In previous articles I have looked at the important developments in the Australia-Japan trade and investment relationship, including hydrogen/ammonia, critical minerals, circular economy, quantum computing, supply chain and cyber resilience. These are all connected to the fundamental partnership model in which Australia and Japan support each other to achieve their long-term goals of security in energy and prosperity.

There are two more fundamentals I want to highlight. The first is population. Recently published data by the Australian Bureau of Statistics show that for the 12 months to September 30 2023 the population of Australia grew by 659,800 to reach a total of 26.8 million. This represents a remarkable growth of 2.5%, the highest growth rate since 1975. The largest States (NSW, VIC and QLD) actually grew at a higher rate than the average. Most of the growth came from net immigration of 548,000 while natural increase was 111,000. The low natural increase rate corresponds to a low fertility rate of around 1.6, which has been falling in recent years but the very high immigration intake more than offsets this trend.

When combined with a GDP per capita of $81,000 (ranked 10th in the world), which is almost twice that of Japan, the Australian market becomes very attractive in its own right. This has led to the renewed interest by Japanese companies in Australia’s real estate sectors (housing, commercial and industrial) as well as retail and related consumer demand. Some of the new investments are from newcomers to Australia but many are from existing businesses that are expanding their portfolios. In any case, these trends will further enhance the breadth of Australia-Japan opportunities.

A second fundamental is the imperative of foreign direct investment (FDI) for Australia’s long term prosperity. I have been analysing the Australian economy for four decades and one of the characteristics has been a current account deficit. From 1980 to 2019 the current account was in deficit, a result of the high levels of fixed capital formation for which there were insufficient domestic savings. This meant that Australia relied on foreign direct and portfolio investment to achieve its remarkable economic growth. The reliability of Australia’s political and institutional structures and the wealth of natural resources meant that foreign investors were optimistic about investing and have been proven correct.

Since 2019 the current account balance has been positive. This is mainly due to the large volumes of iron ore exports at high prices to China. Coal and LNG exports also played a role but have recently declined, as have exports to Japan and South Korea. While some consumer related imports have fallen due to the impact of higher interest rates on household budgets, large ticket items such as automobiles and ITC equipment continue to rise. Concurrently, the current account primary income balance (portfolio investment) continues as ever to be in deficit.

My point about these trends is that the current account surplus is dependent on the trade surplus, which is a result of one commodity (iron ore) and one major market, China, which is itself now under an economic cloud. So the cyclical aspect may quickly turn downward and become a trade deficit, especially as the population growth will result in more imports of manufactured consumer and capital goods. Under this scenario, the current account will again turn into deficit.

My conclusion is that the recent current account surplus should not give the Australian side any relaxed assumptions about the need for stability in economic policy. Sudden policy changes in energy and resources sectors in recent years do raise the perceived risk of investment. An eye on the long-term is critical for the mutual benefit of all partners.

Author: Manuel Panagiotopoulos

Managing Director, Australian and Japanese Economic Intelligence