This article (originally from November 30, 2011) explains why Japan’s status as the world’s largest net creditor nation does not guarantee long-term stability when the yen appreciates. Because most overseas earnings are denominated in foreign currencies, Japan’s income balance expands during yen depreciation but contracts when the yen strengthens. Combined with aging-related declines in national savings, sustained yen appreciation could push Japan into a “twin deficit” of both fiscal and current accounts.
To prevent this, the author argues that Japan must evolve from a one-way asset manager into a global investment hub—attracting capital from abroad and reallocating it into high-return overseas projects through Tokyo’s financial markets. Unlike the United States, Japan cannot rely on the privilege of a key-currency status, making domestic investment-environment reform essential.
The article warns that tax hikes alone would depress economic activity, reduce savings, and worsen the current account, stressing the need for comprehensive fiscal reform and growth strategy.

2011/11/30

Avoid the twin deficits of the current account and fiscal balance at all costs.
When the yen appreciates, it becomes difficult to maintain a surplus in the income balance.
Improve the investment environment to attract funds from around the world.
The headline alone is sufficient, but let us excerpt the content.

Toward a mature creditor nation, Japan’s conditions (Part 3).
Aim to become a hub for asset management.

…Omitted before.
The boldface in the text and asterisks are mine.

As a result of more than thirty years of accumulated surpluses in trade and service balances, Japan now boasts net external assets of 250 trillion yen, making it the world’s largest holder of net external assets, surpassing second-place China (just under 150 trillion yen).
If these assets are properly utilized, it is possible to expand the surplus of the income balance.
If the yen is expected to depreciate in the future, it would be appropriate to use past accumulation for the future.
Generally, the wealth Japan earns abroad is denominated in foreign currencies, and when it is recorded in Japan’s domestic accounts, it is converted into yen.
Therefore, the weaker the yen is, the larger the surplus in the income balance becomes.
The income balance includes the earnings of overseas subsidiaries and branches, so optimizing the allocation of production bases and strengthening production activities to increase earnings is desirable.
However, when the yen moves toward appreciation, the opposite logic applies, and if other conditions remain unchanged, it becomes difficult to maintain a surplus in the income balance.
Then, as mentioned above, combined with the decline in savings due to aging, the current account turns into a deficit, resulting in the twin deficits of fiscal and current account balances.
While yen appreciation makes it easier to purchase foreign assets and thus can be a factor improving the income balance in the future, the overall improvement effect is limited.
Promoting the internationalization of the yen and denominating foreign investment in yen to avoid the impact of exchange rate fluctuations is another option, but it would be difficult to realize in a short period.
…Omitted.
From now on, it will be necessary to reinforce the “one-way” style of asset management.
Specifically, there is the idea of “hub-center-style asset management,” in which “Japan attracts investment capital from around the world, and that capital is invested by companies and investors in businesses and assets overseas where high returns are expected, thus earning a surplus in the income balance.”
In achieving hub status, attention should be paid to Asia.
Emerging countries in East Asia have strong demand for capital, while China and Japan possess massive household financial assets.
To match this supply and demand of funds through Japan, especially the Tokyo Stock Exchange, it is necessary to enhance transparency, flexibility, and predictability in regulations and oversight, and to harmonize accounting standards and information disclosure with global standards.
Coordination with foreign markets such as Hong Kong, Shanghai, and Singapore will also be necessary.

*In fact, none of that is necessary; implementing my “solution” alone is sufficient.

…Omitted.
The reason the United States suffers few problems despite having twin deficits is that large amounts of investment flow into the country from abroad.
This is possible only because the dollar is the key currency, and Japan cannot do the same.
Therefore, before falling into twin deficits, Japan should improve its domestic investment environment to attract foreign investment.
*This proves 100% the correctness of my “solution.”
Furthermore, eliminating the fiscal deficit is also essential.
However, it should be noted that tax increases are not the only means.
If tax hikes cause the economy to stagnate and savings to be drawn down, the movement toward a savings shortfall accelerates, and the current account deteriorates in order to satisfy the “identity equation.”
This is why it is said that fiscal consolidation through fiscal and social security reform, combined with planning and implementing a growth strategy, must be pursued together.
…Omitted afterward.

Fujita Yasunori, born in 1968.
Graduated from Keio University.
Doctor of Engineering from the University of Tokyo.
Specialty: applied economic theory.