Japan's International Trade Patterns, Institutions, and Policies

This report presents an overview of Japan's performance in its trading relations. The report begins with a discussion of the development, size, and importance of Japan's international trading sector. It then examines the composition, institutions, and policies for trade. This is followed by a review of Japan's balance of payments, capital flows, value of the yen, and direction of trade.

LC 14.2/2--62 -67 E Report NO. 82-67 E MAY 1 0 1983 JAPAN'S INTERNATIONAL TRADE PATTERNS, INSTITUTIONS, AND POLICIES by Dick K. Nanto Analyst in International Trade and Finance Economics Division COMPLIMENTS O F HF 3000 Japan The Congressional Research Service works exclusively for the Congress, conducting research, analyzing legislation, and providing information at the request of committees, Members, and their staffs. The Service makes such research available, without partisan bias, in many forms including studies, reports, compilations, digests, and background briefings. Upon request, CRS assists committees in analyzing legislative proposals and issues, and in assessing the possible effects of these proposals and their alternatives. The Service's senior specialists and subject analysts are also available for personal consultations in their respective fields of expertise. ABSTRACT Japan's aggressive export drive and chronic balance of trade surplus with the United States has generated considerable interest in the Japanese international trading sector. This paper presents an overview of Japan's performance in its trading relations. The paper begins with a discussion of the development, size, and importance of Japan's international trading sector. trade. It then examines the composition, institutions, and policies for This is followed by a review of Japan's balance of payments, capital flows, value of the yen, and direction of trade. CONTENTS .............................................................. iii SUMMARY ............................................................... I. TRADE DEPENDENCY ................................................ I1 . BACKGROUND AND HISTORY 111. INSTITUTIONS FOR TRADE .......................................... A . Ministry of International Trade and Industry (MITI) ......... B . The Japan External Trade Organization ....................... C. Trading Companies ........................................... D . International Banks ......................................... E . International Organizations for Trade ....................... IV. FOREIGN TRADE POLICIES .......................................... A . Export Policies ............................................. B . Import Policies ............................................. LEVEL AND COMMODITY COMPOSITIOlJ OF TRADE ........................ A . Export Levels ............................................... B. Composition of Exports ...................................... C . Import Levels ............................................... D . Composition of Imports ...................................... E . Balance of Merchandise Trade ................................ VI. BALANCE ON CURRENT ACCOUNT ...................................... A . Services .................................................... B . Capital Flows ............................................... VII . VALUE OF THE YEN ................................................ VIII . DIRECTION OF TRADE .............................................. SELECTED BIBLIOGRAPHY ................................................. 59 ABSTRACT .........................................a JAPAN'S INTERNATIONAL TRADE PATTERNS, INSTITUTIONS, AND POLICIES In many respects, international trade is the lifeblood of Japan's economy. For a country long on people but short in natural resources, the international economy offers much needed sources of supply and markets not available domestically. Japan's participation in the greater world economy enables it to enlarge the scope of its economic activity and to enhance productivity, efficiency, and economic well-being. As Japan discovered during its 250 years of seclusion, an island economy practicing autarky imposes constraints on its own economic progress and standard of living. This paper presents a broad overview of Japan's international trade and balance of payments. It begins with a discussion of the development, size, and importance of Japan's international trading sector. examines the composition, institutions, and policies for trade. It then This is followed by a review of Japan's balance of payments, capital flows, value of the yen, and direction of trade. SUMMARY J a p a n r a n k s t h i r d among t h e w o r l d ' s l a r g e s t e x p o r t i n g n a t i o n s ( a f t e r t h e U n i t e d S t a t e s and West Germany) and a c c o u n t s f o r about 7 p e r c e n t o f a l l t r a d e of non-Communist c o u n t r i e s . A s a p e r c e n t a g e o f g r o s s n a t i o n a l p r o d u c t , however, J a p a n depends l e s s on f o r e i g n m a r k e t s t h a n many o t h e r i n d u s t r i a l i z e d c o u n t r i e s . I n 1980, J a p a n e x p o r t e d 15 p e r c e n t o f i t s GNP, which was l e s s t h a n t h a t r e p o r t e d f o r A u s t r a l i a , F r a n c e , I t a l y , West Germany, and Canada. The U n i t e d S t a t e s a t 10 p e r c e n t , however, e x p o r t s a s m a l l e r s h a r e o f GNP t h a n J a p a n . S p e c i f i c J a p a n e s e i n d u s t r i e s , however, a r e h e a v i l y d e p e n d e n t o n e x p o r t markets. E x p o r t s , f o r example, a c c o u n t f o r about h a l f o f t h e o u t p u t o f J a p a n ' s a u t o m o b i l e , machine t o o l , and t e l e v i s i o n r e c e i v e r i n d u s t r i e s and a p p r o x i m a t e 1y t h r e e - f o u r t h s o f t h e p r o d u c t i o n o f w a t c h e s and c a m e r a s . J a p a n ' s i m p o r t s , m o r e o v e r , i n c l u d e c r i t i c a l raw m a t e r i a l s , e n e r g y , and food e s s e n t i a l t o t h e w e l l - b e i n g of t h e n a t i o n . The p e r c e p t i o n i n J a p a n , t h e r e f o r e , t e n d s toward t h e p o s i t i o n t h a t t h e c o u n t r y i s h e a v i l y d e p e n d e n t on f o r e i g n t r a d e . Such dependence on i m p o r t s o f e s s e n t i a l commodities h a s been a m a j o r c o n c e r n t o policyrnakers. I n a d d i t i o n , t h e economic d i s r u p t i o n s o f t h e 1970s added a new d i m e n s i o n t o J a p a n ' s p e r c e p t i o n o f i t s s e c u r i t y . J a p a n now t e n d s t o v i e w t h r e a t s t o i t s n a t i o n a l s e c u r i t y a s more l i k e l y t o o c c u r i n t h e economic than m i l i t a r y sphere. Its d e f i n i t i o n of national s e c u r i t y tends t o take a w i d e r meaning t o i n c l u d e i n t e r r u p t i o n s i n s u p p l i e s o f r a w m a t e r i a l s , sudden p r i c e h i k e s , r a p i d changes i n c u r r e n c y v a l u e s , and food embargoes. J a p a n ' s i n s t i t u t i o n s f o r t r a d e i n c l u d e t h e powerf u l M i n i s t r y o f I n t e r n a t i o n a l T r a d e and I n d u s t r y (MITI), which h o l d s p r i m a r y r e s p o n s i b i l i t y f o r f o r m u l a t i n g and implementing economic p o l i c y d e a l i n g w i t h b o t h i n t e r n a t i o n a l t r a d e and domestic industries. It does coordinate policy with other ministries and the Prime Minister, but its interests lie mainly in enhancing the strength of domestic industry. MITI maintains close relations with businesses and factions within the Liberal Democratic Party and seeks a consensus on matters of policy. Japanese integrated trading companies serve as middlemen, financiers, intelligence gatherers, and developers. The largest nine firms handle more than half of the nation's imports and nearly half of the exports. They maintain large staffs abroad and also engage in considerable third-country trade, including the handling of an estimated 10 percent of all U.S. Japan's methods for promoting exports has taken two paths. exports. The first has been to develop industries that initially could manufacture products that would substitute for imports in the domestic economy and then become efficient enough to sell them abroad. The second was to provide incentives for firms to export. Most export incentives, however, were dropped during the 1960s and 1970s as Japan's balance of trade improved. The problem of the 1980s for Japan appears to be more of restraining exports than of promoting them. Japan's import policies have been undergoing considerable liberalization from the protectionist decades of the 1950s and 1960s. Under the recent Multilateral Trade Negotiations, the average tariffs on industrial imports are scheduled to decline from 5.0 to 2.5 percent. This compares favorably to the drop from 6.1 to 4.2 percent in the United States and 6.3 to 4.6 percent for the European Economic Community. Japan, however, still maintains rigid import quotas or high tariffs on agricultural products, leather, and other politically sensitive items. Problems with standards, customs procedures, and other nontariff barriers, also appear to keep imports of manufactured goods at relatively low levels. D u r i n g t h e 1960s and l 9 7 O s , t h e v a l u e of J a p a n ' s m e r c h a n d i s e e x p o r t s grew a t a n a v e r a g e a n n u a l r a t e o f 1 8 . 9 p e r c e n t t o r e a c h t h e e q u i v a l e n t o f $129.8 b i l l i o n i n 1980. E x p o r t s w e r e drawn i n t o w o r l d m a r k e t s b y economic l i b e r a l i z a t i o n a b r o a d , low p r i c e s f o r J a p a n e s e p r o d u c t s , and a w i d e n i n g recogn i t i o n o f h i g h q u a l i t y i n c e r t a i n items. They were pushed i n t o w o r l d m a r k e t s by d o m e s t i c r e c e s s i o n s and s a t u r a t i o n i n home m a r k e t s . J a p a n t s i m p o r t s c o n s i s t main1 y o f m i n e r a l f u e l s - - i n c l u d i n g ~ e t r o l e u m - -(50%), food ( l o % ) , raw m a t e r i a l s ( 9 % ) , and m a c h i n e r y and e q u i p m e n t - - i n c l u d i n g mobiles--(7%). auto- Export s c o n s i s t p r i m a r i l y o f m a c h i n e r y and equipment ( 6 3 % ) , m e t a l s ( l 6 % ) , c h e m i c a l s ( 5 % ) , and t e x t i l e s ( 5 % ) . J a p a n p r e f e r s t o measure i t s b a l a n c e o f m e r c h a n d i s e t r a d e w i t h s h i p p i n g c o s t s included i n the values of imports. By t h i s m e a s u r e , i n r e c e n t y e a r s , i t h a s i n c u r r e d t r a d e d e f i c i t s o n l y f o l l o w i n g t h e two m a j o r o i l c r i s e s i n 1973 and 1979. I f i m p o r t s a r e v a l u e d on a free-on-board b a s i s , Japan has had no m e r c h a n d i s e t r a d e d e f i c i t s i n c e 1963. I n terms of t h e b a l a n c e on c u r r e n t account, Japan recorded d e f i c i t s i n 1973-75 and 1979-80. As f o r t h e c a p i t a l a c c o u n t , s i n c e t h e mid-1960s, long- term c a p i t a l flows h a v e g e n e r a l l y b e e n n e g a t i v e ( n e t o u t f l o w o f long-term investment f u n d s ) , while short-term c a p i t a l flows have u s u a l l y been p o s i t i v e . A c u m u l a t i v e s u r p l u s h a s a c c r u e d i n J a p a n ' s b a l a n c e o f payments, which h a s i n c r e a s e d i t s r e s e r v e s o f g o l d and f o r e i g n exchange from $2 b i l l i o n i n t h e l a t e 1960s t o $25 b i l l i o n i n 1980. The v a l u e o f t h e yen h a s f l u c t u a t e d g r e a t l y s i n c e t h e g r a d u a l s h i f t t o f l o a t i n g exchange r a t e s t h a t commenced i n 1971. From 360 yen p e r d o l l a r i n 1 9 7 1 , t h e yen a p p r e c i a t e d t o 265 yen p e r d o l l a r i n 1973 b e f o r e t h e i m p a c t o f t h e o i l c r i s i s began t o be f e l t . By 1976, i t had weakened t o 297 p e r d o l l a r b u t r e g a i n e d s t r e n g t h o v e r 1978 t o r e a c h 219 yen p e r d o l l a r i n 1979. With t h e jump i n o i l p r i c e s i n 1979, however, t h e yen a g a i n weakened and f e l l t o 227 p e r d o l l a r i n 1980. I n 1 9 8 1 , i t h a s f l u c t u a t e d between 205 and 239 yen per d o l l a r . Japan t r a d e s with n e a r l y e v e r y country o f t h e world. o f i t s m e r c h a n d i s e e x p o r t s went t o non-Communist, I n 1980, 47 p e r c e n t developed c o u n t r i e s , 46 percent t o d e v e l o p i n g c o u n t r i e s , and 7 p e r c e n t t o Communist c o u n t r i e s . The United S t a t e s w i t h 24 p e r c e n t of J a p a n ' s e x p o r t s was t h e l a r g e s t c u s t o m e r , followed by West Germany, South K o r e a , Taiwan, and China w i t h l e s s t h a n 5 p e r c e n t e a c h . J a p a n ' s s u p p l i e r c o u n t r i e s r e f l e c t i t s n e e d s t o i m p o r t f o o d , e n e r g y , and raw m a t e r i a l s . I n 1980, d e v e l o p i n g c o u n t r i e s s u p p l i e d 60 p e r c e n t o f J a p a n ' s i m p o r t s w i t h h a l f o f t h a t coming from t h e Middle E a s t . Developed c o u n t r i e s provided 35 p e r c e n t and communist c o u n t r i e s 5 p e r c e n t o f J a p a n ' s i m p o r t s . The U n i t e d S t a t e s w i t h 17 p e r c e n t and S a u d i a A r a b i a w i t h 14 p e r c e n t were t h e l e a d i n g e x p o r t e r s t o J a p a n . O t h e r m a j o r e x p o r t e r s were I n d o n e s i a , t h e United Arab E m i r a t e s , A u s t r a l i a , and Canada. The s t r u c t u r e o f J a p a n ' s t r a d e g i v e s r i s e t o i n t e r n a t i o n a l t r a d e f r i c t i o n . I n most c a s e s t h e c o u n t r i e s t h a t e x p o r t e n e r g y , f o o d , and raw m a t e r i a l s t o J a p a n c a n n o t a b s o r b an e q u a l amount o f J a p a n e s e e x p o r t s o f f i n i s h e d products. T h i s means t h a t b i l a t e r a l t r a d e i s u s u a l l y n o t b a l a n c e d . Japan i s forced t o run l a r g e t r a d e d e f i c i t s with c o u n t r i e s providing e s s e n t i a l i m p o r t s w h i l e r u n n i n g s u r p l u s e s w i t h l a r g e m a r k e t economies, s u c h a s t h e United S t a t e s and t h o s e o f Europe, who c a n buy J a p a n 1s e x p o r t s . The r e s u l t i n g p o l i t i c a l f r i c t i o n i s a m a j o r c h a l l e n g e f o r J a p a n e s e policymakers . I . TRADE DEPENDENCY Japan i s one of t h e g r e a t t r a d i n g n a t i o n s o f t h e world. With i m p o r t s and e x p o r t s o f m e r c h a n d i s e t o t a l l i n g $272 b i l l i o n i n 1980, J a p a n i s t h e t h i r d l a r g e s t t r a d i n g n a t i o n a f t e r t h e United S t a t e s and West Germany. Among non- Communist c o u n t r i e s , J a p a n a c c o u n t s f o r about 10 p e r c e n t o f t h e t r a d e o f t h e i n d u s t r i a l i z e d n a t i o n s and 7 p e r c e n t o f a l l t r a d e . 11 A s a p e r c e n t a g e o f g r o s s n a t i o n a l p r o d u c t , however, J a p a n e x p o r t s l e s s t h a n o t h e r m a j o r t r a d i n g c o u n t r i e s o f t h e w o r l d . I n 1980, f o r example, i t e x p o r t e d 15 p e r c e n t o f i t s GNP compared w i t h 1 8 p e r c e n t f o r A u s t r a l i a , 20 p e r c e n t f o r F r a n c e , 23 p e r c e n t f o r I t a l y , 28 p e r c e n t f o r West Germany and t h e U n i t e d Kingdom, 30 p e r c e n t f o r Canada, and 57 p e r c e n t f o r t h e N e t h e r l a n d s . The United S t a t e s , a t 10 p e r c e n t , however, e x p o r t s a s m a l l e r s h a r e o f i t s GNP t h a n J a p a n . 21 I n terms of o v e r a l l markets, t h e r e f o r e , Japan i s l e s s dependent on f o r e i g n t r a d e t h a n many o t h e r i n d u s t r i a l i z e d c o u n t r i e s o f t h e w o r l d . For s p e c i f i c i n d u s t r i e s , however, i n t e r n a t i o n a l e x p o r t m a r k e t s a r e e x t r e m e 1 y i m p o r t a n t . E x p o r t s a c c o u n t f o r about h a l f o f t h e o u t p u t o f t h e J a p a n e s e a u t o m o b i l e , machine t o o l , and t e l e v i s i o n r e c e i v e r i n d u s t r i e s and about t h r e e f o u r t h s o f J a p a n ' s 31 p r o d u c t i o n o f w a t c h e s and cameras. I n export-oriented i n d u s t r i e s such a s t h e s e , i n t e r n a t i o n a l m a r k e t s a l l o w f i r m s t o a c h i e v e economies o f l a r g e - s c a l e p r o d u c t i o n , volume s a l e s , and worldwide f e e d b a c k f o r p r o d u c t improvement and t o m i t i g a t e demand f l u c t u a t i o n s b y b a l a n c i n g d o m e s t i c and f o r e i g n s a l e s a c c o r d i n g t o economic c o n d i t i o n s . 11 I n t e r n a t i o n a l Monetary Fund. I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s , Aug. 1981. p. 46-7. 21 I b i d . 153-4: 31 Bank o f J a p a n . Economic S t a t i s t i c s Monthly, A p r i l 1981. p . 133-4, J a p a n Economic J o u r n a l . I n d u s t r i a l Review of J a p a n l l 9 8 1 . p. 4 6 f f . I n t e r m s o f c r i t i c a l raw m a t e r i a l s , moreover, J a p a n i s h i g h l y d e p e n d e n t on i n t e r n a t i o n a l t r a d e . J a p a n e s e i m p o r t s o f food account f o r about h a l f o f t h e p o p u l a t i o n ' s c a l o r i c i n t a k e and about 30 p e r c e n t o f t h e v a l u e o f t o t a l food 41 consumption. - J a p a n a l s o depends on i m p o r t s f o r n e a r l y a l l i t s c r u d e p e t r o l e u m , i r o n o r e , l e a d o r e , copper o r e , b a u x i t e , wool, and c o t t o n . I t i m p o r t s about 75 p e r c e n t o f i t s c o a l and z i n c o r e . 5/ Such dependence o n i m p o r t s o f food and c r i t i c a l raw m a t e r i a l s h a s been a m a j o r c o n c e r n t o government p o l i c y m a k e r s . Economic d i s r u p t i o n s o f t h e 1 9 7 0 s , m o r e o v e r , added a new d i m e n s i o n t o J a p a n ' s p e r c e p t i o n o f i t s economic insecurity. These d i s r u p t i o n s i n c l u d e t h e U.S. s u s p e n s i o n o f d o l l a r con- v e r t i b i l i t y i n 1 9 7 1 , t h e o i l c r i s e s o f 1973 and 1979, and t h e U.S. embargo 61 on s o y b e a n e x p o r t s i n 1973. As J a p a n began t h e d e c a d e of t h e 1 9 8 0 s , t h e r e f o r e , such i m p o r t dependence and r e c e n t h i s t o r y o f i n t e r n a t i o n a l economic d i s r u p t i o n s c a u s e d many p o l i c y m a k e r s t o c o n s i d e r t h r e a t s t o t h e c o u n t r y ' s n a t i o n a l s e c u r i t y more l i k e l y t o o c c u r i n t h e economic t h a n m i l i t a r y s p h e r e . T h i s f o c u s on economic r a t h e r t h a n m i l i t a r y c o n s i d e r a t i o n s was f a c i l i t a t e d by t h e U.S. provided p r o t e c t i o n a g a i n s t l a r g e - s c a l e w a r f a r e . n u c l e a r u m b r e l l a , which Japan's d e f i n i t i o n of national s e c u r i t y , t h e r e f o r e , t e n d s t o t a k e a broad meaning t o i n c l u d e i n t e r r u p t i o n s i n s u p p l i e s o f raw m a t e r i a l s , sudden p r i c e h i k e s , r a p i d c h a n g e s i n c u r r e n c y v a l u e s , and food embargoes. 41 J a p a n . Economic P l a n n i n g Agency. Economic Out l o o k , J a p a n ' 8 1 . ~ c o n o m i cP l a n n i n g Agency, c . 1981. p . 26. Tokyo. 5 / J a p a n . O f f i c e o f t h e Prime M i n i s t e r . Monthly S t a t i s t i c s o f J a p a n , S e p t . 1980. Tokyo. p. 4 6 . K r a u s e , Lawrence, and Sukeo S e k i g u c h i . J a p a n and t h e World Economy. I n P a t r i c k , H . , and H. Rosovsky, e d s . A s i a ' s New G i a n t . Washington, B r o o k i n g s , 1976. p. 386. 6 / Akao, Nobutoshi and Maureen White. ~ n t e r e c o n o m i c ,s ~ a y / J u n e1981. p 115-20. . J a p a n ' s Economic S e c u r i t y . CRS -9 XI. BACKGROUND AND HISTORY Following J a p a n ' s d e f e a t i n World War 11, U.S. occupation forces r i g i d l y c o n t r o l l e d J a p a n ' s i n t e r n a t i o n a l economic r e l a t i o n s . Imports were l i m i t e d t o e s s e n t i a l food and raw m a t e r i a l s , w i t h a s i z a b l e p r o p o r t i o n f i n a n c e d by U.S. economic a s s i s t a n c e . Over t h e 1945-52 p e r i o d , t h e United S t a t e s provided Japan with n e t economic a s s i s t a n c e of $1,938 m i l l i o n , o f which Japan e v e n t u a l l y r e p a i d $490 m i l l i o n . Approximately 59 p e r c e n t o f t h e a i d was i n food o r a g r i c u l t u r a l equipment, w h i l e 15 p e r c e n t was i n i n d u s t r i a l m a t e r i a l s , and 12 p e r c e n t i n t r a n s p o r t a t i o n v e h i c l e s and equipment. Aid i m p o r t s amounted t o 19 p e r c e n t of t o t a l Japanese imports over t h e o c c u p a t i o n p e r i o d . 71 With extreme s h o r t a g e s of s u p p l i e s i n J a p a n ' s domestic economy, e x p o r t s d i d n o t begin t o r e c o v e r u n t i l t h e Korean C o n f l i c t when s p e c i a l procurement by United Nations f o r c e s induced boom c o n d i t i o n s i n J a p a n ' s i n d u s t r i e s . By 1960, J a p a n ' s e x p o r t s had grown t o account f o r 3 . 6 p e r c e n t o f t h o s e of non-Communist c o u n t r i e s , enough t o r a n k s i x t h and t o b e a t approximately t h e same l e v e l a s t h e N e t h e r l a n d s and I t a l y . Over t h e 1960s, t h e d o l l a r v a l u e of J a p a n ' s e x p o r t s grew a t an average annual r a t e of 1 6 . 9 p e r c e n t , more t h a n 75 p e r c e n t f a s t e r t h a n t h e average o f a l l non-Communist countries. By 1970, t h e r e f o r e , J a p a n ' s e x p o r t s had r i s e n t o account f o r 6 . 8 p e r c e n t of a l l free-world e x p o r t s , up c o n s i d e r a b l y from t h e 3.6 p e r c e n t i n 1960. 81 71 Nanto, Dick K . The United S t a t e s ' Role i n t h e Postwar Economic Recovery of ~ a p a n .Doctoral D i s s e r t a t i o n . Cambridge, Mass., Harvard U n i v e r s i t y , 1976. p. 66-69, 181. 8 1 I n t e r n a t i o n a l Monetary Fund. May 1377. Washington. p. 56-7 International Financial S t a t i s t i c s , During t h e 1 9 7 0 s , t h e growth r a t e i n J a p a n ' s d o m e s t i c economy dropped i n h a l f from t h e d o u b l e - d i g i t r a t e s of previous decades. h i g h e r b i l l s f o r imported e n e r g y and raw m a t e r i a l s . i n d u s t r i e s t o l o o k abroad f o r new m a r k e t s . Japan a l s o faced sharply T h i s caused J a p a n e s e As a r e s u l t , J a p a n ' s e x p o r t s c o n t i n u e d t o grow a t a n a v e r a g e annual r a t e o f 21 p e r c e n t t o a c c o u n t f o r 7 . 1 p e r c e n t o f a l l non-Communist c o u n t r y e x p o r t s i n 1980. Japan's trade grew s o r a p i d l y t h a t whereas t h e United S t a t e s e x p o r t e d f i v e t i m e s a s much a s J a p a n i n 1 9 6 0 , by 1980, i t e x p o r t e d l e s s t h a n t w i c e a s much. 9/ During t h e 1 9 7 0 s , i n p a r t i c u l a r , J a p a n ' s e x p o r t growth provided a s t i m u l u s t o s l u g g i s h d o m e s t i c economic m a r k e t s . growth h a s been " e x p o r t - l e d ." I n t h a t s e n s e , J a p a n ' s r e c e n t economic During t h e e a r l i e r postwar p e r i o d , however, J a p a n ' s r a p i d growth i n i n t e r n a t i o n a l t r a d e a p p e a r s t o h a v e been a s much a r e s u l t o f 101 t h e r a p i d growth i n i t s d o m e s t i c economy a s a c a u s e o f i t . The development of J a p a n ' s i n t e r n a t i o n a l economy f o l l o w e d two d i s t i n c t p a t t e r n s . The f i r s t i s a p r o c e s s o f i m p o r t - s u b s t i t u t i n g i n d u s t r i a l i z a t i o n . A s J a p a n began t o i n d u s t r i a l i z e , i t f i r s t imported c e r t a i n p r o d u c t s . As i m p o r t s r o s e , d o m e s t i c p r o d u c t i o n was i n i t i a t e d and g r a d u a l l y s u b s t i t u t e d f o r imports. I m p o r t s , t h e r e f o r e , would peak and t h e n d e c l i n e , a s J a p a n e s e p r o d u c t i o n r o s e . E v e n t u a l 1 y t h e J a p a n e s e p r o d u c t would g a i n a c c e p t a n c e on world m a r k e t s and e x p o r t s would r i s e . A f t e r a t i m e , however, a s d o m e s t i c wage r a t e s r o s e , p r o d u c e r s i n newly i n d u s t r i a l i z e d c o u n t r i e s became more efficient , c o u l d peak. o r e n e r g y c o s t s became t o o h i g h , Japanese p r o d u c t i o n and e x p o r t s Imports a l s o could r i s e again. 9 / I n t e r n a t i o n a l Monetary Fund. I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s , J u l y i 9 8 l . Washington. p. 4 6 . 101 Ohkawa, Kazushi and H. Rosovsky. J a p a n e s e Economic Growth. ~ l t o T ~ t a n f o rUdn i v e r s i t y P r e s s , 1973. p. 173-5. Palo The second pattern is one of growing relative labor costs forcing industries to move up to higher value-added products. As Japan's wage costs have risen relative to those in less developed nations, its traditional products have become less able to compete both at home and in international markets. This has required that Japan move up the technological spectrum from labor-intensive manufactures to more sophisticated and technology-intensive products. 111 Hence, Japan, which began by exporting such labor-intensive products as textiles, tea, and toys, moved on to cameras, cars, steel, ships, and television receivers, and is now expanding into camputers, copy machines, machine tools, and telecommunications equipment. 111 Lifson, Thomas R. Japanese Business Strategies for the 1980's. Japan Report, v. X X V I , May 1, 1980. p. 2-3. 111. INSTITUTIONS FOR TRADE A. Ministry of International Trade and Industry (MITI). MITI holds primary responsibility for formulating and implementing international trade policy, although it does so by seeking a consensus among interested parties. The Ministry coordinates trade policy with the Ministry of Foreign Affairs, which holds primary responsibility for international political relations, and the Ministry of Finance, which becomes involved in matters pertaining to government revenues or expenditures. MITI also coordinates trade policy with the Economic Planning Agency, the Bank of Japan, and the Ministries of Agriculture, Transport, Telecommunications, and Health on issues affecting their interests. The Prime 121 Minister, Diet, and Fair Trade Commission also can restrict MITI's operations. - MITI is responsible not only for exports and imports, but also for all domestic industries and businesses not specifically covered by other ministries, investments in plant and equipment, pollution control, energy and power, some aspects of foreign economic assistance, and consumer complaints. Such broad responsibility allows MITI to integrate conflicting policies, such as pollution control and export competitiveness, to prevent excessive damage to industries. 131 MITI serves as an architect of industrial policy, an arbiter for industrial problems and disputes, and a regulator. MITI'S major objective is to strengthen Japan's industrial base and to insure that Japan's foreign trade operates 1 2 1 FTC Warns Against MITI's Administrative Guidance. Journal, v. 19, Sept. 1, 1981. p. 2. The Japan Economic 1 3 1 Ojimi, Yoshihisa. A Government Ministry: The Case of the Ministry of 1nterGtional Trade and Industry. In Vogel, E. F. Modern Japanese Organization and Decision-making. Berkeley, University of California Press, 1975. p. 101. smoothly and e f f i c i e n t l y . MITI m a i n t a i n s v e r y c l o s e r e l a t i o n s w i t h d o m e s t i c p r o d u c e r s and key f a c t i o n s w i t h i n t h e L i b e r a l Democratic P a r t y . It d o e s n o t manage J a p a n e s e t r a d e and i n d u s t r y a l o n g t h e l i n e s o f a c e n t r a l l y planned economy. It d o e s , however, p r o v i d e a d m i n i s t r a t i v e g u i d a n c e and o t h e r d i r e c t i o n - - e i t h e r formal o r i n f o r m a l - - t o i n d u s t r i e s on modernization, technology, plans f o r i n v e s t m e n t s i n new p l a n t and equipment, and on competing b o t h w i t h e a c h o t h e r and w i t h f o r e i g n f i r m s . 141 With some i n d u s t r i e s , MITI h a s s t r o n g s t a t u t o r y a u t h o r i t y t o i n t e r v e n e . I n o t h e r s , however, i t s i n f l u e n c e i s weak ( n e w s p a p e r s , f o r example). 151 M I T I f s g u i d a n c e i s b a c k e d , however, by i t s a b i l i t y t o d e v e l o p a c o n s e n s u s among t h o s e i n d u s t r i e s r e c e i v i n g i t s a d v i c e ; i t s power t o g r a n t c e r t a i n l i c e n s e s ; i t s i n f l u e n c e w i t h t h e J a p a n Development Bank, J a p a n ' s Export-Import Bank, and t h e A s i a n Development Bank; and a b a s i c c o n f i d e n c e J a p a n e s e b u s i n e s s seems t o have i n t h e v a l i d i t y o f t h e g u i d a n c e . 161 A s a l a s t r e s o r t , MITI c a n e i t h e r "go p u b l i c " and b r i n g p e e r p r e s s u r e o n t h e r e l u c t a n t f i r m o r e x e r t i t s i n f l u e n c e on t h e f i r m ' s banks o r c r e d i t o r s . 171 The c l o s e r e l a t i o n s h i p between MITI and J a p a n e s e i n d u s t r i e s means t h a t f o r e i g n t r a d e p o l i c y o f t e n complements and i s c o o r d i n a t e d w i t h t h e m i n i s t r y ' s e f f o r t s t o s t r e n g t h e n domestic manufacturing i n t e r e s t s . MITI f a c i l i t a t e d t h e e a r l y development o f n e a r l y a l l m a j o r J a p a n e s e i n d u s t r i e s by p r o v i d i n g p r o t e c t i o n from i m p o r t c o m p e t i t i o n , t e c h n o l o g i c a l i n t e l l i g e n c e , h e l p i n 1 4 1 I b i d . Vogel, E z r a F. J a p a n a s No. One. unive=ity P r e s s , 1979. p. 72-3. . 151 Magaziner , I r a C . and Thomas M. Hout S t u d i e s I n s t i t u t e , 1980. p. 32-3. 161 - Vogel. No. One. p . 71-3. ond doc P o l i c y 171 Lepon, J e f f r e y M . v , 2 , M a y 1978. p . 148-50. Cambridge, Mass., Harvard Japanese I n d u s t r i a l Policy. A d m i n i s t r a t i v e Guidance i n J a p a n . F l e t c h e r Forum. CRS- 15 licensing foreign technology or affiliates, access to foreign exchange, or assistance in mergers. 181 By the 1980s, however, with reduced import tariffs, ready access by firms to foreign exchange, and international codes preventing government subsidies, MITI's ability to protect domestic industry from imports has been weakened considerably. In 1981, for example, MITI initially stood by while a surge of lower-cost aluminum imports from the United States threatened Japan's aluminum industry. The assistance program MITI eventually proposed has faced resistance 19/ by both the United States and Japan's Ministry of Finance. MITI also plays the leading role in agreements by Japanese industry to limit exports t9 various countries. In 1978, for example, MITI requested that the motor vehicle, motorcycle, copy machine, wrist watch, and camera 20/ A later example, in 1981, industries limit their exports to 1977 levels. was Japan's voluntary export restraints on automobiles to the United States and Canada. In the discussions over the issue, MITI, along with the Foreign Ministry, convinced the Japanese auto industry to go along with the restraints despite industry objections. MITI allocated the export quota among the various manufacturers and monitored their compliance. z/ 181 Magaziner, Industrial Policy, p. 45-90. For a description of MITI's activEies in developing the computer, steel, and motor vehicle industries, see Kaplan, Eugene. Japan, the Government-Business Relationship. Washington, U.S. Govt. Print. Off., 1972. p. 77-158. 191 Japanese Aluminum Producers Blast 'Unfair' U.S. Competition. Journal of Commerce, April 29, 1981. p. 13A. Cullison, A.E. Japanese Impose Tariff Quotas on Imports of Aluminum Ingots. Journal of Commerce, October 26, 1981. p. 12A. 201 Oriental Economist, Japan Economic Yearbook, 1979180. Tokyo, Oriental ~ c o n o z s t ,1979. p. 35. 211 Letter, Okawara, Yoshio to William F. Smith. May 7, 1981. Cullinson, Japanese Automakers to Comply with Quotas. Journal of Commerce, May 4, 1981. p. 1, 5. A. E. The J a p a n E x t e r n a l T r a d e O r g a n i z a t i o n (JETRO) B. . JETRO was e s t a b l i s h e d by MITI i n 1958 i n o r d e r t o c o n s o l i d a t e J a p a n ' s e x p o r t promotion e f f o r t s . operates a s a non-profit It f a c i l i t y i n i t i a l l y c a p i t a l i z e d a t two b i l l i o n y e n . The 221 J a p a n e s e government p r o v i d e s more t h a n h a l f o f i t s a n n u a l o p e r a t i n g b u d g e t . I n i t i a l l y , JETRO's a c t i v i t i e s f o c u s s e d m a i n l y o n promoting J a p a n ' s prod u c t s i n o t h e r c o u n t r i e s . As J a p a n ' s e x p o r t e r s e s t a b l i s h e d t h e m s e l v e s i n world m a r k e t s and J a p a n ' s b a l a n c e o f t r a d e t u r n e d from d e f i c i t t o s u r p l u s , however, JETRO' s r o l e h a s s h i f t e d from s t r i c t 1y e x p o r t promotion t o more v a r i e d a c t i v i t i e s . These i n c l u d e t h e f u r t h e r a n c e o f m u t u a l u n d e r s t a n d i n g w i t h t r a d i n g p a r t n e r s , i m p o r t p r o m o t i o n , l i a i s o n between s m a l l b u s i n e s s e s i n J a p a n and t h e i r o v e r s e a s c o u n t e r p a r t s , and d a t a d i s s e m i n a t i o n . JETRO m a i n t a i n s o f f i c e s i n more t h a n sixty countries. T r a d i n g Companies. C. A major Japanese c o n t r i b u t i o n t o i n t e r n a t i o n a l t r a d e h a s b e e n t h e development o f t h e i n t e g r a t e d ( g e n e r a l ) t r a d i n g company. These were f i r s t o r g a n i z e d d u r i n g t h e l a t e 1800s t o r e p l a c e t h e f o r e i g n companies d o m i n a t i n g J a p a n e s e t r a d e and t o p r o v i d e f o r e i g n m a r k e t i n g s e r v i c e s t o Japanese f i r m s u n f a m i l i a r with t h e o u t s i d e world. 231 The t r a d i n g company's r o l e i n i t i a l l y was t o a c t a s s p e c i a l i z e d w h o l e s a l e r s f o r J a p a n e s e m a n u f a c t u r e r s i n d o m e s t i c and f o r e i g n m a r k e t s and t o buy raw m a t e r i a l s and o t h e r i n p u t s f o r m a n u f a c t u r i n g o p e r a t i o n s . L a t e r , however, J a p a n e s e t r a d i n g companies d e v e l o p e d t h e c a p a c i t y t o s e r v e a s f i n a n c i a l i n t e r m e d i a r i e s , a b s o r b f o r e i g n exchange r i s k f o r t h e i r c u s t o m e r s , p r o v i d e 1979. 221 J a p a n E x t e r n a l Trade O r g a n i z a t i o n . J a p a n E x t e r n a l Trade O r g a n i z a t i o n , Tokyo, JETRO, 1979. p . 2-4. 231 - Krause and S e k i g u c h i , J a p a n and World Economy, p . 389-92. CRS- 17 technical advice to small firms whose products might be exported, and engage in direct investment overseas, often to secure stable sources of supply. A few large trading companies have grown to form the core of zaibatsu groupings of businesses. Trading companies, moreover, engage in trade not only for Japanese firms, but among third countries. Such transactions might include, for example, arranging for the sale of a U.S. chemical plant to the Soviet Union or importing Rumanian urea into Bangladesh. 241 Third country trade now accounts for more than 10 percent of the sales of the nine largest trading companies. of all U.S. 251 Japanese trading companies handle approximately 10 percent 261 exports. - Japan's integrated trading companies enter into a variety of transactions. Each company will handle as many as 20,000 different products with numerous suppliers. This enables them to arrange multi-product deals encompassing many facets of a project. An example would be the export of a turnkey petrochemical plant to Singapore requiring equipment, technology, and consulting services of many different firms. x/ In 1980 more than 6,000 trading companies existed in Japan. The top nine companies, however, accounted for the bulk of the transactions. The leaders 24/ Young, Alexander K. The Sogo Shosha: Japan's Multinational Trading compazes. Boulder, Colo., Westview Press, 1979. p. 9-10. the 251 Kanabayashi, Masayoshi. Japan's Big and Evolving Trading Firms: Can Something Like Them? Wall Street Journal, Dec. 17, 1980. p. 56. uX.Use 261 Lachica, Eduardo. Unlikely American Exporter: Japan. Journal, Nov. 11, 1981. p. 31. 27/ - Young, Sogo Shosha, p. 4-9. Wall Street o f t h e t o p n i n e were M i t s u b i s h i w i t h s a l e s o v e r t h e f i s c a l y e a r o f $63.4 b i l l i o n , f o l l o w e d by M i t s u i w i t h $57.6 b i l l i o n , C . I t o h w i t h $48.7 b i l l i o n , and Marubeni w i t h $46.3 b i l l i o n . Sumitomo and Nissho-Iwai w i t h s a l e s of $43.9 and $29.9 b i l l i o n , r e s p e c t i v e l y , a l s o were m a j o r t r a d e r s . 281 T o g e t h e r t h e t o p n i n e t r a d i n g companies r e c o r d e d g r o s s s a l e s i n f i s c a l y e a r 1980 of $330 b i l l i o n o r an amount e q u i v a l e n t t o 3 0 . 2 p e r c e n t o f t h e n a t i o n ' s GNP. 291 These companies a l s o h a n d l e more t h a n h a l f o f J a p a n ' s i m p o r t s and n e a r l y h a l f of J a p a n ' s e x p o r t s . products. There i s g r e a t e r c o n c e n t r a t i o n i n c e r t a i n These companies, f o r example, h a n d l e more t h a n 90 p e r c e n t of J a p a n ' s i m p o r t s o f s t e e l , 70 p e r c e n t o f food i m p o r t s , and more t h a n 50 p e r c e n t o f i m p o r t s o f t e x t i l e s and f u e l s . They a l s o a r e r e s p o n s i b l e f o r n e a r l y 90 p e r c e n t of J a p a n ' s e x p o r t s o f s t e e l , 60 p e r c e n t o f t h e e x p o r t s o f c h e m i c a l s , and 50 percent of t h e t e x t i l e s . I n 1980 n e a r l y 6 , 0 0 0 J a p a n e s e were employed abroad b y t h e b i g n i n e t r a d i n g companies. 30/ D. I n t e r n a t i o n a l Banks. J a p a n ' s e x t e n s i v e f o r e i g n t r a d e and i n t e r n a t i o n a l c a p i t a l f l o w s a r e f i n a n c e d b y a well-developed b a n k i n g s y s t e m . The s y s t e m was o r g i n a l l y p a t t e r n e d a f t e r England's but h a s subsequently evolved i n t o one with i t s own s t r u c t u r e and c h a r a c t e r i s t i c s . I t c o n s i s t s o f a m i x t u r e o f government and p r i v a t e banking i n s t i t u t i o n s w i t h a h i g h e r d e g r e e o f s p e c i a l i z a t i o n t h a n i n most c o u n t r i e s . 311 28/ Aoyama, N o r i o . The Role o f t h e J a p a n e s e Sogoshosha. P a p e r p r e s e n t e d a t t h y u . S.-Japan B u s i n e s s C o n f e r e n c e , L i n c o l n , Nebraska. Oct 6 , 1981. . 291 - Ibid. 30/ K e i z a i Koho, J a p a n 1981, p . 31. 7 31/ B i e d a , Ken. The S t r u c t u r e and O p e r a t i o n o f t h e J a p a n e s e Economy. s y d n e T John Wiley and Sons A u s t r a l a s i a , 1970. p . 134-35. CRS- 19 The Bank of Japan stands at the head of the banking structure. Although it coordinates policy with the Ministry of Finance, it maintains considerable independence in pursuing monetary policy and regulating activities of Japan's banking community. The commercial banking system centers on fourteen city banks (including the Bank of Tokyo), which tend to be larger and to have headquarters in more populous cities than Japan's sixty-three regional banks. ?lost of these city banks are very large. When ranked by assets (in 1979) the Dai-Ichi Kangyo Bank was the tenth largest in the world, the Fuji Bank the fourteenth, the Sumitomo Bank the sixteenth, the Mitsubishi Bank the seventeenth, the Sanwa 321 Bank the nineteenth, and the Norinchukin Bank the twentieth. - The six largest Japanese banks, therefore, rank among the top twenty in the world. All but the Norinchukin Bank also rank among the top twenty in terms of deposits. When ranked by pre-tax earnings, however, only the Industrial Bank of Japan at eighteenth place was counted among the world's top twenty. The Bank of Tokyo was established as a special foreign exchange bank with the purpose of facilitating foreign exchange transactions and export financing. 331 All the city banks and some of the regional banks, however, also are authorized to deal in foreign exchange, finance international transactions, and make international loans. Sixty-four foreign banks, including many American, also maintain subsidiaries in Japan and handle international transactions. 341 32/ - The Top 5 0 0 . The Banker, v. 1 3 0 . p. 125. 3 3 1 Adams, T.F.M. and Iwao Hoshii. A Financial History of the New Japan. ~ o k ~ o T ~ o d a n sInternational, ha 1972. p. 104-5. 34/ - Ranking Foreign Banks in Japan. Euromoney, March 1981. p. 79. The Export-Import Bank of Japan plays an important role in financing costly exports such as whole plants or major pieces of equipment. Such export financing often is vital in international bidding on major projects and is a key component in Japan's programs for export promotion. In mid-1981, the Bank reported a total 35/ of 5.02 trillion yen in loans and discounts outstanding. - E. International Organizations for Trade. United Nations (U.N.), Japan holds membership in the International Monetary Fund (IMF), Organization for Economic Cooperation and Development (OECD), and the General Agreement on Tariffs and Trade (GATT). It also participates in the international organi- zations whose focus is economic development. As a member of the IMF, Japan cooperates with other countries in moderating short-run volatility in the value of the yen and in following guidelines for maintaining a strong and viable international currency system. It is obliged to follow IMF guidelines, for example, which prohibit countries from manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members. This places a constraint on Japan's ability to protect its less efficient export industries by holding the value of the yen at an artificially low level. 361 Japan's membership in the OECD also constrains its foreign economic policy to some extent. The 0ECD1s "gentlemen's agreement" on guidelines for government-supported export credits, for example, places a floor on interest rates and other terms of loans to less developed countries which often are p. 57, 351 - The Bank of Japan. 36/ International Monetary Fund. Economic Statistics Monthly, August 1981. Annual Report 1980. p. 105. Washington, IMF, 1980. used to finance imports. z/Japan occasionally circumvents such guidelines, however, by combining economic assistance and loans. GATT provides the structure under which Japan hammers out most detailed international agreements on import and export policies. In particular, the Tokyo Round of the Multilateral Trade Negotiations resulted in the reduction of many of its tariff and non-tariff barriers to trade. =/ Japan also negotiates bilaterally with countries on economic matters of mutual interest. 37/ Eximbank and the War on Export Credit Subsidies: Should We Compete? ~ r a d e T o l i cReview, ~ v. 2, July 1981. p. 3. 381 Key MTN Agreements Open Markets in European Community, Canada, and Japan. Business America, v. 4, Feb. 23, 1981. p. 3-9. IV. FOREIGN TRADE POLICIES A. Export policies. The fundamental proposition that Japan must "export or perish" (if not perish, at least suffer a sizable decrease in standard of living) appears to underlie much of its export policymaking. It tends however, to view exports not as an end but as a means by which it can buy imports. MITI feels that since Japan is lacking in resources and has a high population density, it cannot attain a high income level without importing a variety of primary and finished goods while exporting finished products. 391 Following World War 11, Japan's re-emergence as a major exporter was not accomplished without considerable difficulty. Without raw material exports that tend to sell themselves, Japan had to crack open foreign markets that often were unfamiliar or even hostile. Developing markets abroad for products bearing the label, "Made in Japan," did not come easily. The president of the Sony Corporation, for example, after his first visit to the United States left with the impression that selling Sony products here would be impossible. 401 Japanese exports also were not always afforded the lowest tariff rates. Although Japan joined GATT in 1955, for example, fourteen nations (including the United Kingdom, France, and Australia) did not extend most-favored-nation treatment to Japanese exports until later. 411 Until the late 1960s, Japan's ability to export usually fell short of its appetite for foreign products. With no floating exchange rate to elicit 391 Japan. Ministry of International Trade and Industry. White Paper on the ~ZernationalTrade, 1979. Tokyo. Foreign Press Center, 1979. p. 97. 401 Weymouth, Lally. Meet Mr. Sony, How the Japanese Outsmart Us. ~ t l a n s cMonthly, v. 244, Nov. 1979. p. 37. 41/ - Krause and Sekiguchi, Japan and the World Economy, p. 414. The market forces to reduce any trade deficit, Japan turned to either restricting imports or promoting exports. paths. Its methods for promoting exports took two The first was to develop world-class industries whose products would initially substitute for imports and then compete in international markets. The second was to provide incentives for firms to export. During the two decades following World War 11, Japan's export strategy took the form of a combination of taxes and government assistance to build its export industries. After joining the IMF in 1964, however, it had to drop its major export incentive, the total exemption of export income from taxes, in order to comply with IMF procedures. Special tax treatment of costs for market development and export promotion were maintained, however, into the 1970s. c/ Once Japanese export industries became established, most have been able to compete without abnormal government assistance. Japan's current programs of export promotion and of export finance appear to differ little from those in other major countries. MITI's problem of the 1980s appears to be more one of restraining Japanese exports, in the face of increased protectionist pressures abroad, not promoting them. B. Import policies. By the late 1950s, Japan's international trade had regained its prewar level and its balance of payments was displaying enough strength that the rigid protection imposed during the immediate postwar recovery period became increasingly difficult to justify. The IMF, GATT, and OECD all placed strong pressure on Japan to free its commerce and inter- 42/ Ishimine, Tomotaka. Fiscal Incentives for Japan's Export and Direct ~ o r e i zInvestment. Bulletin for International Fiscal Documentation, v. 32, 1978. p. 174-5. national payments system. trade liberalization. 431 In 1960, therefore, Japan adopted a policy of gradual This liberalization has continued into the 1980s. The process of liberalization involved easing import quotas, reducing tariff rates, freeing transactions in foreign exchange, and admitting foreign capital and technology into Japanese industries. By 1964, Japan was able to achieve the level of trade liberalization required for full membership in GATT, the IMF, and the OECD. 441 Not until December 1968, however, did it make the political decision truly to begin to open its economy to international competition. .By then Japan's trade problem had shifted from one of deficits to surpluses. protected. Even with liberalization, however, its economy was still relatively 451 Under the Kennedy Round of trade negotiations completed under GATT in 1967, moreover, Japan was committed to reduce its tariff rates. Japan's average tariff rates on consumer goods, therefore, dropped from 23.6 percent in 1968 to 11.2 percent in 1972. For capital goods, the corresponding tariff rates were cut - from 15.2 to 9.3 percent over the same period. 461 During the 1970s, with Japan's strong export performance, the remaining barriers to trade in its industrial sector became increasingly difficult to justify. Under the Tokyo Round of the Multilateral Trade Negotiations concluded in 1979, Japan is scheduled to reduce import tariffs by 1987 on about 2,600 industrial products and about 200 agricultural or fishery products. N.Y., 431 - Ho, Alfred K. Japan's Trade Liberalization in the 1960s. International Arts and Sciences Press, 1973. p. 6-7. 441 Ho, Japan's Trade Liberalization, p. 16. 451 - Krause and Sekiguchi, Japan and World Economy, p. 426-7. 461 Ibid., p. 428. - In addition, White Plains, it has signed codes which call for the simplification of application procedures for import licenses; publication of standards for manufactured goods and systems of approved imports; setting of a customs valuation standard at sales price; and government procurement, including that by the Nippon Telegraph 471 and Telephone Company, based on national treatment and non-discrimination. When the Tokyo Round tariff cuts are fully implemented, Japan's average tariff rate on total industrial imports (dutiable plus duty-free, excluding should decline from 5.0 to 2.5 percent. This compares favorably with the drop from 6.1 to 4.2 percent scheduled for the United States and from 6.3 to 4.6 percent for the European Economic Community. On most industrial products, therefore, tariffs no longer can be considered a serious barrier to imports into Japan. %/ The tariff on automobiles, for example, is zero. In terms of import quotas, Japan still maintains residual quantitative restrictions on 5 manufactured goods and 22 agricultural products. This is down considerably from the 490 items in 1962, the 136 items in 1964, the 90 items in 1970, and the 31 items in 1973. The items under quota restrictions, such as oranges, beef, flour, fruit juice, shore fish, and leather, however, have proved to be highly visible and the subject of considerable complaints by exporting countries. 491 Japan certainly is not the only country which imposes import quotas; the stringency of its quotas, however, opens it to foreign criticism. The United States, for example, also maintains an import quota on beef, although it has 471 - Japan, MITI, White Paper 1979, p. 105. 481 U.S. Department of Commerce. International Trade Administration. Tokyo ~ o u n d y a r i f Reduct ions. Washington, U. S. Department of Commerce, 1980. p . 1-3. 491 Krause and Sekiguchi, Japan and World Economy, p. 426. MITI, White paper-79, p. 107. U.S. Congress, U.S.-Japan Trade Report, 1980. p. 54-63. only a minor effect on the U.S. price of beef. In Japan, however, the price of beef is so high that at times cattle have been air-freighted in for slaughter, since the quota does not apply to living animals. Unlike Japan's policy to eliminate gradually most import barriers in its industrial sector, protection of its agricultural sector remains strong. Agricultural import policy, however, is determined mainly by Japan's agricultural ministry, not MITI. This ministry has little incentive to liberalize agricultural imports, since Japan's farmers export little, are highly dependent on government price supports, and with the shortage of land, have only distant hope of competing fully with imports. As a result of these policies, in 1979, food cost 70 percent more in Tokyo than it did in New York City or Paris. =/ Although some very tough residual attitudes of protectionism remain, Japan is generally considered to be an open trading nation, except in most agricultural products. 511 Nontariff barriers to foreign products in Japan, however, still make market penetration difficult. These include an intricate and unwieldy system of distribution, the tendency of firms belonging to zaibatsu groupings to buy from affiliated companies, arbitrary product standards, complicated and time-consuming customs procedures, long time lags in regulatory approval, and the fact that most foreign firms had been shut out of the Japanese market during the years when the economy was growing rapidly. In November 1981 the United States proposed to Japan that it reduce a number of trade barriers to reduce its export surplus. These included removing 50/ Gutman, M. and A, Kruck. Prices and Earnings Around the Globe. Zuricx Union Bank of Switzerland, 1979. p. 11. 51/ U.S. Congress. House Committee on Ways and Means. Subcommittee on ~rade. United States-Japan Trade Report 1980, Committee Print, Washington, U.S. Govt. Print Off., 1980. p. 1. import tariffs on 29 commodity items, abolishing nontariff barriers which hamper imports, simplifying highly co~plicatedimport procedures, and generally relaxing the remaining import controls. 521 Japan responded by promising to move up tariff reductions on 1,600 commodities (scheduled to occur in future years) and to reduce nontariff barriers on 67 of 99 items on which complaints had been received. In 1982, Japan's import barriers, in particular nontariff barriers, became a primary target of U.S. legislation aimed at attaining reciprocity in market access between the United States and major trading partners. 531 Trade negotiations traditionally have hinged on offers of reciprocal trade concessions usually presented as a package of reductions in tariff and nontariff barriers. Such concessions, however, generally did not require equal market access on an industry by industry basis across countries. Nations with a recent history of protectionism, moreover, could offer much, because they had much to give. As currently envisaged, reciprocity would tend to de-emphasize past concessions and focus on current market access for competitive U.S. products on an industry by industry basis. It also would expand coverage to include, not only merchandise, but services and investment. the U.S. Proposed U.S. reciprocity legislation would require President to determine which foreign markets are less open than those in the United States, pursue remedies under current dispute settlement procedures, and if necessary, retaliate against the exports of the country in question. Japan has viewed the reciprocity proposals with some alarm. feel that such reciprocity would only promote protectionism. 521' Cullison, A.E. U.S. Nudges Japanese on Trade. ~ o v e m G r18, 1981. p . l A , 7A. Many in Japan 541 Journal of Commerce, 531 See, for example, S. 2071, S.2094, and H.R. 5457, 97th Congress. Jan. 54/ Cullison, A. E. p. 1A. 12, 1982. Japanese Hit US Plan for Trade. Journal of Commerce. V. LEVEL AND COMMODITY COMPOSITION OF TRADE A. The growth of Japan's exports during the 1960s and Export Levels. 1970s was phenomenal. Beginning in 1960 at $4.1 billion, Japan's merchandise exports grew at an average annual rate of 18.9 percent to reach $129.8 billion in 1980. During 1974, the growth rate in merchandise exports reached a high of 50.4 percent, although sone of this growth appears to have been merely moved forward from 1975. During the 19808, exports are likely to continue to grow, but rising protectionism in many markets has caused policymakers to reconsider the limits to a strategy requiring such rapid increases in exports. (See Table 1. ) The growth in Japan's exports can be viewed as the result of both pull and push factors. The pull represents increasing demand for Japan's products as trade barriers in major countries were reduced and and incomes grew. In addition, from the mid-1960s, procurement for the Vietnam War created a large market for Japanese goods. The countries involved in the war (or their bases) were located relatively close by. One estimate is that in 1971 the 551 Indochina conflict added more than a billion dollars to Japanese exports. Another pull factor was the price competitiveness of Japanese products, particularly during the 1960s. increased by only 4 percent. From 1960 to 1970, Japan's export price index By 1975, however, export prices had jumped 38 percent, although they declined by 12 percent by 1978. In 1979 and 1980, export prices rose 19 percent, but even at that, in 1980 they were only 51 percent higher than they were in 1960. (U.S. export prices were 189 percent higher.) This price competitiveness facilitated sales of Japanese products abroad. 561 551 Krause and Sekiguchi, Japan and World Economy, p. 419. 561 Bank of Japan. Economic Statistics Annual, 1980. ~ a ~ a n T l 9 8 1 .p. 8. Tokyo, Bank of Table 1. Year Japan's Merchandise Exports, Imports and Trade Balance, 1960-80 (In millions of U.S. dollars and percentages) Exports a/ a/ Imports - Balance Annual Growth Rate of Exports Customs clearance basis (includes shipping costs). Source: Export and import data from Bank of Japan. Economic Statistics Annual, 1977, p. 207 and 1980, p . 223. Japan Posted Trade Deficit for December, Asian Wall Street Journal Weekly, Jan 25, 1982. p. 7 During the 1970s the rising quality of Japanese products began to receive wide press. Japanese steel, ships, watches, television receivers, stereo equip- ment, automobiles, semiconductors, and many other goods gradually developed a reputation for being manufactured to high standards and under strict quality control. This also worked to increase demand for Japanese exports. The push factor for Japan's exports came as domestic markets became saturated or as the domestic economy moved into a recession. By 1964, for example virtually all households had radios and television sets (monochrome), 80 percent had bicycles, and each household had an average of 2.7 watches. 571 New markets had to be found elsewhere. During recessions, moreover, manufacturers looked abroad for sales as domestic markets contracted and as accounts receivable from domestic wholesalers became increasingly difficult to collecto As recessions ended, new export markets often were maintained. With the slower economic growth rates of the 1980s, moreover, Japanese firms are likely to be turning to export markets for expansion. B. Composition of Exports. Japan's exports comprise a variety of pro- ducts, virtually all of which are processed to some degree. and 3 . ) (See Tables 2 During the postwar period, the composition of Japan's exports shifted through a technological progression. Primary products, light manufacturers, ~ gradually eclipsed and crude items, which were predominant during the 1 9 5 0 ~were by heavy industrial goods, complex machinery and equipment, and consurner durables which required large capital investment and advanced technology to produce. his is not to say that the earlier products decreased in absolute amounts, but rather that those of advanced technology increased much more rapidly, 5 7 1 Japan. Office of the Prime Minister. Japan Statistical Yearbook, 1968. ~ o k ~ Japan o 7 Statistical Association, 1969. p. 458-59. Table 2. Japan's Exports by Commodity, Selected Years, 1960-80 (in millions of U.S. dollars)* Conmodity 1960 1970 1975 1979 1980 255.9 647.7 760.1 1,206.8 1,588.5 1,223.4 2,407.5 3,718.7 4,908.2 6,295.5 169.0 372.4 729.6 1,547.1 1,862.7 Foodstuffs Textiles Chelnicals Plastics Fertilizers Other Nonmetallic mineral manufacturers Metals Iron and steel products Fabricated metal products Nonferrous metals 568.4 3,805.3 12,517.5 18,378.9 21,318.6 (388.1) (2,843.7) (10,176.5) (14,113.4) (15,454.2) (154.7) (713.7) (1,8011) (3,127.0) (3,947.0) (25.6) (248.0) (539.9) (1,138.5) (1,917.4) Machinery and equipment 1,035.1 8,941.3 Motor vehicles (78.1) (1,337.4) Vessels (288.1) (1,409.6) Scientific and optical equipment (92.5) (498.5) Tape recorders (9.7) (450.8) Radio Receivers (144.6) (694.9) Power generating machinery (24.1) (238.3) Thermionic valves, transistors (6.4) (399.8) Office machinery (1.3) (329.4) Metalworking machinery Watches and clocks Television receivers Electric generators & equipment Textile machines Sewing machines Other Other commodities Rubber tires and tubes Toys Other Total (115.7) (7.8) (129.5) (3.5) (383.8) (2.9) (156.6) (21.7) (196.4) (48.4) (129.3) (54.7) (251.3) (2,471.3) (451.9) (1,534.2) (1,743.2) (458.2) (1,386.4) (1,733.5) (782.8) (1,282.7) (1,660.4) (435.4) (1,243.4) (1,503.4) (715.6) (871.3) (534.4) (409.6) (465.5) (246.8) (9,489.0) (21,647.6) (27,573.6) 621.7 1,909.0 (23.3) (162.2) (90.0) (137.5) (508.4) (1,609.3) 4,134.5 (545.4) (115.1) (3,474.0) 4,054.5 19,317.7 55,752.8 7,708.0 (900.6) (254.1) (6,553.3) 103,031.6 10,493.8 (1,382.1) (335.3) (8,776.4) 129,807.O "Totals may not add because of rounding. Valued on a free-on-board basis. Sources: Bank of Japan. Economic Statistics Annual, 1980. Tokyo, Bank of Japan. p. 227-30. Japan Tariff Association. The Summary Report, Trade of Japan. December 1980. p. 73-80 and March 1976, p. 67-74. Japan Ministry of Finance. Monthly Return of the Foreign Trade of Japan, January-Decenber 1960. p. 72-371. Table 3. Composition of Exports, Selected Years, 1960-80 (percentages)" Commodity 1960 1970 1975 1979 1980 4.2 1.9 1.3 1.5 1.4 100.0 100.0 100.0 100.0 Foodstuffs Textiles Chemicals Plastics Fertilizers Other Nonmetallic Mineral Manufacturers Metals Iron and Steel products Fabricated Metal products Nonferrous Metals Machinery and Equipment Motor Vehicles Vessels Scientific and Optical Equipment Tape Recorders Radio Receivers Power Generating Machinery Thermionic Valves, Transistors, etc. 25.5 (1.9) (7.1) (2.3) (0.2) (3.6) (0.6) (0.2) Office Machinery Metalworking Machinery Watches and Clocks Television Receivers Electric Generators and Equipment Textile Machines Sewing Machines Other Other Commodities Rubber Tires and Tubes Toys Other Total 100.0 *Totals may not add because of rounding. Source: See Table 2. Between 1960 and 1980, for example, foodstuffs fell from 6 to 1 percent of total exports. Textiles, likewise, fell from 30 to 5 percent, and other manufacturers dropped from 15 to 8 percent. Nonmetallic mineral manufacturers also declined from 4 percent in 1960 to 1 percent in 1980. Over the same period, exports of higher technology items, such as machinery and equipment, soared from 26 to 63 percent of total exports. chemicals increased slightly. Metals and Major exports in 1980 were motor vehicles, iron and steel products, vessels, and scientific and optical equipment. C. Import Levels. exports. During the 1960s and 1970s, imports grew in tandem with In a sense, import growth was constrained by exports, because exports generated the foreign exchange to purchase the imports. Beginning from $4.5 billion in 1960 (on a customs clearance basis), imports grew at an average annual rate of 18.8 percent to reach $140.5 billion in 1980. The growth in imports was facilitated by several major factors. The most important probably has been the overall growth in the Japanese economy and income levels. Another factor has been the price of imports. In 1973, Japan's import prices were at essentially the same level as in 1955. By 1976, however, they had nearly doubled and by 1981 had increased by another 50 percent. 581 Each increase in import prices, in particular those of essential raw materials and energy, caused ~apan's import bill to rise accordingly. In the short-term Japan had little choice but to pay higher prices for imports. Its bill for imported crude oil, for example, rose from $23 billion in 1978 to $53 billion in 1980. 591 581 Japan. Office of the Prime Minister. Annual Report on the Consumer priceyndex, 1979. Tokyo, 1980. p. 12. Bank of Japan. Economic Statistics Monthly, May 1981. p. 12. 59/ - 1980. Japan Tariff Association. p. 87. Summary Report, Trade of Japan, December, A third major factor explaining the increase in imports has been trade liberalization. Reduced tariff rates and a weakening of other barriers to trade have enabled imports to compete more fully in Japan's markets. The appreciation of the yen after 1971, moreover, caused imports to be less expensive for Japanese buyers. In the short-term, the level of imports tends to fluctuate with Japan's domestic economy. When the economy expands, imports also grow. During recessions, when growth slackens or turns negative, imports also slow down or decline. D. Composition of Imports. Japan imports a wide range of products, al- though energy, raw materials, and food have been the major items. 4 and 5.) (See Tables It experienced the largest growth, however, in imports of mineral fuels, (petroleum, coal, and other fuels, mainly because of price increases), which rose from 17 percent of all imports in 1960 to 50 percent in 1980. The only other major category of imports to gain in terms of the percentage of total imports was the miscellaneous category, which rose from 7 percent in 1960 to 11 percent in 1980. All other categories of imports declined as a percent of total imports, although in absolute terms, they grew quite rapidly. Over the 1960 to 1980 period, raw materials declined from 17 to 9 percent of total imports. Metal ores and scrap, likewise, declined from 15 to 6 percent. The most precipitous decline, however, was in textile materials (mainly cotton and wool), which fell from 17 percent to 2 percent of total imports. This one statistic tells much about the diversification of Japan's economy away from textiles and the growing popularity of locally produced synthetic fibers. Food imports rose from 12 percent of total imports in 1960 to 15 percent in 1975 only to fall to 10 percent by 1980. Foodstuff imports include animal feeds, such as corn and grains, but not soy beans. Similar declines occurred in imports of chemicals and in machinery and equipment. Table 4. Japa2's Imports by Commodity, Selected Years, 1960-80 (in millions of United States dollars)* Commodity 1960 1970 1975 1979 1980 -- - . P Foodstuff Corn Wheat Sugar Other Textile Materials Raw cotton Wool Other Metal Ores and Scrap 673.2 Iron ore and ferrous scrap (443.4) Nonferrous metal ores (155.6) (74.2) Other 2,696.3 4,416.6 (1,549.3) (2,568.4) (1,064.1) (1,763.2) (82.9) (85.0) Raw Materials Wood Soy beans Natural rubber 0ther 773.5 (170.3) (107.4) (125.8) (370.0) 3,017.7 5,718.7 (1,572.1) (2,620.6) (365.8) (940.3) (115.3) (155.5) (964.5) (2,002.3) flineral Fuels Petroleum and products Coal Other 741.6 3,905.5 25,640.9 (600.4) (2,785.5)(20,995.2) (141.2) (1,010.1) (3,454.4) (0.0) (109.9) (1,191.3) Chemicals 265.2 1,000.5 2,057.3 Machinery and Equipment Precision Instruments Office machines Aircraft 0 ther 434.9 (26.8) (52.9) (29.2) (326.0) 2,297.7 4,286.0 (455.2) (165.5) (322.4) (504.9) (294.4) (368.9) (1,560.4) (2,957.0) Miscellaneous commodities Nonferrous metals Textiles Iron and steel products Other 293.5 (118.4) (19.0) (87.6) (68.5) 2,426.7 5,404.2 (944.8) (1,284.5) (314.5) (1,310.4) (276.1) (188.5) (891.3) (2,620.8) Total 4,491.1 18,881.2 57,863.1 *Totals may not add because of rounding. Valued on a customs-clearance basis. Source: Based on information from Bank of Japan, Econonic Statistics Annual, 1980, Tokyo, p. 231-34. Japan, Ministry of Finance, Monthly Return of the Foreign Trade of Japan, January-December, 1960, Tokyo, p. 72-371. Japan Tariff Association. The Summary Report, Trade of Japan, December 1980. Tokyo, p. 82-89 and March 1976, p. 76-83. Table 5. Composition of Imports, Selected Years, 1960-1980 (percentages)* 1960 Commodity Foodstuffs Wheat Corn Sugar Other Textile Materials Raw Cotton Wool 'Other Metal Ores and Scrap Iron Ore and Ferrous Scrap Nonferrous Metal Ores Other Raw Materials Soy Beans Wood Natural Rubber Other Mineral Fuels Petroleum and Products Coal Other Chemicals Machinery and Equipment Office Machines Precision Instruments Aircraft Other Miscellaneous Commodities Nonferrous Metals Iron and Steel Products Textiles Others Total - - *Totals may not add because of rounding. Source: See table 4. 1970 1975 1979 1980 In terms of in ividual commodities, major imports were petroleum and products, wood, coal, iron ore, and other ores. The Japanese government's strategy of importing raw materials and exporting finished products in order to maintain its high standard of living is amply revealed in this list of Japan's major imports. The predominance of energy and raw materials in Japan's imports implies that its strategy of import-substituting industrialization has proceeded nearly as far as it can go. The products that Japan now imports generally have no domestic substitute. Raw material, energy, and food imports, moreover, are expected to increase as the economy grows. In order to balance its external trade accounts, therefore, Japan is being forced to turn to higher value-added exports and to manufacturing processes that conserve on raw material or energy inputs. E. Balance of Merchandise Trade. Between 1960 and 1964, Japan incurred annual deficits (on a customs clearance basis for imports) ranging from $0.4 to $1.5 billion. By 1965, however, this pattern began to shift. 1969, the balance alternated between deficit and surplus. From 1965 to By 1969, with a positive balance of $966 million, Japan's trade position was widely regarded as having achieved a position of that of a surplus trading nation. 60/ By 1972, the trade surplus had ballooned to $5.1 billion. (See Table 1) The rapid rise in the prices of petroleum and raw materials during 1973, however, plunged Japan's balance of trade into deficit. reached $6.6 billion. In 1974, the deficit Japan's determined exporters, however, soon reversed the trend toward deficit, and by 1976 the balance again registered a surplus. This surplus grew to a record $18.2 million in 1978. 60/ Witaker, Donald P., et. al. Area Handbook for Japan. 3rd ed. Washington, U.S. Z v t . Print. Off., 1974. p. 500. Note: Custons clearance figures tend to overstate the size of merchandise trade deficits. CRS -3 9 The second o i l c r i s i s i n 1979, however, a g a i n pushed t h e b a l a n c e of trade into d e f i c i t . With c o n s e c u t i v e d e f i c i t s of $7.6 and $10.7 b i l l i o n , i n 1979 and 1980, r e s p e c t i v e l y , t h e c o u n t r y appeared t o b e heading f o r a long s t r u g g l e with a d v e r s e e x t e r n a l b a l a n c e s . By 1981, however, a world g l u t o f petroleum s o £tened p r i c e s and, c o n c u r r e n t l y , because o f c o n s e r v a t i o n and a slowing economy, consumption demand weakened. ~ a p a ns' r a p i d e x p o r t growth, - moreover, helped r e t u r n i t s t r a d e b a l a n c e t o s u r p l u s . 611 J a p a n ' s e x p e r i e n c e with i t s b a l a n c e of t r a d e over t h e p a s t two d e c a d e s i l l u s t r a t e s a fundamental weakness and s t r e n g t h t h a t l i k e l y w i l l p e r s i s t . The c o u n t r y i s h i g h l y v u l n e r a b l e t o i n c r e a s e s i n t h e p r i c e o f petroleum and raw m a t e r i a l s . Without c l o s e s u b s t i t u t e s , when p r i c e s r i s e , i t h a s l i t t l e c h o i c e but t o pay them, which c a u s e s i t s import b i l l t o r i s e d r a m a t i c a l l y . J a p a n ' s s t r e n g t h , however, i s t h a t i t s e x p o r t s e c t o r i s a b l e t o respond r a p i d l y t o match i n c r e a s e s i n i m p o r t s . This i s p a r t l y a t t r i b u t a b l e t o t h e system of f l o a t i n g exchange r a t e s which a u t o m a t i c a l l y works t o b r i n g e x t e r n a l accounts i n t o balance. Countries with d e f i c i t s i n t h e i r balance of t r a d e ( i f n o t o f f s e t by s u r p l u s e s e l s e w h e r e ) , e x p e r i e n c e a d e p r e c i a t i n g c u r r e n c y which t e n d s t o reduce imports and i n c r e a s e e x p o r t s . I n J a p a n ' s c a s e , however, t h e a b i l i t y o f e x p o r t e r s t o expand s a l e s abroad w h i l e commanding premium p r i c e s f o r t h e i r p r o d u c t s seems r e m a r k a b l e . Following t h e 1973 o i l c r i s i s , f o r example, when J a p a n ' s import b i l l r o s e by some $39 b i l l i o n , i t s e x p o r t i n d u s t r i e s i n c r e a s e d t h e i r s a l e s by $27 b i l l i o n . As a n o t e o f c a u t i o n , t h e customs c l e a r a n c e t r a d e s t a t i s t i c s t h a t Japan p r e f e r s t o c i t e tend t o o v e r s t a t e t h e amount o f t h e t r a d e d e f i c i t . (~uro~ean 611 S a t o , A k i h i r o . Japan F e a r s Trade S u r p l u s W i l l Spark Renewed ~ r i c t z n . Asian Wall S t r e e t J o u r n a l , August 3 1 , 1981. p . 1, 2 0 . nations and even the United States at times also use these figures.) These data include sliipping costs, even though in balance of payments accounting, such costs are picked up as imports of services. If shipping costs are excluded from imports, Japan has not incurred a merchandise trade deficit since 1963, even during the oil crises of 1973 and 1979. Table 6. Year (p. Japan's Exports, Imports, Trade Balance, Net Service Exports, Net Transfers, and Current Account Balance, 1961-80 (millions of U.S. dollars) Exports a_/ (See Table 6.) Imports a/ A Imports are valued f.0.b. Trade Balance Services Net Current Transfers Account Balance (free on board). Source: Bank of Japan. Balance of Payments Monthly, March 1970 1-21, May 1973 (p. 1-2), March 1974 (p. 1-2), Feb. 1981 (p. 1-2). VI. BALANCE ON CURRENT ACCOUNT The balance on current account, which includes invisibles as well as merchandise, is generally accepted as a more comprehensive indicator of the trade performance of a nation than the merchandise trade balance. It should be noted that invisibles, such as services, also generate employment or income. A. Services. Since 1961, Japan's net service trade has been in deficit. Trade in services includes transportation (freight and passenger fares), insurance, travel expenditures, and income from investments. In 1980, a service trade deficit of $11.3 million was formed from service exports of $31.5 billion and imports of $42.8 billion. This deficit can be broken down into a $4.3 billion deficit in transportation, a $3.9 billion deficit in travel expenditures, a $0.8 billion surplus in investment income, and a $3.9 billion deficit in other services. g/ In transportation, the largest deficits occur in freight, charter fees, and port fees. In travel expenses, the deficit reflects the larger number of Japanese businessmen and tourists who travel abroad than foreigners who travel in Japan. In investment income, the small surplus relects the greater amount of Japanese investment overseas compared with foreign investment in Japan. In other services, a surplus existed in military transactions, but there were deficits in management fees, patent royalties, and other fees. Adding net exports of services and net unilateral transfers (mostly remittances) to the merchandise trade balance (free-on-board) gives the balance on current account. 62/ - In this balance, Japan began to register surpluses from Bank of Japan. Balance of Payments Monthly, Feb. 1981. p. 23-46. 1965 and has generally kept in the black with the exception of 1967 and the years following the two oil crises of 1973 and 1979. In 1979, Japan's current account balance registered a deficit of $8.7 billion, followed by another deficit of $10.7 billion in 1980. In 1981, the balance turned to surplus again. The current account balance exerts a large influence on the value of the yen in foreign exchange markets. of foreign currency to Japan. It represents the major demand for and supply The current account, however, does not reflect three other types of international transactions: long- and short-term capital flows and official settlements (payments by central governments). B. Capital Flows. Capital movements consist of the international short- and long-term loans governments or private entities make with or receive from each other. A short-term capital credit for Japan, for example, would occur when an American buys a Japanese bond. A debit would arise when a Japanese opens a British savings account. A long-term capital credit would arise when an American company establishes a subsidiary in Japan, while a debit would occur when a Japanese company builds a plant abroad. Following World War 11, unlike Japan's rapid reentry into the international trading world, its return to world capital markets was slow and deliberate. Even before the war, however, Japan did not participate in world capital markets to the same extent as the United States or European countries. In recent years, however, capital flows have become more important in the balance of payments and their impact on the evolution of Japan's economy. 631 As might be expected of a country recovering from a major defeat, Japan remained a net debtor nation until the mid-1960s. 631 - By 1967, however, total Japanese Krause and Sekiguchi, Japan and World Economy, p. 440. investments overseas began to exceed foreign investments in Japan, which changed it from a net debtor to a net creditor nation. Japan's major form of borrowing came in loans designed to assist domestic industrial development, but gradually shifted more toward international sales of stocks. 641 As Japan shifted from a net debtor to net creditor nation, earnings on the foreign investment account also shifted from deficit to surpus. (These earnings are counted as services in the current account.) Net income from investments turned positive at the end of 1971 and reached $854 million in 1980. 651 From 1945 to around 1965, when Japan perceived that it was being threatened with balance-of-payments deficits, rigorous controls were placed on outflows of capital. Long-term capital inflows also were controlled, partly as a means of limiting foreign involvement in Japan's economy but also to prevent a burdensome repayment problem from developing. In principle, direct investment by foreign firms for the purpose of establishing new businesses was forbidden. The purchase of shares of existing firms also was restricted to about 5 percent or less for one investor. 661 In order to tap sources of foreign technology, licensing agreements with foreign firms were encouraged (rather than allowing direct investments). The government allowed limited short-term financing arrangements through foreign loans and debentures, but these tended to be subject to considerable government control. 641 - 671 Bank of Japan. Balance of Payments Monthly, February 1981. p. 47ff. 651 Ibid., p. 23-36. 661 Japan External Trade Organization. Operating a Business in Japan. T O ~ ~ O T J E T R Oc., 1974. p. 3-4. 671 Whitaker, Area Handbook, p . 522. Krause and Sekiguchi, Japan and World Economy, p. 440-41. By 1967, however, the Japanese government began to lift its restrictions on international capital transactions. By 1973, all industries, except for five, in principle, were opened for foreign firms to establish totally owned subsidiaries. Seventeen additional industries, however, were restricted to either 50 percent ownership or a case-by-case ruling on foreign ownership. The 1973 liberalization also removed limitations on the purchase of a controlling share of existing firms by foreign enterprises, provided the firm whose shares were being purchased gave its consent. On December 1, 1980, Japan's new Foreign Exchange and Foreign Trade Control Law went into effect. Under this law, all external economic transactions are free, unless specified otherwise. Restrictions can be imposed only as exceptional actions to meet an emergency, such as unusual instability in the foreign exchange markets or an abnormally large movement in funds. This represented a complete reversal from the previous legal system where all economic transactions were controlled unless specified otherwise. 681 Under the new law, the Japanese government still can specifically invoke any of several criteria to declare a particular transaction illegal. The govern- ment, for example, retains the power to limit foreign ownership of companies whose takeover would "cause a grave impact upon the country's economy and security." As of 1981, this clause had been used to justify limiting foreign ownership to between 25 and 50 percent in 11 companies, mostly in energy and high technology. 68/ Matsuda, Osamu. New Exchange Law Goes Into Effect. ~ o u r n x ,v. 18, Nov. 15, 1980. p. 11-1. 691 Japan Economic 69/ Kanabayashi, Masayoshi. Japan Relaxes Investment Rules for Foreigners. Wall Street Journal, Dec. 1, 1980. p. 31. ) As international capital and foreign exchange transactions have been gradually liberalized, both imports and exports of capital have increased. From 1964, when the balance of long-term capital flows turned negative, to 1979, the balance has continued to grow in a negative direction. Japanese investments overseas were rising faster than foreign investments in Japan. In 1978 and 1979, the negative balance exceeded $12 billion. In 1980, however, Japanese investments abroad dropped by $4 billon, while foreign investments in Japan soared by $10 billion over their 1979 levels. As a result, in 1980, the long-term capital balance registered a positive $2 billion. (See Table 7.) Over the 1951-80 period, Japan approved a total of 23,948 cases of direct investment overseas for a value of $36.5 billion. Of this total, manufacturing accounted for 35 percent, mining for 19 percent, and commerce for 15 percent. By region, 27 percent went to both North America and Asia, 17 percent to Latin America, 13 percent to Europe, 11 percent to Oceania and Africa, and 6 percent to the Middle East. 701 As of the end of 1980, Japanese held assets from foreign direct investments in the United States of $4.2 billion (53% in trade, 20% in manufacturing, and the rest in petroleum, insurance and other activities). Americans held assets in Japan worth $6.3 billion (48% in manufacturing, 25% in petroleum, 18% in trade, and the rest in banking, finance, and other activities). 711 701 - Keizai Koho Center, Japan 1981, p. 42-43. 71/ Whichard, Obie G. U.S. Direct Investment Abroad in 1980. Survey of Current Business, v. 61, Aug. 1981. p. 32. Chung, William K. and Gregory C. Fouch. Foreign Direct Investment in the United States in 1980. Survey of Current Business, v. 61, Bug. 1981. p. 41. Table 7 . Year J a p a n ' s Balance o f Payments, C a p i t a l Flows, O f f i c i a l S e t t l e m e n t s , and F o r e i g n Exchange R e s e r v e s , 1961-1980 ( m i l l i o n s o f U.S. d o l l a r s ) Long-term Capi t a 1 Flows Short-term Capi t a 1 Flows Errors and Omissions Balance of Payments a/ Gold and F o r e i g n Exchange R e s e r v e s (end o f y e a r ) Change Level C u r r e n t Account Balance + O f f i c i a l S e t t l e m e n t s = B a l a n c e of Payments Flows + E r r o r s and Omissions. E r r o r s c a n b e t r a c e d t o r e p o r t i n g m i s t a k e s , u n r e por t e d t r a n s a c t i o n s , and l e a d s o r l a g s i n payments when exchange r a t e a r e fluctuating. b/ - I n c l u d e s g o l d t r a n s c h e ( t r a n s f e r of r e s e r v e s ) o f $180 m i l l i o n . c/ - I n c l u d e s $122 m i l l i o n i n S p e c i a l Drawing R i g h t s . d/ - I n c l u c e s $128 m i l l i o n i n SDR's. e/ - I n c l u d e s $160 m i l l i o n i n SDR's. S o u r c e s : Bank o f J a p a n . Balance o f Payments Monthly. J a n . 1968 ( P . 1 - 2 ) , O c t . 1976 ( p . 1 - 2 ) , Feb. 1 9 8 1 , ( p . 1-21. Economic S t a t i s t i c s Annual 1980. p . 243. CRS-4 7 I n terms of d i r e c t o v e r s e a s i n v e s t m e n t s o u t s t a n d i n g , J a p a n e s e b u s i n e s s e s a r e s t i l l f a r behind t h o s e i n t h e United S t a t e s , t h e United Kingdom, o r West Germany. The t r e n d and momentum, however, a r e i n ~ a ~ a n f'asv o r . The J a p a n e s e a r e on a f a s t t r a c k , and t h e i r outward expansion i s l i k e l y t o a c c e l e r a t e . Over t h e 1978-80 p e r i o d , Japanese d i r e c t o v e r s e a s i n v e s t m e n t s each y e a r averaged $4.6 billion--more t h a n t h e cumulative amount i n 1970. 721 The m o t i v a t i o n behind t h e Japanese o v e r s e a s investment d r i v e stems from s e v e r a l sources. F i r s t i s t h e r i s i n g c o s t o f l a n d and l a b o r i n J a p a n . This makes i n v e s t m e n t s i n c o u n t r i e s , p a r t i c u l a r l y i n A s i a , w i t h lower wage and overhead c o s t s q u i t e a t t r a c t i v e . handle export s a l e s . Second i s t h e need f o r investment i n f a c i l i t i e s t o Third a r e J a p a n ' s t i g h t e n i n g p o l l u t i o n c o n t r o l r e q u i r e m e n t s which have encouraged a move o v e r s e a s b y c e r t a i n k i n d s o f s m e l t i n g and p r o c e s s i n g plants. Fourth i s t h e v o r a c i o u s Japanese a p p e t i t e f o r raw m a t e r i a l s , e n e r g y , and food. Many of J a p a n ' s i n v e s t m e n t s a r e i n m i n i n g , energy f a c i l i t i e s , o r food p r o d u c t i o n . The f i f t h motive a r i s e s from b a r r i e r s t o J a p a n e s e e x p o r t s i n v a r i o u s markets. R e s t r i c t i o n s on automotive e x p o r t s t o t h e United Kingdom, A u s t r a l i a , and many o t h e r c o u n t r i e s , f o r example, have f o r c e d J a p a n e s e automakers t o e s t a b l i s h assembly p l a n t s t h e r e . receivers. The same h a s been t r u e f o r p l a n t s m a n u f a c t u r i n g t e l e v i s i o n Firms e x p o r t i n g from developing c o u n t r i e s , moreover, even i f owned by J a p a n e s e companies, u s u a l l y r e c e i v e p r e f e r e n t i a l t a r i f f t r e a t m e n t i n developed c o u n t r y markets (under t h e Generalized System of P r e f e r e n c e s ) . And s i x t h , l o c a l governments o f t e n provide f i n a n c i a l i n c e n t i v e s i n t h e form o f reduced t a x e s o r 721 J a p a n e s e M u l t i n a t i o n a l s , Covering t h e World w i t h I n v e s t m e n t . ~ u s i n z sWeek, June 1 6 , 1980. p. 92-93. subsidies for firms locating in their jurisdiction, 731 Flows into Japan of short-term capital have generally exceeded outflows. During the 1960s, the annual balance averaged $137 million. During the 1970s it averaged $1,155 million and reached $3,071 million in 1980. The bulk of short-term capital is in trade credits. 741 Japanese bond markets have also been developing as a source of international financing. In 1970, the first such yen-denominated bond issue was floated by the Asian Development Bank. This was followed by similar issues by the World Bank and syndicates of Japanese banks. E/ The addition of capital flows (plus errors and omissions) to the balance on current account provides what is termed the balance of payments or official settlements. This represents final government action to balance inflow and outflow transactions in the international sector. Sincee1961, Japan's balance of payments has generally been in surplus, with the notable exception of the years following the oil crises in 1973 and 1979. Most of the deficit or surplus in the balance of payments is accommodated by changes in government holdings of gold and foreign exchange. Since Japan has usually enjoyed a surplus in this account, its official reserves of gold and foreign exchange have increased during the past two decades. Starting from $1.49 billion in 1961, its official reserves rose to $15.23 billion by 1971, peaked at $33.02 billion in 1978, and dropped to $25.23 billion in 1980. 731 Japan, MITI, White Paper on International Trade 1981, p. 127-29. 74/ - Bank of Japan. 75/ - Whitaker, Area Handbook, p. 525. Balance of Paynents Monthly, Feb. 1981. p. 59. VII. VALUE OF THE YEN The relative value of the yen is determined in foreign exchange markets by the forces of demand and supply. The demand for yen arises from the demand for what the yen will buy by foreigners in Japan--either goods and services or investments. The supply of yen arises from the desire of yen holders to exchange their yen for dollars, marks, or other foreign exchange in order to purchase something abroad. An excess of Japanese exports (excess demand for yen), therefore, will tend to increase the value of the yen. An import surplus (excess supply of yen), likewise, will tend to decrease the value of the yen. Capital flows enter foreign exchange markets in the same manner as imports and exports. Markets do not differentiate between someone buying foreign ex- change for a capital or merchandise transaction. A surplus in a country's current account, therefore, can be offset by a deficit in capital flows. Likewise, a current account surplus can be exacerabated by a similar surplus in capital flows. Governments also intervene to influence either the supply of or demand for a currency. If the yen is either depreciating or appreciating more than market conditions seem to warrant, the Japanese government often will intervene by either buying or selling yen on the foreign exchange market. Prior to the 1970s, Japan also maintained control over foreign exchange transactions in order to reduce the demand for foreign exchange. Its import restrictions also worked in a similar manner to reduce demand for foreign currencies and prop up the value of the yen. In 1949, the value of the yen was set at 360 per dollar as part of an American plan to stabilize prices in the Japanese economy. Japan maintained that exchange rate until 1971, when former U.S. President Nixon abandoned dollar convertibility to gold, imposed a 10 percent surcharge on imports, and set in motion a series of changes that eventually led to floating exchange rates. 76/ By that time the yen had become undervalued, Japanese exports were costing too little in international markets and imports from abroad were costing Japanese too much to buy. This was reflected in Japan's current account balance which had risen from deficits in the early 1960s to a $5.8 billion surplus in 1971. The time was ripe for the "Nixon dollar shock." Following the U.S. measures to devalue the dollar, the Japanese government attempted to keep the yen from appreciating too rapidly by buying dollars and selling yen on the foreign exchange market. Over 1971 and 1972, the Bank of Japan bought nearly $14 billion worth of foreign exchange, which was added to its official reserves. While this reduced the exchange losses by Japan's multinational corporations, Japan paid dearly for the resulting increase in its domestic money supply by the virulent inflation it suffered in 1973 and - 1974. 77/ By the end of 1971, the yen had appreciated from 360 to 314 yen per dollar. By the end of 1972, it was up further to 302 yen per dollar and peaked temporarily at 265 yen per dollar in 1973 before the impact of the oil crisis began to be felt. Over the ensuing recession, the yen weakened to an average of 297 yen per dollar in 1976, but regained strength over 1978 to register an average of 76/ Nanto, U.S. Role, p. 247-58. A 77/ Hayden, Eric W. Internationalizing Japan's Financial System. An occasional Paper of the Northeast Asia-United States Forum on International Policy, Stanford University. Dec. 1980. p. v. Organisation for Economic Co-operation and Development. OECD Economic Surveys, Japan. Paris, OECD, 1972. p. 31-35. 219 yen per dollar in 1979. On occasion, short-term fluctuations took the value to about 180 yen per dollar. 781 With the large increase in oil prices in 1979 and ensuing deficits in Japan's trade and current account balances, the yen weakened to 227 yen per dollar by 1980. Considerable intervention by the Japanese government, which saw its official reserves of foreign exchange drop from $33 billion in 1978 to $20 billion in 1979, In plus large inflows of capital, however, kept the yen surprisingly strong. 1981, with high U.S. interest rates and a strong dollar, the yen depreciated slightly against its 1980 level. Table 8. Yen-Dollar Exchange Rate, 1970-81 Year: 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Rate: 360 351 303 271 291 292 297 269 211 219 227 221 Source: International Monetary Fund, International Financial Statistics, Dec. 1975, p. 220-21 and Feb. 1982, p. 225-26. Annual averages of the yenldollar exchange rate mask sizable short-term fluctuations. In 1979, for example, although the average exchange rate was 219 yen per dollar, monthly averages ranged from 198 to 249. These large swings in relative exchange rates can negate gains in tariff concessions and change relative costs of production faster than investment in new plant and equipment can occur in response to the changes. An industry can enjoy a comfortable international cost advantage one year and similar cost disadvantage the next-not because of underlying productivity changes but because of fluctuations in 781 issues. International Monetary Fund, International Financial Statistics, various t h e exchange r a t e . I n s t a b i l i t y i n t h e exchange r a t e , r a t h e r t h a n t h e r a t e ' s being c o n s i d e r e d t o b e t o o h i g h o r t o o low, a p p e a r s t o i n v i t e government i n t e r v e n t i o n i n t o t h e f o r e i g n exchange market. With J a p a n ' s new Foreign Exchange Law, which came i n t o e f f e c t December 1, 1980, t h e government h a s even l e s s c o n t r o l o v e r t h e exchange r a t e t h a n i t did i n the past. T r a d e r s and i n v e s t o r s d e a l i n g w i t h Japan, t h e r e f o r e , a r e being s u b j e c t t o c o n s i d e r a b l y more exchange r i s k t h a n i n p r e v i o u s p e r i o d s . DIRECTION OF TRADE VIII. Japan t r a d e s with n e a r l y e v e r y country i n t h e world. S i n c e t h e mid-1950s, however, i t s e x p o r t m a r k e t s have been s h i f t i n g from d e v e l o p i n g t o d e v e l o p e d c o u n t r i e s . ( s e e Table 9 . ) I n t e r m s o f m e r c h a n d i s e e x p o r t s , i n 1980, 4 7 . 1 p e r c e n t went t o developed c o u n t r i e s w i t h h i g h income l e v e l s . Another 4 5 . 8 p e r c e n t found m a r k e t s i n t h e d e v e l o p i n g c o u n t r i e s , and 7 . 1 p e r c e n t were s o l d t o Communist countries. The l a r g e s t customer was t h e U n i t e d S t a t e s (24.2 p e r c e n t o f e x p o r t s ) , followed by West Germany, South Korea, Taiwan, t h e P e o p l e ' s R e p u b l i c o f C h i n a , S a u d i a A r a b i a , and Hong Kong a l l a t t h e much l o w e r l e v e l o f between 3 . 7 and 791 4.4 percent each. The d i s t r i b u t i o n o f c o u n t r i e s from which Japan buys goods r e f l e c t s i t s n e e d s t o import f o o d , e n e r g y , and raw m a t e r i a l s . I n 1980, developing c o u n t r i e s s u p p l i e d 6 0 . 3 p e r c e n t of J a p a n ' s i m p o r t s w i t h about h a l f coming from t h e M i d d l e E a s t . (See Table 10.) The d e v e l o p e d c o u n t r i e s p r o v i d e d 3 5 . 0 p e r c e n t of J a p a n ' s i m p o r t s , and t h e communist c o u n t r i e s t h e r e m a i n i n g 4 . 7 p e r c e n t . I n terms o f s p e c i f i c c o u n t r i e s , t h e U n i t e d S t a t e s w i t h 1 7 . 4 p e r c e n t and S a u d i a A r a b i a w i t h 1 3 . 9 p e r c e n t a r e t h e l e a d i n g e x p o r t e r s t o J a p a n . They a r e f o l l o w e d by I n d o n e s i a , t h e U n i t e d Arab E m i r a t e s , A u s t r a l i a , Canada, I r a q , C h i n a , I r a n , M a l a y s i a , and Kuwait . The s t r u c t u r e o f J a p a n ' s i n t e r n a t i o n a l t r a d e n a t u r a l l y g i v e s r i s e t o i n t e r national trade friction. J a p a n ' s problem i s t h a t t h e c o u n t r y ' s economic w e l l - b e i n g r e s t s p a r t l y o n i t s a b i l i t y t o import f o o d , e n e r g y , and raw m a t e r i a l s and e x p o r t f i n i s h e d p r o d u c t s . I n most c a s e s , t h e c o u n t r i e s which p r o v i d e Japan w i t h i m p o r t s o f e s s e n t i a l commodities d o n o t h a v e t h e p o p u l a t i o n , 791 - K e i z a i Koho, J a p a n 1 9 8 1 , p . 32-33. Table 9. J a p a n ' s E x p o r t s by Country Groups and S e l e c t e d C o u n t r i e s , S e l e c t e d Y e a r s , 1961-80 ( i n m i l l i o n s o f U.S. d o l l a r s ) - C o u n t r y Groups and S e l e c t e d C o u n t r i e s 1961 1965 1970 1975 1979 1980 Developed C o u n t r i e s o f which: United S t a t e s Canada West Germany United Kingdom Australia Developing Areas Noncommunist A s i a o f which: Rep. o f Korea Taiwan Hong Kong Thailand Philippines Indonesia India Middle E a s t L a t i n America A f r i c a ( E x c l u d i n g South A f r i c a ) Other Coxmuni s t C o u n t r i e s o f which: S o v i e t Union P e o p l e ' s Rep. o f China Total Exports S o u r c e : Bank o f J a p a n . 1981, p. 15-16. Balance o f Payments Monthly, J a n . 1968, p . 15-16, Feb. T a b l e 10. J a p a n ' s I m p o r t s by Country Group and S e l e c t e d C o u n t r i e s , S e l e c t e d Y e a r s , 1961-1980. (Customs C l e a r a n c e B a s i s ) ( i n m i l l i o n s of U.S. d o l l a r s ) Country Group and S e l e c t e d C o u n t r i e s 1961 1965 1970 197 5 1979 1980 Developed C o u n t r i e s of which: United S t a t e s Canada West Germany U n i t e d Kingdom Australia Developing A r e a s Noncommunist Asia of which: Rep. of Korea Taiwan Thailand Philippines Indonesia India Malaysia Middle E a s t L a t i n America A f r i c a ( E x c l u d i n g South A f r i c a ) Other Communist C o u n t r i e s of which: S o v i e t Union P e o p l e ' s Rep. of China T o t a l Imports Source: Bank of J a p a n . 1981, p., 19-20. Balance of Payments Elonthly, J a n . 1968, p. 19-20, Feb. income levels, or trading ties with Japan to buy sufficient finished products to bring bilateral trade into balance. (See Table 11.) The oil exporting countries, for example, continue to run large trade surpluses with Japan. In order to offset its deficits in trade with those countries, Japan must run trade surpluses with other countries. In 1980, for example, Japan's $30 billion bilateral merchandise trade deficit with the Middle East was met partly by surpluses of $7.0 billion with the United States, $5.2 billion with South Korea and Taiwan, and $4.0 billion with the countries of Western Europe. While the nations experiencing bilateral trade deficits with Japan can sympathige with Japan's dilemma, the deficits often tend to become politically difficult to tolerate. Japan currently is walking an uneasy tightrope in trying to balance its need to run bilateral surpluses with countries like the United States and its desire not to incite protectionist reactions. Table 11. Japan's Bilateral Trade Balances by Country Group and Selected Countries, Selected Years, 1961-1980 (in millions of U.S. dollars) Country Group and Selected Countries 1961 Developed Countries of which: United States Canada West Germany United Kingdom Australia Developing Areas Noncommunist Asia of which: Rep. of Korea Taiwan Thailand Philippines Indonesia India Middle East Latin America Af rica (Excluding South ~frica) Other Communist Countries of which: Soviet Union People's Rep. of China Total Balance 1965 1970 112 10 -1,029 -149 -1 10 -22 -352 113 -143 -8 42 -239 380 -366 -6 7 85 -919 137 2 16 263 409 104 28 56 -28 69 -36 789 139 61 88 -14 56 20 1,889 589 44 9 259 -79 -321 -287 1,957 940 1,010 235 -9 5 1,580 -187 -6 7 2,888 1,891 545 39 -6,670 -273 -320 -136 198 -14 -756 -219 411 9 - -1,703 -186 3 12 -49 -10,402 2,241 2,976 -101 -18,643 2,038 1,518 -191 -30,142 3,217 2,747 -234 -114 -49 158 1,677 1,991 2,486 -1,600 -80 -14 -1,574 -72 20 -140 3 15 283 437 1975 -460 1979 1980 5,715 12,052 -459 -1,348 522 663 -2,417 5,972 -2,367 1,682 1,416 -3,691 6,959 -2,287 3,255 1,828 -3,593 -3,329 15,345 456 728 -2,110 550 744 -7,640 -25,253 -84 1 2,372 2,853 797 -268 -9,709 -99 918 755 -10,721 Source: Based on data in Bank of Japan, Balance of Payments Monthly, Jan. 1968, p. 15-20, and Feb. 1981, p. 15-20. 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