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

IMF Working Papers, February 5, 2021

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

Authors: Mariana Colacelli, Deepali Gautam, Cyril Rebillard
Date: February 5, 2021
Core summary:
- The composition of Japan’s current account balance has changed over time, with an increasing income balance primarily reflecting 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.

Composition and drivers:
- Increasing income balance driven primarily by:
- growing net foreign asset (NFA) position
- higher corporate saving
Cross-country comparison:
- Japan exhibits relatively high yields on FDI assets.
- Japan exhibits very low FDI liabilities.
Exchange rate response:
- Separate exchange rate elasticities estimated for income credit and income debit using panel estimation.
- Novel accounting approach distinguishes:
- the mechanical response to exchange rate fluctuations, and
- the economic response to exchange rate fluctuations.
- Overall external-account response to exchange rate movements remains dominated by the trade channel.
- Income balance contributes a small but reinforcing effect to the response.

Empirical approach:
- Panel estimation to obtain distinct exchange rate elasticities for income credit and income debit.
- Novel accounting decomposition separating mechanical vs economic exchange rate effects.
Subjects and keywords covered:
- Credit, Current account balance, Income, Real effective exchange rates, Trade balance
- Keywords: balance response, Current Account, debit channel, Exchange Rate Elasticity, Income Account, Income Balance, income credit, Japan, NFA, property income, WP