world market for videocassette recorders was monopolized by products made in Japan, but today, a majority of VCRs are manufactured outside the country.

These structural modifications have meant slower imports of fuels and raw materials and rising shares of manufactured goods, which claimed an all-time high of 59.1% of all imports in 1995. Mining and manufacturing imports as a percentage of the domestic demand for such products have nearly doubled from 8.0% in 1983 to 15.3% in 1995.

Cross-Border Division of Labor in Asia
Interestingly, while Japan's overall exports in fiscal 1995 grew by only 7.7%, exports to Asian countries grew by a substantially higher 16.9%. This is because the shipment of capital goods, such as components and machine tools, to subsidiaries and local affiliates in Asia increased by a much wider margin than exports of finished products. This is another structural change that suggests that imports from Asian countries will continue to grow.

The trade relationship between Japan and other Asian countries is in a state of flux. Under the traditional "vertical" division of labor, raw materials were exchanged for manufactured goods. This is changing to the more "horizontal" pattern that characterizes the ties among industrial nations, where different types of manufactured products are traded among one another.

This type of relationship brings many economic benefits to the Asian countries, such as technology transfers from Japan, the creation of employment opportunities, and the promotion of economic growth. While Japan may initially be adversely affected in terms of domestic production and employment, in the long term these changes should lead to productivity improvements and greater sophistication of the industrial structure.