Thanks to its bilateral trade balance with the U.S., and its current-account surplus with the rest of the world, Japan finds itself on America’s watch list for currency manipulators at a time when the Trump administration is turning up the heat on economic friends and foes alike.
While there’s no argument that Japan exports twice as much to the U.S. as it takes in imports, it has reason to grumble about taking flak over its current-account surplus, which also includes income from overseas investments.
Unlike the other nations on the watch list, Japan’s current-account surplus mostly comprises the returns from investments, in the U.S. and elsewhere, not the profits from trade. Put another way, Japan finds itself in hot water partly because it’s making money from such things as auto factories it has built in the U.S., creating American jobs.
During the presidential campaign and early in his administration, President Donald Trump singled out Japan for criticism on its currency and trade policies, and with Vice President Mike Pence headed to Tokyo soon for economic talks, that surplus is one of the issues that Japanese Prime Minister Shinzo Abe must consider. While the first meetings of Abe and Trump seem to have gone well, there are numerous points of friction in the economic relationship, from Japan’s protected agricultural sector to Trump’s criticism of Japanese companies, such as Toyota.
And currency will likely be on the agenda when Trump meets Chinese President Xi Jinping later this week. Before taking office, Trump promised to label China a currency manipulator, although this hasn't happened.
Nathan Sheets, former under secretary for international affairs at the Treasury and now a visiting fellow at the Peterson Institute for International Economics in Washington, said that a country’s current account offers important, albeit incomplete, information about whether a country is manipulating its currency.
"I think the current account is a good measure, but I wouldn’t want to say in every case it’s 100 percent foolproof," he said in an interview last week. A country such as Japan that has an aging population and high savings rate is more likely to maintain a surplus, he said.
Income from Japanese investments overseas was almost four times larger than profits from trade in 2016. To be sure, Japan exports more to the U.S. than it imports, and this trade portion is more than half the current-account surplus with the U.S.
But even then, Japan was the second-largest investor into the U.S. in 2015, with holdings worth more than $400 billion, and the head of currency policy at Japan's Ministry of Finance plans to explain that to the U.S. "Supporting the current-account surplus is Japanese investment into the U.S. and I want to gain the understanding of the Trump administration," Masatsugu Asakawa said on Tuesday.
And all that investment creates jobs in the U.S. as well as profits for the likes of Toyota Motor Corp. or Sony Corp. Japanese automakers by themselves supported more than 1.5 million U.S. jobs in late 2015, according to a report prepared for the Japan Automobile Manufacturers Association.
The U.S. complaint is that "large surpluses depress global aggregate demand, highlighting the urgency of deploying all policy levers to boost strong, sustainable, balanced, and inclusive growth." The U.S. also, however, courts foreign investment, which has led to at least some of that excess.
At the federal level, the annual SelectUSA conference facilitated more than $23 billion in spending from 2013, and state governments compete through their tax codes in an effort to attract more business investment.
Japan is already using massive government and monetary stimulus to boost the domestic economy. Yet due to a slow-growing economy and an aging society, investing overseas is still seen by many of the nation’s companies as more attractive than investing at home.