Japan's Growing Income Surplus and Issues to be Overcome if Japan is to Establish Itself as an "Investment Nation"
April 4, 2007
This report examines the current structure of Japan's external assets and liabilities and income balance through a comparison with those of other developed nations, and examines the issues Japan must face if it is to become an "investment nation" and use its income surplus as a source of economic growth.
The greatest single contribution to the growth of Japan's income surplus in recent years has been made by receipt of income on investment in securities, followed by receipt of income on direct investment. Although investment income payments have also grown for the past three years, the growth of receipts has greatly exceeded that of payments. An examination of the balance of external assets, which is the source of investment income, reveals that investment in securities has been rising steadily for the past decade. Direct investment, by contrast, has seen little or no growth.
Although Japan's income surplus is far greater than that of many other countries, including the United States or the United Kingdom, closer examination of its structure reveals a certain "immaturity" as compared with those of the United States or the United Kingdom, in two respects.
The first is the fact that the flow of money, which gives rise to the income surplus, is still a "one-way street". In Japan, the basic model is "trade surplus → of assets accumulated as a result of surplus → income receipts". By contrast, in the G5 nations, of which the United States and United Kingdom are typical examples, the flow of money has evolved into a "hub-center" model, whereby "influx of investment funds from other countries → global investment by American/British companies and investors → income receipts".
The second is Japan's low return on external investment. This is because, in comparison with the United States or the United Kingdom, (i) Japan's asset portfolio is biased towards investment in securities and foreign currency reserves, on which the return is low, and (ii) the return on direct investment is low. The high level of investment in securities is due to the decline in the ability of companies to bear and manage risk after the bursting of the bubble economy. When it comes to the operation of foreign currency reserves, which have grown as a result of exchange rate intervention, the emphasis tends to be on stability rather than profit. The low rate of return on direct investment indicates that Japanese companies have yet to overcome their domestic market orientation. Japan's overseas direct investment is praiseworthy in that it takes advantage of the international competitiveness of manufacturing industry, but it cannot be said to be making dynamic use of overseas resources and business models.
Thus, although Japan's income surplus is growing in amount, investment funds and business models are still highly "independent" and from the standpoint of "skill in external investment", many issues have yet to be resolved. On the trade side, some progress has been made in the construction of international industry-related systems producing growth of both exports and import, but in the future, it is necessary that external investment too will make dynamic use of overseas resources from a global perspective, and that rates of return will rise.
There are already signs of change and, in recent years, the financial position of Japanese companies has improved, and their ability to bear risk has recovered. As Japanese companies gain experience in high-return investment and risk management it is possible that Japan will become more attractive as a business center and that the flow of foreign funds into Japan will grow.
The government should support private-sector initiatives (i) by encouraging the creation of an innovative domestic market environment through deregulation and experiments in the creation of open markets and (ii) through the international harmonization of economic and financial transaction rules (including mergers and acquisitions), etc., that will help to reduce the risks attendant on cross-border activities.
FFor more information on the content of this report, please contact Naoko Ogata , the Japan Research Institute, Limited.