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Economy in Brief

Japan Financing Trends Remain Favorable, Despite Q3 Decline
by Carol Stone December 16, 2004

The Bank of Japan today reported third quarter flow-of-funds for the Japanese economy. These data, as other recent Japanese statistics, showed some positive economic tendencies. Use of credit is trending higher.

A turnaround in financing activity began about the third quarter of last year as seen in the chart alongside, when the year-to-year change in the nonfinancial sector's use of funds turned positive after a three-year contraction. The decrease in those liabilities in the third quarter need not indicate a reversion to weakness. As also evident in the graph, in most years of these data's short history, the third quarter has been the weakest. The year-to-year gain remains on a generally firming trend. The same is true for private corporate business in Japan, which experienced a substantial decline in debt usage from 2000 through 2002.

The details of the flow-of-funds also highlight developments in the foreign sector. These data are a mirror image of the balance-of-payments; the BOP data use a domestic perspective, so Japanese investment abroad is viewed as an asset of Japanese investors. But in the flow-of-funds, the "overseas sector" is seen from its point-of-view. Thus, Japanese investment abroad is treated as the overseas economy's liabilities. In the third quarter, these liabilities continued to grow vigorously. The other side, overseas investment in Japan, that is, the overseas sector's "assets" in Japan, decreased in Q3, although this followed an outsized rise in Q2. This made the year-on-year expansion a quite substantial 15.7% and extended the strong 9.1% growth during 2003. These significant gains in capital holdings in both directions highlight the globalization of capital resources and once again call attention to the fact that capital flows are not just a passive response to a nation's current account position.

% Change, Not Seasonally Adjusted Q3 2004 Q2 2004 Year/ Year
2003 2002 2001
Total Liabilities: Domestic Nonfinancial Sector -1.4 -0.2 3.4 2.8 -2.3 -2.1
Private Nonfinancial Corporations -3.0 -0.1 3.0 2.8 -8.1 -10.2
Overseas Assets in Japan -1.9 5.0 15.7 9.1 -4.0 -3.4
Overseas Liabilities to Japan 1.7 3.6 9.6 4.1 -3.3 11.2
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