What’s keeping Japan’s current account surplus from shrinking into oblivion?

This item has been corrected.

Japan’s Ministry of Finance announced today that its current account—that measures Japan’s exchange of goods, services and money with the rest of the world—ran a surplus in 2012. But only just barely. At ¥4.7 trillion ($50.4 billion), last year’s was the smallest since 1985, when Japan began using its current method of compiling the data.

This is bad because, in theory at least, a current account deficit implies that a country is borrowing to finance consumption at the expense of long-term investment.

But Japan isn’t there yet, and that seems to be on account of its net income—which, generally speaking, is earnings on investment abroad. That amount was enough to offset a trade deficit that was the worst in Japan’s history, at ¥6.9 trillion. Net income actually rose slightly in 2012, hitting ¥14.3 trillion, compared with ¥14.0 trillion in 2011.

Here’s a look at the relationship between Japan’s current account and its trade balance on a monthly basis:

Screen Shot 2013-02-08 at 7.29.02 AM

What the slight growth in net income means in practice is that Japan reaped enough earnings off its investments abroad to keep its balance of payments in the black. Digging into the details, that growth comes more from direct investment income (pdf, p.3) than from portfolio investment income, which actually slumped a little.

In particular, the uptick in net reinvested earnings, which rose nearly 60% from last year and hit ¥1.9 trillion, signals a revival in the businesses of overseas Japanese subsidiaries. Note that there is usually a lag (pdf, p.7) in the recording of retained earnings, which means the uptick doesn’t account for the last months of 2012. So it would be unwise to read too much into that data. But it could suggest that, even as Japan’s export sales are circling ever closer to the drain, its overseas businesses are keeping afloat.

Correction: An earlier version of this story said that Japan’s current-account surplus was the smallest in history, rather than the smallest since 1985.

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