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1、Table of ContentsAbstractIntroduction 3I. What Has Driven the Increase in Japans Income Balance?4 in. How Does Japans Income Balance Compare to Peers? 8 IV. Interconnectedness Between the Trade and Income Balances 11Does the Change in Current Account Composition Towards Income Balance Affect its Res
2、ponsiveness to the RealExchange Rate?14V. Conclusions 19References 22BoxThe Rise in CorporateSavingin Japan 6FiguresL Japan9s Increasing Income Balance and its Composition 51. Japan9s Income Balance Compared to Peers 8Geographical Allocation of FDI Assets, and Impact on Yields 102. Negative Correlat
3、ion Between Trade and Income Balances 13Tables1. Japan and G6 Income Balance - Contributions of Stocks and Yields (2015-17 average)_9Theoretical Effects of REER Appreciation on Trade and Income Balances 162. Income Credit and Debit Elasticities to REER: Baseline Specification 17Annexes1. Comparing J
4、apan9s Income Balance to Peers - The Role of Stocks vs. Implied Yields_25Comparing Japans Income Balance to Peers - Advanced Creditor Countries 272. Income Balance Semi-Elasticity Estimates - Data and Sources 28Income Credit and Debit - Disentangling Mechanical and Economic Effects 293. Income Balan
5、ce Elasticities - Empirical Strategy 33Income Balance Elasticities - Robustness Tests and Additional Estimates36On the liabilities (or debit) side of the income-account-difference decomposition, Japans stock of foreign liabilities is much smaller than that of G6 countries, especially for FDI but als
6、o for portfolio debt. This leads to a large contribution to the overall difference of investment income balances (3.2 out of the 3.5 percentage point of GDP difference). FDI liabilities. The fact that implicit yields paid on FDI liabilities are very high in Japan (close to 13 percent; see Table 1) s
7、uggests measurement issues, possibly on the valuation of FDI liabilities. To the extent that a finn is included in national statistics, both its stock and flows of FDI should be captured, making it unlikely that macroeconomic aggregates omit FDI stocks without also omitting the corresponding flows.
8、Measurement issues are more likely to lie in the method used to value the stock of FDI. That said, adjusting implicit yields to the G6 level, while leaving FDI income payments unchanged, would only correct“ Japans stock of FDI liabilities from 5 to 20 percent of GDP, i.e. still a level of FDI liabil
9、ities significantly below the G6 average level (at about 50 percent of GDP). The low level of inward FDI in Japan has long been recognized in the academic literature, including in relation to measurement issues and corporate governance (Lawrence, 1993; Ito and Fukao, 2005; and Hoshi, 2018). Portfoli
10、o debt. Portfolio debt income paid is small in Japan, due to both (i) low portfolioPortfolio Debt Liabilities(In percent of GDP)Source: Lane & Milesi-Ferretti database, External Wealth of Nations, 2018.debt liabilities, and (ii) low implicit yields. On the government side, public foreign borrowing i
11、s indeed relatively low, especially when compared with G6 countries, due to the large pool of domestic saving available and domestic investors, willingness to hold Japanese public debt (strong home bias). On the corporate side, low corporate bond liabilities can be linked to the rise of corporate sa
12、ving and the associated corporate deleveraging after the Japanese real estate bubble burst at the start of the 1990s. Indeed, whileportfolio debt liabilities were following similar trends in Japan and in G6 countries in the 1980s, Japans portfolio debt liabilities started to diverge from the trend i
13、n G6 countries after the bubble burst and as a consequence of corporate deleveraging (text chart).Finally, Japans implied yields on portfolio debt are also lower than in G6 countries, due to the extremely accommodative monetary policy and low credit risk in Japan.IV. Interconnectedness Between the T
14、rade and Income BalancesAnalysis of current account developments should take into account the interconnectedness between its components, the trade and income balances. While Section III studied the income balance through a static comparison across countries, the income balance may not reflect one fo
15、r one on the current account balance given indirect effects through the trade balance. For example, additional revenue from an increase in the income balance may be spent, leading to higher imports and a lower trade balance. Conversely, a change in the trade balance may be partially offset by opposi
16、te changes in the income balance. For example, to the extent that the imposition of tariffs on a surplus/creditor country decreases its trade balance (after taking into account offsetting effects such as trade diversion and exchange rate depreciation), a resulting exchange rate depreciation may actu
17、ally boost the income balance through the mechanical effect (see Section V), thus providing an additional offsetting mechanism. In addition, the size of the current account balance may itself alter its composition over time. Countries experiencing current account surpluses over a sustained period of
18、 time, like Japan, will see a rise in their NFA and primary income, and to the extent that these additional revenues are spent, a decrease in their trade balance. This is also consistent with the so-called transfer problem J whereby countries with a high NFA tend to have more appreciated exchange ra
19、tes (see e.g. Lane and Milesi-Ferretti, 2004), thus decreasing the trade balance. Ultimately, the size of the current account balance is driven by the saving-investment identity and its drivers, rather than any of its components taken in isolation. The remainder of this section further explores the
20、interconnectedness between trade and income balances and their links with the current account.In most countries, including Japan, the current account balance has a high and positive correlation with the trade balance (Figure 4, left panel, left bars). Indeed, most countryspecific correlations betwee
21、n the current account and the trade balance (for the period 1980- 2018 or longest available) are close to one (0.76 for Japan). Conversely, country-specific correlations between the current account balance and the income balance (total, primary, or secondary) tend to be much weaker, although there i
22、s substantial heterogeneity across countries.On the other hand, the income balance is negatively correlated with the trade balance for most countries (Figure 4, left panel, right bars), Country-specific correlations between the trade balance and the income balance (total, primary, or secondary) are
23、generally negative (-0.58 for both the total and primary income balances for Japan), with substantial heterogeneity across countries, especially for the secondary income balance. Several mechanisms may contribute to the observed negative correlation between the income and trade balances, including:
24、General mechanisms: Aging. As countries age, they tend to accumulate net external assets to provide for consumption during old age, leading to an increasing income balance in the earlier phases of aging. In more advanced phases of aging, particularly the post-retirement phase, such countries are exp
25、ected to start dissaving and increase imports, moving towards trade deficits. Income effect. When the income balance increases, agents may consume the additional income, leading to higher imports and lowering the trade balance. This effect likely depends on the marginal propensity to consume of hous
26、eholds receivingthe income: likely higher for secondary income (as migrant remittances flow to relatively poorer households), and lower for primary income (as firm shareholders tend to be wealthier). When restricting the sample to the top 30 percent of economies with largest income flows (total, pri
27、mary, secondary), correlations are more negative, especially for secondary income. Market pressure. Countries with high net debtor positions (and negative income balance) may need to run trade surpluses to meet external debt service obligations on their stock of foreign borrowing. Other mechanisms l
28、inked to globalization and the growing role of multinational firms may help explain the negative correlation between the income and trade balances as these forces have increasingly blurred the attribution of income between both balances: Offshoring. As firms move their production facilities overseas
29、, goods exports are progressively substituted by income receipts. Offshoring may also lead to increased services exports (intellectual property revenue including royalty payments and patent fees from overseas subsidiaries). Profit shifting, with transfer pricing affecting the trade and income balanc
30、e in opposite and offsetting ways. igure 4. Japan: Negative Correlation Between Trade and Income Balances-1Correlations Between Current Account and itsComponents: Japan vs. Other CountriesCA balance CA balance CA balance CA balance & Trade & Income & Primary & balance balance Income Secondary balanc
31、eIncomebalanceIncomeTradeTradebalance & balance & balance &TradePrimarySecondarybalanceIncomeIncomebalance balance G7 ex-Japan: Unweighted average-45 -40 -35 -30 -25 -20 -15 -10 -5 05 10 15 20 25 30Trade balance (G&S, % of GDP)通 ISO NPL(doD Jo %)。up_Bq EOUUITrade Balance and Income Balance Across Co
32、untries(average 2015-2017)4035 ISO NPL302520151050-5-10-15-20 Advanced Economies: Median Top 30% with largest income flows: MedianSources: IMF BOP data; National authorities; and IMF WEO data.Note: Correlations are calculated between two variables expressed in % of GDR using annual data, over the lo
33、ngest period available.-20 Advanced Economies: Median Top 30% with largest income flows: MedianSources: IMF BOP data; National authorities; and IMF WEO data.Note: Correlations are calculated between two variables expressed in % of GDR using annual data, over the longest period available.-25Sources:
34、IMF BOP data; National authorities; and IMF WEO data.The offsetting pattern between the trade balance and the income balance documented above at the country level is also observed across countries (Figure 4, right panel).Countries with a large population living abroad, receiving sizable migrants rem
35、ittances, tend to be located in the upper-left quadrant of the chart, illustrating the income effect. Low-tax jurisdictions, in turn, tend to appear in the lower-right quadrant due to distortions in the composition of their current account, reflecting profit shifting and the large role ofmultination
36、al firms. Conversely, less countries are located in the upper-right and lower-left quadrants, illustrating respectively the income effect and market pressures.V. Does the Change in Current Account Composition Towards IncomeBalance Affect its Responsiveness to the Real Exchange Rate?the trade balance
37、 response to REER changes has been widely studied, there is less literature which is the focus in this paper. Notably, in the case ofWhen facing movements in REER, there are several mechanisms at play affecting the response of the income balance and the external current account balance (CA). The ana
38、lysis presented in Section V aims at better understanding how the income balance reacts to changes in exchange rates. Normative questions, such as whether Japans current account or income balances should adjust, or not, are outside the scope of this paper. The reader is invited to consult IMF (2020)
39、 for the latest assessment of Japans external position; in addition, the IMF External Sector Report focuses on the current account balance as a whole, rather than the income balance per se, given the interconnectedness between trade and income balances (see Section IV). WhileJapan: REER, Current Acc
40、ount Balance, Income BalanceJapan: REER, Current Account Balance, Income Balanceon the income balance response一 Japan, the increase in the income balance over the last few decades has occurred alongside REER depreciation (text chart), raising the question of the income balance responsiveness to REER
41、 changes. Alberola et al (2018) analyze the impact of foreign stock positions on the CA balance and its components, and find that the income balance is mostly determined by the NFA position while no statistically significant role is identified for exchange rates. Adler and Garcia-Macia (2018) analyz
42、e NFA returns defined as the income balance plus NFA valuation changes however, with significant variation in (often large and volatile) valuation changes, results obtained on the role of the exchange rate on NFA returns in their analysis are not applicable to the income balance on its own (as studi
43、ed here). NFA valuation changes apply to stock positions and are not included in the income balance; in contrast, the mechanical effect that we highlight here applies to flows (as such, it is much smaller than NFA valuation changes) and is part of the income balance.Theoretically, we propose that th
44、e income balance response to exchange rate fluctuations can be decomposed into a mechanical effect (due to the currency composition of foreign assets and liabilities and related income credit and debit) and an economic effect: Mechanical effect. For most countries, foreign assets and related income
45、credit tend to be denominated in foreign currency, implying that a REER appreciation would lead to a mechanical decrease in income credit (expressed as percentage of GDP). For example, in 2017 the share of foreign assets denominated in foreign currency was around 70 percent in the United States, 85
46、percent in Japan, and nearly 100 percent in the median emerging economy (EME), while it has been lower in the median G6 country since 1999 (at around 50 percent) following the creation of the euro (Benetrix et al, 2019). However, thecurrency denomination of foreign liabilities and related income deb
47、it is more heterogenous across countries, with advanced economies better able to borrow from abroad in domestic currency. For example in 2017, 85 percent of the United States foreign liabilities were denominated in domestic currency, compared to 82 percent for the median G6 economy and 67 percent fo
48、r Japan. This pattern implies a more limited mechanical effect from a REER appreciation on foreign liabilities and income debits for advanced economies. On the other hand, EME more often borrow in foreign currency due to the original sin,“ delivering a mechanical decrease in foreign liabilities and
49、income debits when the REER appreciates (80 percent of EMEs foreign liabilities in 1990 were denominated in foreign currency, although that share has declined to 40 percent in 2017). In this simplified presentation, we are not taking into account the potential effect that the REER appreciation may have on GDP (expressed in domestic currency), which would likely be much