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Japan's Trade Surplus in a Downtrend--for Now

News analysis: Experts say there could be an upswing late in '96 or early in '97. Long-term prospects are a matter of dispute.


TOKYO — The dramatic decline in Japan's trade surplus now being celebrated in the Clinton White House is likely to continue and even accelerate as the year unfolds, according to trade experts here. Japan might even report a trade deficit for January, the first such event in more than a decade.

But economic analysts say the pendulum could well reverse direction late this year or early in 1997--shortly after the U.S. presidential election--if the current yen-dollar relationship continues.

Japan announced last week that surging imports, shifts of production overseas and rapid currency fluctuations caused the nation's global trade surplus to tumble 14.5% for 1995.

Japan's global current account surplus, the broadest measure of trade in goods and services, fell to $110.44 billion in 1995, from $129.14 billion the previous year, for the second consecutive year of decline, the Finance Ministry said. The December surplus was down 15.5% from a year earlier.

If the yen remains around its current level, further sharp monthly declines, as measured in dollars and compared with year-earlier figures, are virtually inevitable in coming months.

"The surplus in the current account will continue on a shrinking trend," the Finance Ministry predicted.

With President Clinton having made reduction of Japan's huge trade surpluses a key foreign policy goal, the favorable turn in statistics is well-timed for his reelection campaign. Whether current trends are likely to be sustained in future years, however, is a matter of dispute.

"You'd be going out on a limb to suggest this was more than good luck on the part of the administration. This hasn't been engineered, in my view, with the election in mind," said Tod Wood, an analyst with Baring Securities (Japan) Ltd.

The principal causes are the transfer of manufacturing from Japan to other countries and the strengthening of the Japanese yen against the dollar and other currencies, making imports cheaper in Japan and Japanese exports more expensive. But recently the yen has been weakening.

Still, the timing of the latest trade data could hardly be better.

Japan's politically sensitive trade surplus with the United States fell 17% in 1995 and a dramatic 35% in December, compared with a year earlier. Such figures are likely to help ease U.S.-Japan trade tensions and boost Clinton's claims of success in dealing with Japan on trade issues.

In its current accounts, including services as well as goods, Japan even ran a global trade deficit during the first 20 days of January, Wood noted. This is not too unusual because of Japan's long New Year holiday, during which imports enter the country as usual but few exports go out, he said.

But there appears to be "a better than 50% chance" that Japan will record a January trade deficit, which would be its first monthly deficit since 1984, he said.

The dollar was trading at about 107 yen in Tokyo on Friday, up from a post-World War II record low of 79.75 set on April 19 last year--but little changed from its average of about 102 yen in December 1994. This means that come April and May, even if there were no decline in Japan's surpluses measured in volume or yen terms, the figures will show dramatic declines in dollar terms, so long as exchange rates remain stable between now and then.

"Add another 25% to the rate of decline," Wood said. "For a month such as this [December], instead of 15.5% down, you'd see it down 40%."

Eventually, however, if the dollar retains its current strength or becomes even stronger, the trend toward lower Japanese surpluses could turn around again.

Currency fluctuations "make things look better than they are," said Robert Feldman, chief economist at Salomon Bros. Asia Ltd. Salomon Bros. is forecasting that late this year, Japan's trade surplus will stop declining and then start rising again in 1997, he said.

"Right now, import volume is growing 9% to 10% faster than export volume," Feldman said. "That is enough to shrink the surplus." But if exchange rates stay in their current range, by next year import growth is likely to slow and "exports will probably bounce back," he predicted. That could leave Japan continuing to run huge surpluses.

U.S. trade negotiators, meanwhile, are focused on half a dozen areas of trade where Washington hopes to see further progress by Japan in opening up markets to foreign penetration. These include semiconductors, aviation, insurance, film, telecommunications and copyrights for pre-1970 musical recordings, which are unprotected in Japan.

Wood, the Baring analyst, predicted that even if Japan's trade surpluses show steady declines for the next several years, Washington will not end the pressure on trade issues.

"It is the duty of the [U.S. trade representative] to seek out those areas it feels are not as open as the U.S., and open them," Wood said. "The U.S. will continue to pursue [market-opening agreements] aggressively . . . because Japan remains very protectionist compared to the rest of the developed world. You have a building next to the White House filled with lawyers, called the USTR, that is hungry for blood. . . . They'll stay hard-nosed on Japan."

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