Japan’s Foreign Assets and Liabilities: Implications for the External Accounts

WP/21/26 Japan’s Foreign Assets and Liabilities: Implications for the External Accounts by Mariana Colacelli, Deepali Gautam and Cyril Rebillard IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2021 International Monetary Fund WP/21/26 IMF Working Paper Asia and Pacific Department Japan’s Foreign Assets and Liabilities: Implications for the External Accounts1 Prepared by Mariana Colacelli, Deepali Gautam and Cyril Rebillard Authorized for distribution by Paul Cashin February 2021 Abstract The composition of Japan’s current account balance has changed over time, with an increasing income balance primarily r eflecting a growing net foreign asset position and higher corporate saving. A comparison of Japan’s income balance with peer countries highlights: (i) relatively high yields on FDI assets, and (ii) very low FDI liabilities in Japan. Panel estimation is used to derive separate exchange rate elasticities for income credit and debit, with novel accounting that disentangles the mechanical from the economic response to exchange rate fluctuations. Despite the changing composition of Japan’s current account balance, its response to exchange rate movements still operates mostly through the traditional trade channel, with a small but reinforcing contribution from the income balance. JEL Classification Numbers: E21, F21, F32, F36, F41, G15, O16 Keywords: NFA, Japan, Current Account, Income Account, Income Balance, Exchange Rate Elasticity Authors’ E-Mail Addresses: M Colacelli@imf.org, DGautam@imf.org, CRebillard@imf.org1 A summary of the analysis in this working paper was included in the Japan 2019 Article IV Staff Report and the 2019 Japan Selected Issues Paper. The authors are grateful for helpful comments by Gustavo Adler, Odd Per Brekk, Paul Cashin, Ken Chikada, Luis Cubeddu, Russell Green, Takuma Hisanaga, Gee Hee Hong, Martin Kaufman, Shujaat Ali Khan, Daniel Leigh, Pablo Lopez Murphy, Toshitaka Nagase, Kentaro Ogata, Pau Rabanal, Piyaporn Sodsriwiboon, Takuji Tanaka, Francis Vitek, Niklas Westelius, and Takefumi Yamazaki, and for informative discussions with seminar participants at the Bank of Japan and Japan Ministry of Finance during the 2019 Japan Article IV mission (November 2019), and participants at an APD internal seminar. We are particularly grateful to Albe Gjonbalaj for excellent research assistance. IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2 Table of Contents Abstract ___________________________________________________________________1 I. Introduction ______________________________________________________________3II.What Has Driven the Increase in Japan’s Income Balance? ________________________4III. How Does Japan’s Income Balance Compare to Peers? __________________________8IV.Interconnectedness Between the Trade and Income Balances _____________________11V.Does the Change in Current Account Composition Towards Income Balance Affect itsResponsiveness to the Real Exchange Rate? _____________________________________14VI. Conclusions____________________________________________________________19References ________________________________________________________________22 Box 1. The Rise in Corporate Saving in Japan _________________________________________6Figures 1. Japan’s Increasing Income Balance and its Composition ___________________________52. Japan’s Income Balance Compared to Peers ____________________________________83. Geographical Allocation of FDI Assets, and Impact on Yields _____________________104. Negative Correlation Between Trade and Income Balances _______________________13Tables 1. Japan and G6 Income Balance – Contributions of Stocks and Yields (2015–17 average) __92. Theoretical Effects of REER Appreciation on Trade and Income Balances ___________163. Income Credit and Debit Elasticities to REER: Baseline Specification _______________17Annexes 1. Comparing Japan’s Income Balance to Peers – The Role of Stocks vs. Implied Yields __252. Comparing Japan’s Income Balance to Peers – Advanced Creditor Countries _________273. Income Balance Semi-Elasticity Estimates – Data and Sources ____________________284. Income Credit and Debit – Disentangling Mechanical and Economic Effects__________295. Income Balance Elasticities – Empirical Strategy _______________________________336. Income Balance Elasticities – Robustness Tests and Additional Estimates ____________36 3 I. INTRODUCTION Over the past decades, the composition of Japan’s current account balance has changed with a now-