FX Macroeconomics
also realized that internal improvements (public works) or public investment could absorb some of the surplus savings but not enough. Conant concluded that exporting the saving to other countries, building infra-structure, laying the railroads and telegraph lines, the i n f o rma ti o n highway of the day, was the way to alleviate the US savings c o n g es t io n, w
h ich
t h r ea t e ne d profit-margins at home.
Japan can
export some of its surplus savings, but t yp ic a l ly , J a p a nese investors have been reluctant to do so on a sufficient scale. Japanese companies do invest in plant and production outside of Japan and since the late 1990s, the Ministry of Finance reports that the local sales of Japanese affiliates surpassed exports as the primary way Japanese businesses service foreign
demand. For example, roughly 70% of the Japanese-brand cars in the US were produced in the US.
Portfolio capital flows are even bigger. Japanese investors have been significant net sellers of
great that on a given month, the income it generates may be larger than the new portfolio outflows and that is with record low bond yields in the US, Germany, UK and France.
In the past when the private sector was unable to recycle Japan’s c u r r e n t ac c ou n t surplus, the g o v er nm en t would - through inte r v enti on . Japan
has
ac cumu l a t e d more
than
Japanese officials think their world is characterized by a shortage of
investment, instead it is plagued by a surplus of savings
foreign financial assets this year. Moreover, Japan’s past investments
in foreign bonds
(and equities) generate a large monthly capital stream that is the main driver of the country’s current account surplus. The stock of that investment is so
20 FX TRADER MAGAZINE July - September 2013 Japan needs world to is
$1 trillion of reserves. This route seems to have been effe ct iv ely blocked by the G7/G20, given the sharp de p r e cia t io n of the yen seen in past six months.
revolutionize
its thinking, but Abenomics is not it. Japanese officials think their
by a shortage of investment. Instead
it is plagued
characterized by
a
surplus of savings. It can boost consumption (what Conant saw
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