The future of Japan’s current balance of payments in terms of the IS balance
—Positive growth and reconstruction of private finance are essential even if Japan continues to have a current-account surplus —
March 13, 2012
Although household excess savings have been declining since the early 1990s, since the second half of the 1990s, the non-financial corporate sector has become an excess savings agent and in recent years has amassed excess savings equivalent to those of the household sector in the 1980s. The private sector as a whole is holding an amount of excess savings well above the general government sector’s funding shortage (fiscal deficit).
An examination of the sustainability of the private sector’s excess savings by system sector gives the following results.
- Household sector: the excess savings in the investment-saving (IS) balance have been declining since the 1990s. As Japan’s population ages, savings are sooner or later expected to turn negative, but with the decline in the ratio of population of productive age, the rate of decline of investment will accelerate further, and it is likely that excess savings will be maintained overall.
- Non-financial corporate sector: while savings are holding steady, investment is falling in conjunction with the decline in the expected growth rate. As a result, excess savings have been accumulating since the second half of the 1990s. Given that there is little prospect of a significant rise in the expected growth rate, excess savings are likely to remain at a high level.
- Financial institutions: investment is nearly zero but owing to interest on investment in government bonds and lending, excess savings have been accumulating since the early 1990s, and it should be possible to secure stable excess savings equivalent to around 1% of nominal GDP, excluding the general sector’s net interest payment costs.
Given this situation, in the “Cautious scenario” (nominal in the mid-1% range, real around 1%) under the “Basic strategy for the revitalization of Japan”, it is likely that the private sector will maintain substantial excess savings and that a current-account surplus equivalent to 2-3% of nominal GDP, throughout the 2010s. In the “Growth strategy scenario” (nominal 3%, real 2%) too, the private sector’s excess savings decline, but the reduction of the fiscal deficit makes it likely that a current-account surplus equivalent to around 2% of nominal GDP will be maintained.
However, if economic stagnation results in continued zero nominal growth and, at the same time, if no attempt is made to further improve the structural basic fiscal balance through tax increases, etc., the basic fiscal balance will begin to deteriorate once more from the mid-2010s, and the current-account balance will go into deficit around fiscal 2025. Moreover, given that a rise in the general government sector’s interest payment costs is expected, if dependence on foreign markets for the absorption of government bonds increases, the resulting interest payment drain may mean that it is no longer possible to make up the general government sector’s funding shortfall with private-sector savings. To maintain Japan’s current-account surplus and ensure stable absorption of government bonds, it will be vital to secure nominal positive growth through growth strategy and steadily rebuild the basic fiscal balance.