JRI Research Journal;Vol.5 No.5,
Restructuring Energy to Stop Income Outflow ―Decarbonization Significantly Improves Terms of Trade―
Shinichi Nishioka, Tomohiko Kozawa
Summary
Japan’s terms of trade have deteriorated as import prices have risen sharply due to soaring resource prices. The terms of trade represent the profit margin of trade transactions, and when they deteriorate, income flows out of the country. The deterioration in Japan’s terms of trade is also significant on a global scale, as Japan’s dependence on imports for energy resources is one of the largest in the world.
About 8 trillion yen of income is forecasted to flow overseas in fiscal 2021 due to deteriorating terms of trade. A large amount of income has already flowed out: about 40% of the income generated by economic growth since 2000 has been lost due to the deterioration. Deterioration in terms of trade not only reduces corporate profits but also lowers household incomes. Since 2000, real wages have fallen by about 10% as a result, almost offsetting any increase in labor productivity.
To prevent the outflow of income overseas, it is essential to transform the energy structure. According to an estimate by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which includes the financial authorities of various countries, decarbonization efforts will cause the use of mineral fuels to fall to about 15% of the current level and the terms of trade to improve by 2050, boosting income growth by just under 40%
At present, radical efforts to decarbonize the world are causing high resource prices and worsening the terms of trade in Japan. However, in the medium to long term, decarbonization efforts have the effect of increasing income through improved terms of trade as well as increased productivity and reduced losses due to climate change. In this sense, transformation of the energy structure is important not only for mitigating climate change risks and ensuring economic security, but also from a purely economic perspective in terms of increasing the income of the country as a whole.