Japan's trade surplus on a balance of payments basis was estimated at 14.8 trillion yen in 1999, significantly lower than the 16 trillion yen posted in 1998 after two consecutive years of sharp increase.

What are the reasons for such remarkable improvement? Will the trend continue even in 2000 and give Japan a more balanced external equilibrium?

In order to make such a prediction, the following five points must be examined.

The first is whether or not the U.S. economy will be able to realize the so-called "soft landing."

In the past several years, the U.S. has recorded almost 4 percent economic growth, which is clearly higher than its theoretical potential. As a result, the risk of inflation is growing and the trade deficit widening due to a sharp increase in imports. In fact, it has been forecasted that the trade deficit will reach a historical $320 billion in 1999.

To handle this situation, a tight monetary policy is being implemented, thus reducing the growth rate. In regard to this point, it seems reasonable to foresee that, driven by information-technology-related investments, the U.S. economy will attain the soft landing with approximately 3 percent growth in 2000.

The second factor to be discussed is the possible economic recovery of our Asian neighbors.

It is true that they are still halfway through reforming their economic and political systems to more efficient and democratic ones. However, judging from the recent surges in stock prices it appears reasonable that in 2000 they will continue steadily toward recovery. In fact, according to IMF's economic outlook, the growth rate in Asia, excluding Japan but including China, is predicted to reach 5.3 percent in 1999 and 5.4 percent in 2000. In 1998 it was 3.7 percent.

The third factor is Japanese domestic demand.

Private consumption is still, needless to say, stagnant. However, expansionary fiscal and monetary policies coupled with steady recovery in industrial production, caused mainly by expanding exports, seem to indicate that the worst is over. We can expect positive growth even in 2000.

Again according to the IMF, Japan's economic growth rate is projected to hit 1 percent in 1999 and 1.5 percent in 2000, significantly higher than the minus 2.8 percent registered in 1998.

The fourth factor to be considered is oil prices.

OPEC has showed firm resolve in following production decisions to maintain high prices. Furthermore, reflecting the above-mentioned world economy, the demand for oil will continue to expand. Therefore the price will remain comparatively high, fluctuating in a range of about $20-$25 per barrel.

The fifth point is the yen's exchange rate.

Recently, the yen has appreciated to reach almost 100/$1. However, due to the surge in U.S. interest rates caused by tighter monetary policy, there is hope the yen will stabilize, perhaps at between 100 and 110 in 2000.

We have discussed several important factors to make a forecast on Japan's trade balance. Reflecting the more favorable economic environments of its trade partners, Japan's exports will grow.

On the other hand, Japan's imports will grow more rapidly than exports, due mainly to the increase in domestic demand and higher import prices. Consequently, we can predict that, again in 2000, Japan's trade surplus will continue to decrease, perhaps to 13.5 trillion yen, a decline of about 10 percent from 1999.