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Digital Deficits

Ichiro Suzuki For January 2023, Japan’s current account registered deficits of ¥1,976 billion, up from ¥1,396 billion twelve months ago. Though January is a seasonally weak month for external accounts, it is still alarming that the current account has been under pressure in recent years because of weakness in the trade account. The trade account witnessed distinct deterioration in 2022. Prices of crude oil, Japan’s largest import item, spiked a year ago in response to Russia’s invasion into Ukraine in late February. Then, value of the yen fell precipitously as a result of widening interest rate gap against the United States on top of soaring crude oil prices. This deterioration is about goods trade. Then there is the service account on trade. Service trade suffered a serious blow after the outbreak of the pandemic at the beginning of 2020. Japan effectively closed the border, shutting out foreign visitors, whose consumption on Japan’s soil made immense contribution to the economy for ten years that preceded the outbreak. Throughout the 2010s, this was one bright spot on Japan’s external account. In contrast to foreign visitors’ consumption prior to COVID-19, service trade has a major deficit item. It is payment on consumption of services provided by foreign technology companies, predominant of which are American. People listen to music on their iPhones or watch movies and videos. Every time they do this, payment takes place in Apple’s App Store. Only until several years ago, tech analysts made great fusses on how many units of iPhones were sold, every three months Apple announced results, sending its shares up and down often sharply. CEO Tim Cook held his cool, maintaining that service revenue was going to matter immensely in the future more than iPhone sales. Since then, Apple has become what CEO Cook once predicted. Steady revenue stream from App Store, with little additional costs, is tantamount to minting money, underpinning Apple’s corporate value greatly. The same is more or less true for other tech titans’ services such as Google Play and Amazon Prime. On the corporate front, Amazon Web Service and Microsoft’s Azure have dominant market shares in cloud services among clients in Japan as well as elsewhere. Then there are other subscription services in software in the field of accounting, client relations, internet security, etc. There is no prospect for Japanese firms to compete in these fields in the global market not even in the distant future. For this matter, Europeans do not fare well, either, with a possible exception of SAP in certain segments. (China on the other hand has shut the country down against American tech titans including Google, Facebook and Twitter, to ‘defend’ their own tech firms. Backed by their dominant shares in a huge domestic market, they have created an ecosystem unrelated to American tech firms, and are capable of capturing market shares in the developing world.)

On top of these, the next generation of cars are not only electric but also connected. Software that runs these cars matters considerably more than for internal combustion engine cars. Toyota has founded a research center on AI in Palo Alto, CA. Toyota Research Institute is headed by Chief Scientist Dr. Gill Pratt, who was recruited from Defense Advanced Research Projects Agency (DARPA). While Toyota is capable of doing it alone, others are not able to match Toyota due to financial constraints. Having declared all internal combustion engine cars be phased out by 2040, Honda has chosen to do it together with Sony, which can probably offer what Honda doesn’t have. Others are less sure about what they can do. In the worst case, Japanese car makers except Toyota would be relegated to making boxes to be run on software that is written by Apple, Google, etc, leaving little value-added to themselves. Then, digital deficits would have a mega impact, possibly afflicting Japan’s external accounts for years to come. 

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.


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