Service Deficit with Japan Almost Quadruples

The service deficit with Japan last year jumped nearly four times from 2005 due to the stronger won and rising number of Korean tourists to Japan.

In addition to Korea’s swelling goods deficit with Japan, the service balance has plunged into the red since 2005, indicating a general trade deficit with its neighbor.

The goods deficit mostly came from the production of value-added items for export with parts and materials imported from Japan. This and the rising travel deficit with Japan are fueling fears that Korea’s current account deficit with its neighbor will continue.

○ Record service deficit with Japan

According to the Bank of Korea yesterday, the service deficit with Japan reached 2.81 billion U.S. dollars last year, staying in the red for the third consecutive year. Last year’s deficit was the largest since Korea began to keep the statistic in 1998.

The service balance with Japan had stayed in the black up until 2004. In 2005, the figure was 730.6 million dollars in the red and 1.84 billion dollars in 2006 before rising nearly four times last year.

In addition, the percentage of Korea’s service deficit of its entire service deficit rose from 5.3 percent in 2005 to 9.7 percent in 2006 and 13.7 percent last year.

Korea’s trade deficit rises in line with export growth since it relies on Japan for most of its parts and production equipment for major export items such as semiconductor and cars. As a result, Korea’s trade deficit overall went from 25.4 billion dollars in 2006 to 29.9 billion dollars last year.

This year, the trade deficit is expected to break 30 billion dollars.

○ Better tourism and R&D needed

One of the main reasons for the rise in the service deficit with Japan last year was the surge in the number of Korean tourists to Japan. Korea’s travel deficit with Japan went from 540 million dollars in 2005 to 2.88 billion dollars last year, a 5.4-fold increase.

As the “Korean Wave” representing the popularity of Korean pop culture lost steam, the number of Japanese coming to Korea declined while more Koreans headed off in the opposite direction thanks to the strong won.

The Korea Tourism Organization said 2.39 million Koreans visited Japan last year, more than the number of Japanese tourists to Korea (2.24 million).

Korea’s technological dependence on Japan is often reflected in the service deficit. The service deficit incurring from patent royalties was 400 million dollars in 2005, 450 million dollars in 2006, and 520 million dollars last year.

To prevent the service deficit with Japan from getting out of control, economists say Korea must foster domestic service industries including tourism and improve the service deficit structure by putting more focus on R&D.

The Bank of Korea said Japan has aggressively nurtured its tourism industry and strengthened R&D and intellectual property rights protection. This reduced Japan’s travel deficit from 28.51 billion dollars in 2000 to 17.15 billion dollars last year.

Japan also began to post a surplus in patent fee balance in 2003, and finished 6.56 billion dollars in the black last year.

parky@donga.com