from Follow the Money

More evidence the world economy isn’t really rebalancing

May 14, 2007

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The current account surplus of the world's big oil exporters is now falling.   At least that is what the IMF believes, with good reason.   All the oil exporters ramped up their spending and investment last year. 

But rather than reducing the US deficit -- my read of the latest US data is different than that of the New York Times(more on that later) -- the fall in the oil surplus seems to be leading to an increase in Asia's surplus.

China's q1 surplus is up.  Japan's q1 surplus is up too.  

Japan's March current account surplus was close to $30b (more from the FT).  $30b strikes me as rather large.

The rise in Japan's income surplus isn't really a surprise.    Global interest rates are rising and Japan is a big net creditor.   The coupon the US Treasury pays MoF on its large Treasury holdings has risen steadily as debt bought at low rates in 2003 and 2004 is refinanced at higher rates.  That has implications for the US income balance and the US current account deficit as well.

The rising income surplus could have been used to finance a rising trade deficit.  But Japan's trade surplus is also rising.   The income surplus is just financing larger capital outflows.

The rise in the trade surplus isn't exactly a surprise either.   Japan's soaring commodity import bill has masked the increase in Japan's manufacturing surplus over the past few years.   While oil isn't exactly low, it isn't rising like it did in past years either.  

Japan's exports to Europe are growing much faster (14% y/y) than its exports to the US (up 2% y/y).   No surprise there. Exchange rates do matter.

It also isn't difficult to see why Japanese auto exports are increasing rapidly.  Toyota's US sales have increased faster than its US production.   At current yen/ dollar rates, my guess is that Toyota doesn't have much of an economic incentive to shift production to the US either.

Incidentally, the inflows associated with a rising current account surplus would normally put pressure on the yen to appreciate.  But inflows from the current account clearly have been offset though by large private capital outflows. 

Some of those outflows may come from unleveraged, real money Japanese investors.   Some no doubt come from Japanese residents -- fx day traders -- who borrow yen to increase the returns on their fx bets.  But some no doubt also come from international investors who borrow yen to buy a range of securities that have a higher coupon.  

My guess is that the growing size of Japan's current account surplus provides indirect evidence that the size of the total short yen positions associated with the yen carry trade has continued to increase.    After all, the size of Japan's current account surplus net of FDI flows and portfolio flows -- i.e. the scale of bank lending to non-residents -- is one potential measure of the size of the carry trade.  

A full accounting, though, would require looking more closely at the scale of net portfolio flows -- i.e. determining how much, on net, "real money" investors are taking out of Japan.  And yes, that includes looking at equity outflows.

For more on the carry trade, see Box 1.4 -- written by Hali Edison and Chris Walker -- in the IMF's Asian-Pacific Regional Outlook.

Update: the April investment trust data  from Japan -- hat tip tmcgee -- suggests solid portfolio outflows from Japan, and thus a somewhat smaller role for the leveraged carry trade.  Calculating net portfolio flows though requires data on inflows as well as outflows.    

Do remember though that one measure of the outstanding "short" yen position is the cumulative total of non-portfolio, non-FDI net capital outflows from Japan and that seems likely to be rising over time.    As for that matter is the fx exposure of Japanese households!

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