international finance balance of payments

Current situation The total outstanding amount of government bonds, loans, and financing bills makes up a large portion of Japan''''s national debt, which peaked at ¥1,270 trillion on March

International University — Vietnam National University

Ho Chi Minh City

INTERNATIONAL FINANCE Lecturer: Vu Thuy Mai Uyen

Group Members

1 Neuyén Dinh Nhat Phi BAFNIU20171 100%

2 Mai Nguyễn Ngọc Phượng BAFNIU20096 100%

3 Nguyễn Thị Mai Quyên BAFNIU20405 100%

5 Nguyễn Trọng Nhân BAFNIU20168 100%

Ho Chi Minh City, Vietnam

TABLE OF CONTENTS

A Japan’s high level of Debt to GDP

I Current situation

II Why does Japan have a high level of Debt/GDP ratio?

II Who are the debt holders?

IV Impacts of Japanese debt owners on debt structure

V High debt effects on the Japanese

VI Solutions for companies in Japan to suffer from high levels of GDP/Debt Japan

B Recent movements in the United States, China, and Japan trade balance

I Overview and recent movements in the United States, China, and Japan trade balance

1 Overview and recent movements in the United States trade balance

2 Overview and recent movements in the Japan trade balance

3 Overview and recent movements in the China trade balance

II Comparison between countries:

1 United States and Japan balance of Trade comparison

Reasons for current BOT movements

2 The United States and China balance of trade comparison

Reasons for current BOT movements - China

3 The China and Japan balance of trade comparison

A Japan’s high level of Debt to GDP

I Current situation

The total outstanding amount of government bonds, loans, and financing bills makes up a large portion of Japan's national debt, which peaked at ¥1,270 trillion on March 31, 2023 The

increase of ¥29.2 trillion from March 2022 to the current date may be attributed mostly to price

increases fueled by inflation and fiscal stimulus measures imposed in reaction to the COVID-19 epidemic The amount of debt has increased to its greatest point for the seventh year running

Japan’s National Debt

Created by Nippon.com based on data from the Ministry of Finance -

Figure 1: Japan’s National Debt (from 2011 — 2023)

Furthermore, Japan has the greatest debt-to-GDP ratio among major countries at 263%,

which is double that of the US Consequently, last year, Japan spent more than 15% of its yearly budget on public works, education, and military combined, instead allocating 22% of its budget

to debt redemption and interest payments

Japan's rising debt pile complicates BOJ's exit path

G7 general government gross debt (% of GDP) Itaty mm fo tm Germany|

— Actual | Forecast

Figure 2: Japan’s rising debt pile complicates BOJ’s exit path (from 2001 — 2023)

IL Why does Japan have a high level of Debt/GDP ratio?

The third-biggest economy in the world is having trouble keeping up with the aging population, slow inflation rate, and lackluster growth Japan has not stopped utilizing negative

interest rates to stimulate the economy as part of its ultra-loose monetary policy In addition, the

majority of people in Japan own government bonds Japan's central bank and Japanese corporations are the borrowers and creditors of bonds issued by the Japanese government It also shows that the Bank of Japan sets interest rates on its own, not in response to the research and

advice of the International Monetary Investment Fund Therefore, even with a large amount of

debt, there is little motivation to take on more debt or raise interest rates from creditors

In particular, Japan's stock and real estate markets saw a huge asset price bubble in the late 1980s High earnings and skyrocketing asset prices were hallmarks of this prosperous era

Nevertheless, the bubble burst in the early 1990s, resulting in an extended downturn known as

the "Lost Decade" The Japanese government did raise the issue of national bonds to finance different programs and stimulate the economy in response to the economic problems brought on

by the asset price bubble bust and the ensuing economic stagnation Since deflationary forces kept nominal GDP growth muted, this increased government borrowing did lead to a larger debt- to-GDP ratio

Japan's high GDP-to-debt ratio was significantly impacted by the COVID-19 epidemic Japan enacted large stimulus programs in 2020 and 2021 in response to the pandemic's problems, which led to a budget deficit of almost 6% of GDP Due to the increasing government spending, significant borrowing was required, which added to the government's growing debt The projected debt load might reach 1,200 trillion yen by March 2023, even with assumptions of modest economic growth The financial burden was increased by COVID-19's longer-lasting economic effects, which included supply chain interruptions and a delayed removal of virus protections As a result, it is anticipated that interest payments on the debt will practically quadruple This highlights the need of having sustainable fiscal policies as well as the effect the epidemic has had on Japan's debt-to-GDP ratio

II Who are the debt holders?

A wide range of investors remain Japan's principal debt holders as of 2023 Different organizations own the majority of the Japanese Government Bonds (JGBs) Leading the way is the Bank of Japan (BOJ), which has a significant 53.2% stake in Japanese Government Bonds (JGBs), demonstrating its steadfast dedication to directing the country's monetary policy and maintaining market stability Because of its full ownership, the BOJ has a proactive role in setting interest rates and accomplishing important economic objectives including promoting growth

In the meantime, the substantial stake of 10.8% by Japanese banks highlights their crucial role in the nation's financial industry The financial industry and government debt are closely

linked, as these institutions use JGBs as collateral for a variety of financial transactions and use

them for liquidity management

The insurance industry's significant 19.1% contribution highlights its important role as a significant institutional investor To satisfy policyholder commitments, insurance firms depend

on JGBs to control the risk in their portfolios and to provide a consistent revenue stream

4.5% is made up of public pensions, which reflect the retirement savings of Japanese

nationals These assets demonstrate how the government uses pension payments to both

encourage national savings and meet its borrowing requirements

Pension funds invest 2.8%, indicating their confidence in JGBs' long-term stability and dependability These organizations usually make investments in public debt to provide pension recipients with steady returns

7.3% of investors are foreigners, demonstrating the confidence that investors have worldwide in

Japanese government bonds Significant interest is shown by central banks and sovereign wealth funds, among others, demonstrating the worldwide attractiveness of JGBs and Japan's position as

a haven in the global financial system

1.2% of Japanese families invest in low-risk, stable securities such as government bonds,

which they include in their portfolios and help maintain financial stability at home

A lesser but significant role is also played by several other organizations, which make up

0.9% of the market, such as businesses and smaller institutions

Since the government is effectively in debt to itself, the 0.2% of shares held by the general public

is a comparatively modest amount, perhaps because of accounting or regulatory constraints When taken as a whole, these percentages demonstrate a fairly distributed holding of Japanese Government Bonds among various organizations, supporting Japan's sound financial standing and skillful debt management

JGB Holders

Households Foreigners 139 Others Pension Funds 79.5 1.2%

Figure 3: JGB Holders

IV Impacts of Japanese debt owners on debt structure

The Japanese government backs securities known as JGBs (Japanese Government Bonds) Since the government owns them, government bonds are secure investments because they typically have low-interest rates and little risk In addition, they are unlikely to default JGB will be used as a tool by Japanese investors to balance their high-risk holdings To finance the economy's recovery from the 1990s recession, the Bank of Japan issued JGBs The Japanese invested their money in government bonds during the Lost Decades to preserve it and aid in the nation's reconstruction

Since the people of Japan make up the majority of the bonds, the Bank of Japan is the debt borrower In addition, JGBs would be priced below the Japanese currency (JPY) if they were sold to foreigners As a result, the debt possessed by local and foreign investors will be comparable As the nation assumes responsibility for its residents, the Japanese government will

no longer be under duress to pay its JGB According to TradingEconomics.com, buyers of JGB with a 10-year duration will get a rather meager average return of 0.09% As a result, despite having a significant debt, Japan can pay it off because of its growing economy and use of debt for national development

Figure 4: Yen value

They can pay the interest at maturity since they can easily repay debt This will contribute

to the Japanese government's positive image-building in the international economy Furthermore,

as can be seen from the graph in Figure 4, the data from TradingEconomics.com indicates that the value of the Japanese yen has not changed significantly since the Lost Decades (1990s) This suggests that investing in Japan is safe for international investors Foreign direct investment (FDI) will rise as a result, supporting Japan's economic expansion

V High debt effects on the Japanese

The entire amount borrowed by the government over some time is referred to as the national debt On the other hand, the amount borrowed by the government in a given year is known as the budget deficit Japan finances its expenditures with government bonds A country that has a budget deficit has to borrow more money to cover its debt when it matures High debt repayment expenses reduce the ability to save and invest, which limits both current and future economic growth Japan may have to borrow more money or issue additional bonds to make the payment due to the enormous amount of debt it is currently accumulating Japan might have to lower the interest rate, though, to prevent the payment from rising

Firstly, interest payments must account for more than 15% of government revenue, even

in the case of low-interest rates To raise that money from the Japanese people, taxes must be applied, which skews market incentives for investment and reduces demand for it, both of which reduce GDP

Secondly, interest rate risk will surface if such a large quantity of debt is managed This is also the reason why the Japanese government needs to rely on the central bank to maintain the lowest possible interest rates to maintain stability Since there isn't enough money to pay off such

a big interest debt, the interest payment must increase in tandem with a sharp increase in interest

rates Conversely, low-interest rates can fuel inflation, which drives up costs and lowers

purchasing power

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Finally, investors will become less confident in the government's future ability to pay interest rates if the debt-to-GDP ratio rises steadily Japan has the highest debt-to-GDP ratio in the world, but because its citizens own the great majority of its government bonds, the country

has an extraordinarily low default risk It is not impossible, nevertheless, for interest rates to rise

and default to occur If Japan is unable to pay its debt, the financial system will continue to function If their loans are not returned, a significant number of Japanese businesses—many of them well-run and well-managed—will fail Businesses going bankrupt will result in higher unemployment and a complete cessation of investment Additionally, in a competitive global economy, Japanese exporters will lose their ability to compete on a global scale, which would be difficult to recapture Consequently, the Japanese government will very probably have to expand the money supply to maintain business operations and pay unemployment compensation An increase in the money supply would make it difficult for the nation to pay for imports and drive the yen to decline, possibly resulting in uncontrollable inflation

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VI Solutions for companies in Japan to suffer from high levels of GDP/Debt Japan Japan's high GDP-to-debt ratio poses a significant challenge for companies operating

in the country The debt burden can lead to slower economic growth, higher interest rates, and decreased consumer spending, all of which can negatively impact corporate profitability However, there are several strategies that companies can adopt to mitigate the risks associated with Japan's high debt levels

Prioritizing productivity and innovation should come first Prioritizing research and development expenditures can help businesses create innovative goods and services that will increase their competitiveness in both domestic and foreign markets Even in a difficult economic climate, businesses can reduce their production costs and boost their profit margins

by increasing productivity Businesses that spend money on R&D have a higher chance of being successful and long-lasting, per a Japan Productivity Center report For instance, the study discovered that the average return on assets for businesses in the top quartile of R&D investment was 10.2%, while the average return for businesses in the poorest quartile was 4.9%,

The second is to go global with your business Businesses can become less dependent

on the Japanese economy by diversifying their clientele by entering other markets

Businesses can counteract any decline in local demand by focusing on markets with faster

economic growth According to research by the Japan External Trade Organization, Japanese

businesses that export make more money than those that don't For instance, the study

discovered that Japanese businesses that export have an average profit margin of 6.8% as opposed to 4.5% for businesses that do not export

The next step is to optimize financial management as well To make sure they can pay their debts, businesses should closely monitor their cash flow and debt levels Reducing needless spending, looking for alternate sources of funding, and refinancing current debt at reduced interest rates could all be part of this According to a Japan Institute of Corporate Finance study, businesses that have less debt have a higher chance of being profitable and long-lasting For instance, the study discovered that the average return on assets for businesses in the top quartile of debt-to-equity ratios was 8.5%, while the average return for businesses in the bottom quartile was 4.8%

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Furthermore, it's critical to forge solid bonds with stakeholders Businesses must keep

transparent and honest lines of communication with all relevant parties, such as staff, clients,

vendors, and investors Businesses may create a solid support system that will enable them to get through difficult times by encouraging collaboration and trust among their peers Honda, for example, is renowned for having close ties with its staff members The organization has a long history of empowering and involving its staff Honda maintains solid ties with both its suppliers and customers The second illustration is Uniqlo, which is renowned for having solid customer ties The organization places a high priority on client happiness and service Strong ties exist between Uniqlo and its suppliers

Accepting digital transformation is the final step Businesses should use new technologies like cloud computing, AI, and data analytics to speed up their digital transformation initiatives They can acquire a competitive edge in the digital economy and improve consumer experiences and company processes as a result Rakuten, a Japanese e- commerce business that has embraced digital change, serves as an example of this Rakuten

has made significant investments in data analytics, artificial intelligence, and cloud

computing As a result, Rakuten has been able to enhance consumer satisfaction, optimize business processes, and acquire a competitive advantage in the digital economy

Japan's high debt levels present opportunities as well as problems for businesses that can innovate and adapt Businesses can increase their profitability, strengthen their resilience, and put themselves in a successful long-term position by putting the above-mentioned tactics into practice

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B Recent movements in the United States, China, and Japan trade balance

I Overview and recent movements in the United States, China, and Japan trade balance

1 Overview and recent movements in the United States trade balance

a Overview

Analyzing trade in the US reveals that the trade deficit has declined since 2006, with the

notable exception of 2018, which was mostly brought about by trade policies enacted by the

Trump administration This trade deficit emphasizes the US economy's reliance on imports and raises the prospect of employment losses in local sectors, which presents serious concerns Politicians and the US government are therefore actively monitoring and fixing this issue to this day Their strategies include promoting the growth of domestic manufacturing to bolster the nation's economic stability and negotiating trade agreements that assist American businesses and laborers

b Recent movements

The recent shift in the US trade balance indicates the dynamic interplay of economic variables In 2022, the goods and services deficit increased to $354.0 billion, from $230.0 billion

the previous year, a $124.0 billion increase This change was caused by a marginally 0.6 percent

decline in the services surplus, amounting to $243.7 billion, and a rise in the goods deficit of

$101.5 billion, to $1,191.8 billion In terms of commerce overall, imports increased by $665.5 billion to reach $3,228.8 billion, while exports surged to $2,874.9 billion, a significant $541.5

billion rise from 2021(Table 1) Due to this complex dance of economic factors, the current gross domestic product in 2022 (the goods and services deficit) increased marginally from 3.6 percent

in 2021 to 3.7 percent in 2022 Notably, there was a reduction in US imports from China, which helped the trade deficit with China, the country's largest trading partner, to shrink to $355.3 billion in 2022 from $394.4 billion in 2021(Table 2)

Table 1: Trade balance of the US from 2018-2022

Table 2: Trade deficit of the US with China (USD Billion)

As of 2023, projections for the US trade deficit have mostly stabilized This stability is influenced by several variables, such as the ongoing effects of the COVID-19 pandemic, supply chain interruptions, and increasing inflation The ongoing reduction of the trade deficit with

China, which reached $331.4 billion in the first half of 2023, is particularly noteworthy Several

variables, including the increased volume of Chinese exports to other nations, slower US consumer spending, and stronger internal demand in China, contribute to this drop

These recent trade developments highlight the complex economic ties that shape the United States trade balance, which is still impacted by both domestic and foreign factors Imports

from China witnessed a substantial decline of $1,041.4 billion, marking a significant 51.4%

reduction in the first half of 2023 This sharp decrease contrasts with the 6.6% reduction observed from 2021 to 2022, signaling a notable shift in the trade dynamics between the United States and China The magnitude of this change suggests intricate economic factors at play, prompting further exploration into the drivers behind this significant decrease in imports during

the initial half of 2023(Table 3)

2 Overview and recent movements in the Japan trade balance

a Overview

Beyond market expectations of a JPY 425 billion loss, Japan's trade balance unexpectedly tumed positive in September 2023, ending the previous year with a surplus of JPY 62.44 billion The increase in exports and decrease in imports resulted in the first trade surplus in

three months A record JPY 9,198.14 billion in sales was achieved, an increase of 4.3% year

over year and the first gain in three months thanks to strong US demand Amidst this, imports

fell 16.3% to JPY 9,135.70 billion, marking the sixth consecutive month of decline, mostly

due to decreased energy expenses