Japan, a country that has long relied on foreign trade to establish its nation, saw its trade deficit reach a historical high in 2022. However, some argue that Japan doesn't actually care about this development because the money earned from its overseas investments exceeds its trade deficit. Is this really the case?
According to official Japanese government data, in 2022, Japan's trade deficit reached nearly twenty trillion yen, setting a record high since 1979! This is a rather serious event for Japan, which has relied on trade surpluses to develop its economy. However, some Chinese scholars have pointed out that Japan's overseas investments in 2022 earned nearly thirty trillion yen, far greater than the trade deficit. Therefore, Japan supposedly doesn't care about the so-called huge trade deficit at all!
Additionally, some Chinese scholars believe that Japan is transitioning from a trade-based nation to an investment-based one, so the trade deficit is an inevitable result of Japan's economic transformation and is not surprising or worrying. But are these views correct?
I responsibly tell everyone that these views do not hold up!
Firstly, in the economic world, we cannot simply compare one number with another number, nor can we simply offset them, because it's not as simple as managing a household, where if you earn more than you spend, it's a good thing and signifies prosperity. It's not like that. In macroeconomics, the meaning behind each economic variable is different. For a country like Japan, a trade surplus is the driving force of its economic development; it relies on foreign trade (surplus) to quickly drive the domestic economic machinery.
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Now, the trade surplus has suddenly turned into a trade deficit, and it's a continuous and huge trade deficit. It's clear that this has a significant impact on the Japanese economy.
Overseas investments, on the other hand, drive the economies of other countries or regions, which is completely different from the domestic economy. Some might argue that Japan could use the money earned from overseas to develop its domestic economy, which would still drive its economy, right? In fact, this argument overlooks a very important issue: why did those (Japanese domestic) capitals go overseas to invest in the first place? Due to the profit-seeking nature of capital, capital goes overseas to invest because the domestic economy is not doing well, and the domestic economy can create too little capital gain space for capital, so it goes to other markets to look for opportunities. Therefore, now that thirty trillion yen has been earned overseas, and you want to bring it back to drive the Japanese economy. If that were possible, why did it go out to invest in the first place? Wouldn't it have been better to operate within the domestic economy directly? So, the attempt to use this part of the money to drive the Japanese economy is almost impossible.
Secondly, as I have said in the past, to understand economic matters, no matter what your previous major was, you must first understand the issuance of currency. You need to know how currency is issued, and then you will know the pattern of economic operation.
Why does Japan rely on trade surpluses to drive the development of its domestic economy? This has a lot to do with the issuance mechanism of the yen. As early as just after World War II, due to the Japanese militaristic government's loss of credibility with the people, the issuance of the yen actually lacked the support of national credit, so the public was skeptical and distrustful of the issuance of the yen. By earning dollars through foreign trade and issuing domestic currency based on the exchange rate, this provided a reasonable issuance mechanism for the yen.
Later, as Japan's domestic economy gradually stabilized and the Japanese government's credit gradually stabilized, the Japanese economy needed to take off, and it needed to introduce signals from the global economic trend into the domestic economy, which was also achieved through trade surpluses.Of course, once the Japanese economy became powerful, it also attempted to change this situation, but it didn't succeed. We will discuss this matter again when we move on to the next topic. In summary, Japan's trade surplus is very important for the issuance mechanism of the yen. The problems that have arisen in the Japanese economy over the years have a considerable relationship with the chaotic issuance of the yen.
But this brings up a new question: Can't the dollars earned from overseas investments be brought back to the country to continue the previously mentioned yen issuance mechanism? First, the money can't come back, and even if it does, it can't serve to introduce signals of global economic development or enhance the efficiency of Japan's resource allocation. Why? Because the money you bring back carries the economic development signals of the country where you invested. Bringing this money back to change the issuance of yen and attempting to improve Japan's resource allocation efficiency— is that possible?
Therefore, we absolutely cannot offset Japan's overseas investment profits against its domestic trade deficit. These are fundamentally different economic concepts on different dimensions.
So, has Japan already transformed from a "trade-oriented nation" to an "investment-oriented nation"? I believe that those who say this are thinking of the US dollar when they speak, because the US has long been a country with a trade deficit, and its economy is still doing well. This is because the US also invests overseas, and it has a significant amount of overseas investments. But can the yen compare with the US dollar?
Firstly, for the US dollar, overseas investment is one of the paths for dollar outflow. The US needs to export dollars because the dollar is the only dominant currency in the world. Can Japan do the same?
After the mid-1980s, the Japanese economy was developing well. During that period, Japan also realized that relying on trade surpluses to drive its economy in the long term might be difficult. Especially at that time, some emerging market countries had already benefited from the transfer of industrial chains and industrial structures. Therefore, although Japanese products might be of high quality, their price advantage was completely lost, and it was becoming increasingly difficult to gain a competitive edge in international trade. So, Japanese economists at that time proposed, can we achieve economic stability by turning to overseas investments, like the US?
However, when Japan first thought about investing overseas, the first problem it encountered was the international status of the yen. The yen is not an internationally dominant currency, so to establish a nation through overseas investments like the US, the status of the yen had to be raised. Thus, Japan also implemented the so-called internationalization of the yen. Of course, the yen has long been an international currency, but while they spoke of internationalization, what they truly desired was to be on an equal footing with the US dollar in terms of dominance.
But in the process of implementation, the Japanese ultimately realized one thing: the yen could not be on an equal footing with the US dollar. Therefore, Japan's overseas investments could only rely on earning dollars and then using those dollars for investment. But obviously, due to the contradiction between the source of your country's economic development momentum and your transformation, a contradiction arises at the monetary level. If this contradiction cannot be reconciled, what use is there in having more overseas investments? Just like in the late 1980s and early 1990s, didn't Japan also make a large number of dollar investments overseas? It invested so much in the US that it caused significant strain, right? But in the end, it still stumbled over the status of the yen. A Plaza Accord was enough to make the Japanese economy collapse overnight (of course, when we talk about this, we must emphasize that it's not that the Plaza Accord struck down the Japanese economy; rather, the Plaza Accord was just a catalyst that detonated the contradictions accumulated in the development of the Japanese economy over decades at that moment).
So, what people often see is the relationship between phenomena, often overlooking the essential things behind the phenomena. In this sense, Japan initially wanted to take the path of an investment-oriented nation but failed to do so.
Today's Japan is even less comparable to that era. Not only is the status of the yen not as high as it was then, but Japan's domestic economy is also much worse than it was at that time. Under such circumstances, when you say that Japan wants to achieve the so-called investment-oriented nation, I tell you it is not feasible.Of course, when we talk about Japan, what we really have in mind is China, because after the reform and opening up, the characteristics of China's economic structure are very similar to those of Japan. Therefore, will the problems Japan is facing now be the same problems China will face in the future? Or, if China encounters such problems in the future, what should we do? I think this is probably the most concerning issue for everyone.
One thing is certain: we must not follow the old path of Japan. First, the effort to internationalize the renminbi must not slacken or be abandoned; second, we must pay attention to the transformation of our economic structure. In the past, we relied heavily on foreign trade-driven growth, and now it is clear that relying solely on foreign trade-driven growth has encountered significant problems. Therefore, we emphasize the domestic circulation, and we emphasize the coordination and cooperation between the domestic economy and foreign trade. I think this is a step that Japan did not take at the time. Of course, we are just starting now, and we hope to do well in this regard.
Third, the issuance of the renminbi should not always be anchored to the US dollar, otherwise, there will be problems with the synergy between your currency issuance mechanism and economic development. How to solve this? It is necessary to use market signals to determine the issuance of this currency. We have proposed the establishment of a unified national market, and its ultimate ultimate goal is to build a very solid market foundation for the issuance of the renminbi. Only in this way, can economic development break away from the dependence on foreign trade as a driving force, and the issuance of the local currency can break away from the dependence on the US dollar. No matter which direction the economy will develop in the future, with such conditions, it is possible to open up the path of transformation.
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