Perspectives on the Japanese Current Account Surplus
This paper uses a number of perspectives to analyze the causes of the strong correlation between fiscal policy variables and the Japanese current account surplus in the 1980s. The paper finds that the price elasticities of trade flows and the interest rate elasticities of investment are fairly low. Accordingly, the paper argues that the popular Mundell-Flemming approach somewhat overemphasizes the causality from fiscal policy to the current account. Conversely, the importance of US fiscal policy and the decrease in oil prices may have been understated in previous explanations of the increase in the Japanese current account surplus. The decline in the budget deficits through the traditional income-expenditure mechanism were also important. From a longer-term perspective, the sharp slowdown in private investment in the 1970s and its relative stability in the 1980s, despite large fluctuations in oil prices, is an important cause of both the surplus and the strong correlation between fiscal policy and the current account. Such a perspective helps to understand the developments in the 1985–87 period as well.