The close of 2011 brought an end to an era. Japan Inc., creator and leading light of an export-led economic growth model for more than 60 years, suffered its first trade deficit since 1980. What’s more, deficits look likely to continue for the foreseeable future.
Some of the reasons for the giant shift are clear. Much of the world’s manufacturing has moved to lower-cost producers such as China, and many Japanese multinationals produce goods overseas now, which subtracts from home-country trade figures.
Nevertheless, “it is a startling thing, obviously,” says Mauro Guillen, a professor of management at Wharton and director of the Lauder Institute. “But keep in mind that two things have been going on. First, Japanese firms have shifted production offshore over the last 20 years. Second, the yen has appreciated. This means that exports have gone down and imports have gone up.”
So long as the yen and energy prices remain high, and global demand is weak, Japan will not return to surplus, says a former Bank of Japan official, Hiromichi Shirakawa, now head of economic research at Credit Suisse in Tokyo, according to a report in The Wall Street Journal. Others suggest that the yen is heading for a big fall eventually if trade deficits become a regular occurrence. While that might have the virtue of boosting competitiveness, it would also have a downside by raising import costs for manufacturing inputs.
But how likely is it that the yen will depreciate much as a result of trade deficits? Not so much, according to Guillen. That’s because the key measure regarding a currency’s value is the more comprehensive current account, which tracks not only trade, but also financial transfers, including remittances from those Japanese producers overseas. So do not expect a net outflow of cash from Japan any time soon, even in the face of ongoing trade deficits.
“What really matters is the current account,” Guillen says. That measure “includes the trade balance, income earned on capital invested abroad and net transfers.” And Japan still carries a large current account surplus “that continues to accumulate reserves in spite of the trade balance that now is becoming a small deficit.” The trade deficit is “more than compensated for by the big surplus in the other components of the current account.”
The bottom line: It is not until a country has a current account deficit that it needs overseas financing “in the form of capital transfers. That’s when your currency tends to depreciate,” Guillen adds.
Guillen also points out that Japanese firms “have become more competitive by investing abroad, not less. Still, it may not be enough to meet the challenge from the Korean and Chinese firms.”
So while one part of this story – Japan suffering a trade deficit — may not have the immediate historic impact expected on first glance, another part of the story does – the implied rise of emerging countries as manufacturing centers. “When historians examine the early years of the 21st century, they will most likely point to the rise of emerging-market multinationals as the most significant and consequential change,” Guillen recently told The Korea Times. “By comparison, the crisis of the euro or the financial implosion of 2008 will be regarded as minor events. During 2012, emerging-market multinationals will continue to rewrite the rules of global competition.”