Japan's Coming Balance of Payments Flip

From a Net Lender Nation to a Net Borrower Nation Part 2

This week we are publishing a five-part series on Japan’s economy and policy. Yesterday we looked at demographics and savings; today we turn to the trade account and the balance of payments.

The starting point is the savings–investment identity:

(S–I) + (T–G) = (X–M)

Private savings minus private investment, adjusted for the fiscal balance, must equal the trade balance. In other words, if households move into dissaving and neither the corporate nor government sectors offset, the trade balance must turn negative.

For decades, Japan’s trade surplus was a hallmark of its external strength. High household savings supported investment at home, while the excess spilled over into exports. This created a structural trade surplus that helped power growth from the 1970s until the last decade. But in recent years the picture has changed. The trade account has turned volatile (we …