Japan/US: the economic relationship
Published 22 December 2014
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This publication was archived on 4 July 2016
This article is no longer current. Please refer to Overseas Business Risk – Japan
Summary
The US and Japan are economically and financially interdependent and their close economic relationship affects the global economy. This relationship is likely to strengthen further.
Detail
The US and Japan have long been key economic partners. Even with the relative underperformance of Japan in recent decades, their combined economies represent about 29% of global GDP, 15% of global goods trade flows and 33.6% of global outward FDI. The impact of their domestic economic policies is global.
The US is Japan’s largest export market, the second largest exporter of goods and the largest exporter of services to Japan, with a $48.2bn trade deficit with Japan. The US is Japan’s largest FDI destination holding 35 trillion yen (£190bn) of stock with an annual FDI flow of about £30bn (2013) to the US (representing 32% of all Japan’s FDI). In 2013, Japan’s FDI to the US increased 36.7%. Most (53%) went into the automobile and communications industries.
The Trans-Pacific Partnership trade agreement (TTP) offers those involved an opportunity to increase exports and resolve market access barriers, and is already stimulating other TPP members to liberalise their markets. For those involved it should account for an additional £1trillion worth of trade in goods and $242 billion worth of services, representing about 40% of global GDP and 26% of global trade, including 60% of US exports. Estimates suggest that the TPP could add 3.2 trillion yen (£17bn) to Japan’s GDP. TPP negotiations are approaching their zenith, with US and Japanese now engaging on agricultural market access and cars. If agreed, an eventual US- Japanese agreement in the TPP may become a model both for the EU-Japan FTA and the TTIP.
The US is Japan’s largest portfolio investment destination with 124 trillion yen (£670bn) of US financial products held by Japanese private and government investors, primarily in fixed income markets, followed by equity. In addition, most of Japan’s foreign reserves of 1.3 trillion USD are understood to be invested in US treasuries. As a result, Japan holds nearly as much US government debt (1.2tn USD) as China, the US’ largest foreign bond holder.
The dollar/Yen exchange rate is a major profit driver for Japanese large manufacturing exporters. The exchange rate is sensitive to comparative stances between Fed and BOJ policies and differences between their monetary policies have become starker. The prospect of both higher rates in the US and prolonged easing in Japan has encouraged currency investors to move into the dollar, causing the yen to weaken further. While this benefits export-orientated big business, Japanese SMEs face higher input costs and are struggling. This has made commentators and many policy makers more sensitive about further Yen depreciation If the US Fed resumes raising its policy rate in 2015, this will renew downward pressures on the Yen.
Disclaimer
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