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Revision of the Method for Calculating Reinvested Earnings

February 20, 2006
Ministry of Finance
Bank of Japan

The Ministry of Finance and the Bank of Japan have revised the method for calculating credits of reinvested earnings for January 2005 figures henceforth. Those earnings are classified under credits in "income," and the same amount is recorded under assets in "direct investment." The outline of the revision and estimated figures for 2004 calculated using the new method are presented below.

I. Outline of the Revision

Reinvested earnings refer to direct investors' shares (in proportion to equity participation) of earnings that subsidiaries and associated companies do not distribute as dividends (changes in the internal reserves at the end of the accounting period). In the balance of payments (BOP) statistics, the changes in earnings are recorded under both "income" and "direct investment." This is based on the assumption that the internal reserves are to be paid out to the direct investors as dividends and reinvested in subsidiaries or associated companies by them.

Reinvested earnings are compiled based on the reports on the internal reserves of direct investment enterprises by aggregating the direct investors' portion to the changes in the internal reserves of direct investment enterprises as of the end of the accounting period (internal reserves at the end of the current accounting period minus internal reserves at the end of the previous accounting period). In this process, figures reported in foreign currencies are converted into yen. Previously, figures at the end of the accounting period T0 were first converted into yen by using the exchange rate at the end of the accounting period T0, then figures at the end of the accounting period T0-1 were converted into yen using the exchange rate at the end of the accounting period T0-1, and then differences between the accounting period T0 and T0-1 were recorded as changes in the internal reserves. Under this method, the exchange conversion might cause inconvenience to data users. For example, changes in internal reserves in yen might increase when those in terms of foreign currency decrease (Chart 1). To solve such a problem, the method was revised to first calculate the differences in the internal reserves on a foreign currency basis and then convert the resulting figures into yen by using the exchange rate at the end of the accounting period T0 (Chart 2). The new method has been used for compiling figures for January 2005 onward.

Notes:

  1. Debits in reinvested earnings (liabilities in "direct investment") are not affected by exchange rates because source data are all reported in yen.
  2. Reinvested earnings are equally divided into twelve and recorded over twelve months. This is because internal reserves have been accumulated throughout the accounting period.
  • Chart 1
  • Chart 2

II. Estimated Figures for 2004 Using the New Method

The estimated figures for 2004 of reinvested earnings using the new method are shown in Chart 3. Disparities between "released figures" using the previous method and "estimated figures" using the new method are indicated as "changes due to the revision."

  • Chart 3, Reference