Column: Digital deficit that cannot be covered by inbound tourism surplus, structural changes promoting yen depreciation = Daisuke Karakama | Reuters

[Tokyo 12th]- In my previous contribution to this column, “Japan’s new foreign currency outflow, weaknesses in digital consulting and research and development,” the author wrote about the expansion of the service balance, especially the “other services balance.” We have discussed the possibility that the deficit is a remote cause of the persistently weak yen.

Recently, keeping in mind that the deficit reflects the trends of the times, I have been calling the deficit for other services the “deficit of the new era.”

Looking at the August balance of payments statistics released by the Ministry of Finance on October 10, the deficit in the balance of other services was 522.9 billion yen in August, and the total for January to August was 4.671 trillion yen, compared with the same period last year (3 This has increased by more than 1 trillion yen from 567 billion yen).

On the other hand, the travel balance, which is attracting attention as inbound demand increases, recorded a surplus of 258.2 billion yen, the largest surplus ever for August, and the total for the January-August period was 2.3656 trillion yen, compared with the same period last year (174.2 billion yen). ) has recorded a surplus of more than 13 times that of the previous year.

Although the deficit in the services balance as a whole has been suppressed due to the increase in the surplus in the travel balance, the trend of expansion in the deficit in other services balances is still a matter of concern.

In the future, when analyzing Japan’s international balance of payments, it will be necessary to closely follow trends in the balance of trade and primary income balance, as well as trends in the balance of services, in order to consider the yen exchange rate structurally. I believe this is the key point.

In this regard, the Bank of Japan Review “Globalization of Service Transactions from the Perspective of Balance of Payments Statistics” published on August 10, 2023 discusses recent structural changes with a focus on the service balance, and provides a very interesting perspective. .

It is assumed that many transactions related to service balances involve outright foreign exchange transactions, and what is being discussed here suggests the possibility of “a prolonged depreciation of the yen due to structural changes.”

In past editions of this column, we have stated that the recent expansion of the deficit in other services balances can be understood through the three keywords of digital, consulting, and research and development, but in the Bank of Japan Review, we use a more detailed classification to explain the overall deficit in services balances. It captures changes and clearly highlights the structural changes in recent years.

Specifically, the Bank of Japan review focuses on 1) those related to the movement of goods and production activities (goods-related balances), 2) those related to the movement of people and local consumption activities (people-related balances), and 3) digital The service balance has been reorganized into five categories: 4) related to digital services (digital-related balance), 4) finance and insurance-related (money-related balance), and 5) other than the above (others).

For example, receipts and payments related to inbound tourists (in short, travel receipts and expenditures), which are often talked about in terms of service balances, are classified as 2), while receipts and payments for platform services and Internet advertising transactions of giant US IT companies are recorded in 3).

Payments to foreign consulting companies that have expanded their business in Japan in recent years and increased their sales are also counted in 3) for statistical purposes. (“Professional/Management Consulting Services” records receipts and payments related to Internet advertising and consulting).

Note that 4) is the total of insurance/pension services and financial services, and this deficit has also been on the rise in recent years. Although I will not discuss it in detail this time, as a result of the popularity of investment-oriented insurance products, which have become a hot topic in Japan’s financial administration, Japanese insurance companies are increasing the number of cases in which they provide reinsurance overseas, and insurance premium payments are increasing. There is also the aspect that

In the process of discussing “deficits in a new era,” I once received an inquiry asking, “If we were to limit ourselves to digital-related deficits, how big would that be?” Therefore, I rearranged the service balance according to the Bank of Japan’s classification above, and made a trial calculation to show the changes up to now (August 2023).

As a result, of the service balance deficit, which reached 5.4202 trillion yen in 2022, the highest level in about 20 years since 2002, 4.7814 trillion yen was a digital-related deficit. According to the Bank of Japan’s classification, it is safe to say that “most of them are digital-related.”

However, there are statistical limitations, and payments to foreign consulting companies and sponsorship fees for international sporting events, which have been increasing in popularity in recent years, are included in digital-related income and expenditures. There is still room for debate as to whether it is appropriate to say “digital-related.” However, even if that were the case, it is also true that there would be no major discomfort.

By the way, the digital-related balance deficit was 2,148.3 billion yen in 2014, which is retroactive, so it has more than doubled in eight years.

Even considering that during the same period, the human-related income and expenditure, which is mainly comprised of travel income, turned from a deficit of 816.6 billion yen to a surplus of 796.6 billion yen, and that it is likely to remain stable at a surplus of well over 2 trillion yen per year from now on, The image remains that it is only a matter of offsetting half of the digital-related deficit.

Looking at this year’s 1-8 total, the service balance deficit has reached 2,719.8 billion yen, of which 3,798.4 billion yen is digital-related, and the rapid recovery in inbound demand is the mainstay of human-related business. It is easy to see how the entire surplus of 2,332.9 billion yen has been wiped out.

On top of that, we cannot ignore the existence of money-related balances that widen the deficit, mainly due to reinsurance premium payments overseas. By the way, in terms of money-related balances, the deficit of 159.9 billion yen in 2014 will increase nearly ten times to 1.01053 trillion yen in 2022, and the total for January-August 2023 will exceed last year’s figure at 1.0657 trillion yen. The deficit is widening at a rapid pace. It can be said that half of the surplus (2,332.9 billion yen) earned from human resources (travel balance) during the same period disappeared into the deficit in money-related balances.

In any case, the deficit structure of the service balance is deeply rooted in the sense that it is unlikely to be resolved easily.

It also allows you to get an idea, although not a complete picture, of where digital-related income and expenditures will be paid. Here, payments will be confirmed by country and region, limited to telecommunications, computer and information services, which include payments for platform services of large US IT companies.

Looking at this, of the approximately 3 trillion yen in 2022, one-third, or 1 trillion yen, will go to the United States, followed by Singapore (approximately 400 billion yen), the Netherlands (approximately 290 billion yen), and China (approximately 200 billion yen).

As you might imagine, payments to the United States have been overwhelming, and compared to about 460 billion yen in 2017, this has more than doubled in five years. It is difficult to imagine that there will be any major changes in this increasing trend in the future. By the way, even in the case of deficits in money-related services, the United States is the top destination for payments, followed by countries and Central and South America, where there are potential tax benefits.

In any case, the impact of increasing service payments to the United States, which is behind the steady dollar/yen exchange rate, may be an issue that is gradually gaining attention.

Since last spring, when we have pointed out the structural causes of the yen’s depreciation, some commentators have stubbornly rejected it. However, what the Bank of Japan Review points out is a structural change in Japan’s external economic sector due to the internationalization of service transactions, and what this means is, if anything, a sell-off of the yen.

Although there seems to be general recognition of the structural changes in the trade balance due to the transfer of domestic companies’ production overseas, in modern times internationalization is progressing rapidly, not only in the trade of goods but also in the trade of services. .

Naturally, international capital flows will change as a result of this, and it seems necessary to incorporate such new perspectives little by little in the world of currency analysis.

Editing: Kazuhiko Tamaki

(This column was posted on the Reuters Foreign Exchange Forum. It is written based on the author’s personal views)

*Daisuke Karakama is the chief market economist at Mizuho Bank. After graduating from Keio University’s Faculty of Economics in 2004, he joined the Japan External Trade Organization (JETRO). From 2006, he was seconded to the Japan Center for Economic Research, and from 2007 to the Directorate-General for Economic and Financial Affairs of the European Commission (Belgium). Mizuho Corporate Bank (currently Mizuho Bank) since October 2008. When he was seconded to the European Commission, he was the only Japanese economist involved in preparing the EU economic outlook. His books include “European Risk: Japaneseization, Yenization, and Bank of Japan” (Toyo Keizai Inc., July 2014) and “ECB European Central Bank: From Organization and Strategy to Banking Supervision” (Toyo Keizai Inc., November 2017). Month). He has appeared in many media such as newspapers and TV.

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