My preceding blog-post discussed the process whereby the undervalued renminbi and large Chinese trade surplus have begun to adjust in earnest, over the last three years.
The adjustment in the Chinese trade balance is reminiscent of Japan with a 30-year lag, like other aspects of the US-China relationshkp (though not all). Japan’s balance of trade in goods and services went into deficit in 2011, for the first time since 1980. Special factors have played a role in the last year, including high oil prices and the effects of the tsunami in March 2011. But the downward trend in the trade balance is clear. Even the current account temporarily showed a deficit in January. (Because Japan has long been the world’s largest creditor, a large surplus in investment income is usually enough to change any trade deficit into a surplus on the overall current account.)
This development has received relatively little attention in the United States. This is curious in the respect that two decades ago the Japanese trade balance, which then was in substantial surplus, was the subject of intense focus and worry. At the time, some influential foreign commentators warned that Japan had discovered a superior model of “the capitalist developmental state,” featuring strategic trade policy among other attractions, and that the rest of us had better emulate them. Either that or the Japanese were cheating and we had better stop them.
Most economists did not share the views of these “revisionists,” but argued rather that the trade balances were determined by macroeconomics: Japan’s current account was so high because its national saving rate was so high. The best explanation for the high Japanese saving rate, in turn, was not cultural differences or government policies, but rather demographics. The Japanese population was relatively young then compared to other advanced economies, but it was rapidly aging, as the result of a decline in the birth rate since the 1940s and an increase in longevity. In 1980, 9% of the population was age 65 or older; now this ratio is more than 23%, one of the very highest in the world. As a consequence, Japanese citizens who 30 years ago were saving for their retirement are now dissaving, precisely as economic theory predicted. (E.g., Horioka, 1986, 1992.) Household saving has declined from 14% of disposable income twenty years ago to 2%. The trade and current account balances have now come down as well.
The downward trend in Japan’s saving rate and trade balance illustrate again that the laws of international economics eventually work, even in Asia.
[This post, and the one preceding it, were together published as an op-ed by Project Syndicate.]
Jeffrey Frankel, 1993, “The Japanese financial system and the cost of capital,” in Japanese Capital Markets, edited by Shinji Takagi (Basil Blackwell Inc.): 21-77.
Charles Yuji Horioka, 1992, “Future trends in Japan’s saving rate and the implications thereof for Japan’s external imbalance,” Japan and the World Economy, Vol. 3, Issue 4, April: 307-330.