japan's trade policy

JBPAN'S TRADE POLICY 1. Zntroductwn

A country's trade policy, I believe, is synonymous with its economic development policies, and does not merely aim at direct trade promotion. This is particularly true for the Japanese economy which comprises a large population in small islands with scarce natural resources.l The Japanese have to work hard in manufacturing indus- t r ies to attain economic growth and to raise their standard of living by depending heavily upon foreign trade. Since the natural resource endowment of Japan is poor and limited, her industrial development critically depends upon her ability to import cheaper industrial raw materials and foodstuffs. To pay for these imported raw materials and foodsMs, Japan has to expand her exports of manufactured goods. In other words, the expansion of foreign trade is indispensable for the economic growth of Japan. These are the overall characteristics of the Japanese economy and they are closely akin to the characteristics of the British economy.

Our growth rate of industrial production as well as national income is closely and critically correlated With the expansion of trade. Success or failure of our export expansion programme pro- vides the real impetus or the real bottleneck in our economic development programme. How to maintain export expansion in the rapidly changing pattern of world trade is certainly the crux of our trade policy. Export composition by commodity as well as by area has been continuously transformed so as to meet rapid and enormous shifts of world import demands. New export items have been created one after the other and their competitiveness in terms of quality as well as price has been strengthened in the world market. This has been achieved by tremendous transformation, diversification and modernization of the Japanese economy within a short period. In this sense, there is no trade policy other than the development policies of the entire economy. What was, and what will be in the future, the secret of the fairly successful trade performance and rapid growth of the Japanese economy t These will be explored in the present paper, especially with respect to the post-war development.

In order to catch up with the Western standard of industrialization and income level and to be an equal partner of advanced countries, the Japanese economy must maintain rapid growth and further transformation. Our comparative advantage is experiencing significant changes mainly due to the approach of full emplopent and a rapid increase of the wage level. Tremendous structural change of our economy is needed. Our foreign trade, too, has to be reorganized.

1 Japan is a mountainous country of many small islands with an area of 142,736 square miles, which is less than onetwentieth that of Australia This small country has a population of 95 m. Tokyo alone absorbs 11 m. people, which is roughly the same as the total Australian population.

54

MARCH, 1965 JAPAN’S TRADE w u c y 55

How and in what commodities and with which countries should our trade be expanded? Different approaches may be needed for ou r trade with advanced industrial and underdeveloped countries. Also some regional trade arrangements might be desirable for mutual prosperity. This is the second area to be examined in this paper.

The Japanese economy encountered balance of payments d B - culties in each boom period. This highlights the interesting debate about whether the Japanese economy should refrain from rapid growth since it gives rise to balance of payments difficulties, or whether, because of the rapid growth, the Japanese economy can overcome balance of payments difficulties and continue the process of transformation and diversification. I favour the latter view, and this is reflected in my conclusions.

2. Changing World Trade and Japan’s Adaptation Many studies on international trade disclose significantly different

trade patterns since World War I1 as compared with the nineteenth century (roughly 1800-1913) : a rapidly increasing trade in manufactures among advanced industrial countries, and stagnating trade between advanced industrial countries and underdeveloped non- industrial countries particularly in primary commodities. The pattern of world trade has shifted from “vertical trade” between primary and manufactured goods t o “horizontal trade” in manufactures, particularly heavy industrial and chemical products. Such a structural change in world trade has brought about tremendous difEculties for primary producing countries today, dif3culties which are, it seems to me, closely related to shifts in the determinants of comparative advantage from the pattern of the nineteenth century to that after World War 11.

In the nineteenth century, world trade was structured by dif- ferences between abundant skilled labour (denoted by A ) with limited natural factors (N) in Britain and huge unutilized natural factors with scarce labour in the newly settled countries. CapitaI stocks (the third factor, C) moved fairly freely and were inmerent for both countries in determining comparative advantage. Since natural factors were not easy to change, the international specialization of this E N pattern was stable, durable and mutually complementary, and brought about the transmission of economic growth through trade expansion?

In the twentieth century, particularly since World War 11, the importance of natural factors has been displaced by capital, due mainly to a rapid and wide progress of industrial technology. In- creases in world trade today are mainly determined by difPerent L/C endovment ratias between industrial countries. Since primary product inputs for manufacturing are available at almost the same price for m e r e n t industrial countries, the third factor, N, can be

1 See the excellent explanation of h g n a r Nurkse, P a f t m of Trade and De- velopment. Wicksell Lectures 1959 (Stockholm 1959) , pp. 13-19.

56 THE ECONOXIC RECORD MARCH

regarded as making no significant difference to comparative costs among the industrial countries.

A shift in expansion of world trade from the L-N pattern to the L-C pattern has, in the first place, caused difficulties for primary producing countries which are suffering from low and declining income elasticities of demand for their exports. Secondly, it has also brought an uneasiness for advanced industrial countries. The L-C pattern of trade between industrial and industrializing countries involves an intrinsic instability : both L and C factors are variable in the long run, making see-saw behaviour in the L/C endowment ratio and successive changes in international specialization unavoidable. A large common market like the European Economic Community is aimed, it seems to me, a t stabilizing the intrinsic instability in the trade of mann- factured goods and a t utilizing economies of scale in this production.

Now, the above observation poses several problems, retrospec- tively as well as prospectively, concerning the development of the Japanese economy and trade. First, since Japan lacks natural resources and is a late-comer in industrialization, Japanese industry and trade have, from the beginning of their modern history, had to adapt and diversify themselves most thoroughly and rapidly to changes in the world trade so as to foster harmonious international specialization in the con- text of an ever-changing composition of trade in manufactures amongst advanced industrial countries md to compete with them in the third markets of primary producing countries. Secondly, Japan should be better able to expand horizontal trade with advanced industrial countries in sophisticated manufactures which are the growing stream of world trade but she has a t the same time to expand vertical trade with primary producing countries i n order to obtain most eco- nomically the huge amount of raw materials and foods tds on which Japan heavily depends. This has created a dual structure of Japanese trade: how to find an optimum compromise in trade in both directions is an essential problem for us. Thirdly, in order to find an optimum solution, mme sort of regional co-operation and integration might be desirable for Japan’s economic development. The first problem will be briefly sketched in the following section and the other problems will be dealt with later.

In the 187Os, when she took up economic relations with the rest of the world, Japan mas a nation of 35 million people living near the subsistence level. Between 1878 and 1940, the Japanese national income increased 17 times and, since population doubled, per capita incomes increased 8+ times. Such rapid economic growth has depended to a large degree upon the gains from trade directly and indirectly.

As I see it, the Japanese economy passed through three periods from the 1870s to World War 11: period I, 18iOs-1900; period XI, 1900-31; period 1x1, 1932-42. In each period some leading industry was developed and thus the economy was diversified through develop- ments in some major sectors: agriculture and mining in the first

1965 JAPA?X’S TRADE POLICY 57

period, silk and cotton textiles in the second period, and heavy industries in the third period (this development was not completed and has continued in the post-war years). I n the first period, the Japanese economy concentrated upon improving agricultural productivity. The c o m e of rapid industrialization since 1900 involved two difEerent phases: sub-period IIa from 1900 to 1913, and sub-period IIb from 1914 to 193L5 The fht phase saw structural changes in industry and foreign trade, accompanied by serious diEculties such as shortage of capital, the deterioration in the terms of trade and even a fall in real wages; there was a rapid transformation from agriculture to light indnstries. The second phase of industrialization was predominantly one of balanced growth of industry and foreign trade resulting in a rise in labour productivity in certain key sectors. The third uncompleted period, 1932-1942, should be understood as another transformation period in which the Japanese economy endeavoured to develop heavy and chemical industries. The succeeding period of balanced growth was postponed to the post-war years.

The rate of growth of the Japanese exports has been remarkable : 7.5 per cent per annum from 1881-85 to 1911-13 and 5.1 per cent from 1911-13 to 1938. This high rate of growth was attained through tremendous diversification of exports. As shown in Tables I and 11, the

T~BLE I The Composition of Japanese Exports 6 y Broad Commodity

Classes, 1870-1961: #elected Years* (Percentages)

1.3 4-2 3-0 0 - 8 0.4 0 - 5

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 l06lj

100.0 100.0 100.0 100.0 100.0 100.0

Food drinks and

tobacm

39.9 37.5 22.0 11.1 11.2 7,3 8.8 10.7 6.3 6.5 6 . 1

Raw mtedah

22.8 13.6 14.7 13.6 8.5 7.2 4.4 3.8 2.9 2.9 2-9

Manufactures rued for funher

pnmsine

32.8 35.5 40.1 43.8 49.1 34.8 35.; 25.9 25.6 19.8 19.2

Gmdl finlrhed or wholly

manufactured ~

1.7 10.2 18.2 27-8 30.0 49-4 47.0 56.6 64.4 70.4 71.3

0th- 1 Total

* Pre-war figures do not include the export to the colonies. t This is the last year when the comparable figurer are available. In 1962, the

classification was changed. Source: The Ministry of Finance.

composition of exports rapidly shifted from food (mainly tea) and raw materials to semi-manufactures (mainly raw silk and cotton yarns) and then to finished manufactures.

8 A model of Japan’s industrialization is shown by .Kiyoshi Kojima, “Capital Accumulation and the Course of Industrialization, with Special Reference to Japan,” Economic Journal, Vol. LXX, December 1960.

58 THE ECONOMIC RECORD MARCH

TABLE I1 Share of Principd Export Commodities in the Tota.? Expwt

of Japan 1870-1930: Selected Years (Percentages)

1910

2 .9

0.4 28.6 4.5 7.2

- 10.0 -

1920 1930

0 .9 0.6

0.4 1.5 19.9 29.0 17.5 19.0 8.3 4.6

- 2.4 8 - 0 1.0 0 - 7 0.6

--- 1880

26.2

30.8 0.1 0 .1

-

- - - 1.7

1.7

0 .1 39.3

- -

Tea .. . . Canned or

Rawsilk .. Cotton fabrics

Synthetic fibre fabrics ..

bottledfoods

Silk fabrics ..

Cotton yarn. .

copper .. Machinery . . Pottery .. TOY3 Clothing . . Otbm .. TotalExports

I ~ V n a ~ d s t d

..

1896

10.9

- 24.8 0.3 2 .1

- - - 9.6 0 . 1 2 - 2

0.3 49.7

-

1870

30.5

- 29.4 - - - - - 1.4

0.2 - - -

38.5

100-0

1900

4 .0

0.2 22.3 2 - 9 9.3

10.3

6.5 0.3 1 - 2 0.2 1.0

41.8

- -

0 .3 1 - 1 0 .8

Sourcc: The Ministry of Fiance.

It should be noted that the structural adjustment and diversification of production and trade, though painful, were necessary for two reasons. The decreases in foreign demand for our traditional exports turned the terms of trade against us.‘ Also when certain specialized lines of production increased beyond a given scale, decreasing returns to resources used intensively in that industry occurred. Thus, the traditional Line became unprofitable and it was necessary to develop new industries for which world demand was expected to grow.

In a period of structural adjustment, some industries grow up rapidly and others decline gradually. The growing industries reduce costs of production and prices because of advanced equipment, economies of scale, etc., while the declining industries experience overproduction and have to sell their products at very low prices, just covering their variable capital expenses. Thus, both the growing and declining industries in combination make the terms of trade de- teriorate greatly. Moreover, the new and growing industries usually need additional imports of capital goods and raw materials but are not yet able to cover the additional imports by their own exports. In order to accomplish the transformation of industrial structure, the additional inputs must be covered by foreign borrowing or by an export drive on the part of the old declining industries. If an industry

4 The terms of trade (1913 = 100) were constant at about 125 from 1880 to 1905; deteriorated from 142 in 1906 to 100 in 1913; they were fairly constant at the 100 level from 1913 to 1931 ; and deterioratcd again rapidly from 100 in 1931 to 60.8 in 1937. See Kiyoshi Kojirna, “Japanese Foreign Trade and Economic Growth: With Special Reference to the Terms of Trade”, R n d s of the Hitot- bashi Academy, April 1958.

1965 JAPA?X’S TRADE POLICY 59 declines mainly because of a decreasing and inelastic demand abroad, then the export drive of the declining industry results in serious deterioration in the terms of trade.

3. Structure of Japan’s Trade World War I1 destroyed Japan’s trade almost completely, but

her exports recovered and expanded rapidly at 14.8 per cent annually for the average of 1950-63, which was 2.7 times as fast as the growth in world trade. The share of Japan’s exports in world trade reached 3.6 per cent in 1962 which is, however, still lower than the pre-war level (4.6 per cent in 1938).

The post-war years may be divided into three periods : the devastation period, 1946-1953 ; the recovery period, 1953-1958 ; and the normalization period since 1958. In the devastation period, our exports recorded only $145 m. in 1948 and increased abruptly owing to Korean War to $1,300 m. between 1951 and 1953 (see Table 111).

TOLE I11 Japan’s National Income, Imports and Ezports, 1946-6s

1949 1950

1951 12,570 14.399 14,125 15,800 2% 1,515 15,966 16,683 1 2.410 ::: 1952

1953 1954 16729 17390 2,253 2,010

1956 21,180 21.337 3.605 1957 23,016 22.879 4,023 $= 1958 23,664 23.664 3019 3,019 1959 27,801 27,228 3:939 4 187 1960 33.066 31.342 4.660 4:9%

1955 18:w 19:ul 2,586 2,364

1963

6 I 1.1 211 t.l ig I 3.1 1.3

10.4 6.5 (Md 944 10.3 7.3

15.2 18-1 5.178 5,355 12.8 16.0 -::“I 14.3 18.5

2.7 1.4 6.2 4.1 8.8 7.2

10.8 7.3 9.0 7.0 8.0 7.2 9.7 9.2

10.8 10.7

11.8 11.7 12.4 12.1 12.2 12.2 13.0 13.3 11.9 12.3

10.7 12.1 11.8 14.4 11.1 14.6

Source: The Ministry of Finance

It is interesting to find that Japanese exports in the devastation period consisted mainly of traditional manufactures such as raw silk, silk fabrics, cotton yarn and cotton fabrics (80 per cent in 1949).

In the second period, 1953-58, manufacturing industries recovered and expanded rapidly on all fronts, not only in light industry but also in heavy and chemical industry. Our exports grew at the annual rate of 17.4 per cent from $1,275 m. in 1953 to $3,625 m. in 1959. This was the recovery period and also the continuation of the uncompleted industrialization in heavy manufactures of the pre-war period.

Since 1958 o r 1959, it seem to me, our trade turned the corner-as


in the case of the world trade as a w h o l r i n t o a period of normalization. The growth rate of our exports has slowed down to 11.7 per cent, from $3,625 m. in 1959 to $5,536 m. in 1963. Our imports and exchange controls have been gradually liberalized during this normalization period. The business cycle has resumed its usual short-run character and balance of payments di5culties occurred at shorter intervals in 1961 and 1963.

These recurrent balance of payments difficulties might be dis- tinguished from the previous two bigger difficulties in 1953 and 1957 which demarcated the recovery period from the devastation period, and the normalization period from the recovery period. It is hoped that the present normalization period will be at the same time a period of growth, balanced as between exports and imports and between capital accumulation and wage increases; but it is not easy to maintain steady balanced growth of exports and imports as will be seen later.

Changes in Commodity Composition - In order to clarify structural changes in the past decade and

the recent structure of the Japanese trade, trade performance in 1953 and 1963 will be compared. It should be noted that, since each mas a year of balance of payments dBculties, exports in these years show lower levels and imports higher levels than the cyclical averages.

The most conspicuous change in Japan’s exports in the last decade is the shift from light to heavy manufactures or, more specifically, the replacement of textiles by machinery. As Table IV clearly shows, exports of heavy manufactures and chemicals expanded a t an annual

TABLE IV Japan’s Ezports: Commodity Composition and the

Annzial Growth Rate: 1953-63 ( Percentages)

1. Total exports 2. Food 3. Raw Materials and fuels 4. Heavy manufactures and

chemicals* 4a. chemicals 4b. metals 4c. rnac.hinery and transport

5a. textiles jb. non-ferrous metal

5 ~ . others

equipment 5. Light manuiactures

products

6. Miscellaneous manufactures

Commodity Cornposition

1953

100.0 9.4 3.5

36.8 5.7

15.1

16.0 49.4 36.1

4.9 8 . 4 0.9

1963

100.0 5.3 1.7

52.7 5.8

17.3

29.6 39.8 22.9

3.9 13.0 0.6

Annual Rate of Growth in

( 1 953-63)

14.7 11.2

6.9

18.9 14.4 14.2

23.9 11.9 8.9

11.8 20.1 8.0

The total of SITC 5, 7,67-69, 861-1-6. 863. S o w r e : The Ministry of International Trade and Industry.

1965 JAPAN’S TRADE POLICY 61

rate of 18.9 per cent and increased their share in the total exports from 36.8 per cent to 52.7 per cent, while light manufactures declined relatively. In particular, the share of machinery and transport equipment increased from 16.0 per cent to 29.6 per cent, while that of textiles decreased from 36.1 per cent to 22.9 per cent. This reflects our strenuous effort towards structural adjustment in industry and trade so as to meet the shift in the world demand.

Our structural adjustments in the export pattern to world demand may be measured by the “intensity of trade”, which is the ratio of the share of a given commodity in total Japanese exports to the share of the same commodity in world trade. The intensity of trade reflects the pattern of comparative advantage of a certain country visd-vis the rest of the world, and its change also indicates the adaptability of the country to the changing pattern of world demand. As shown in Table V, Japan has a strong marked comparative ad-

a 100 50 20

28 4 . 6 6 .1

17.5 1

TABLE V Comparison of Commodity Composition of World Ezports and

Japan’s Ezports: 1953 and 1961

b 100 17 50

32 4 .9

12.4 15-1 -

1. Total exports . . .. 2. Foods. raw materials and fuels 3. Light manufactures .. 4. Heavy manufactures and

chemicals .. .. .. 4a. Chemicals .. .. 4b. Metals .. .. .. 4c. Machinery . . . .

5. Others .. .. . .

1953

c 100 34

250

114 i 07 203

86 -

a 100 44 17

39 5 . 9

10.2 22.6 -

1961 -

b 100

11 44

45 4 . 5

13.8 26.7 -

c 100 25

259

115 76

135 118 -

a. The commodity composition of world exports (per cent). b. The commodity composition of Japan’s exports (per cent). c. b f o X 100 = intensity of trade for Japan.

Source: United Xations, Monthly Bidletin of Statistics.

vantage in light manufactures which has been strengthened from 2.5 in 1953 to 3.0 in 1961, while that in heavy manufactures and chemicals remained a t the same level (1.2)) decreasing in chemicals and metals and increasing only in machinery, in spite of the strenuous efforts to develop heavy and chemical industries.

It is widely felt that Japan should push her structural adjustment further. First, the ratio of heavy manufactures and chemicals in total exports of manufactures in Japan (51.2 per cent in 1961) is far behind U.S.A. (82.2 per cent), West Germany (85.2 per cent), United Kingdom (79.7 per cent), France (70.9 per cent) and Italy (61.4 per cent). Japan hopes to catch up with those advanced industrial countries in the exports of sophisticated manufactures which are the most rapidly growing items in the world trade. Secondly, Japan has, sooner

62 THE ECONOMIC BECORD MARCH or later, to make greater room for exports of labour-intensive consumer goods from developing countries. This is a serious task for Japanese trade-policy makers.

In Japan’s imports, as shorn in Table VI, heavy dependence on raw materials (67 .7 per cent in 1963) is the most fundamental characteristic. If food is added, more than 80 per cent of our imports

1. Total imports 2. Raw materials and fuels

2a raw materials raw turtilu) raw metals)

2b. mineral fuels 2c. semi-manufactures

3. Machinery and transport equlprrmt

4. Food 5. Consumer manufactures

I

TABLE VI Japan’s Imports: Commodity Composition cunol

Annual Growth Rate: 1953-1963 (Percentages)

100.0 65-5 46.1

(28.4) (7-2) 12.0 7.5

6.3 25-6 2.5

Composition 1963

100.0 67.7 39-7

(13.1) (11.4) 18.0 10.0

11.6 15.6 4.2

Annual Rate of Growth 1953-63

11.3 12.0 9.8

(3.0) (18.3) 16.9 17.1

21.9 2.6

17.4

Source: The Ministry of International Trade and Industry.

consist of primary products and therefore imports of manufactures are very limited. Japan’s economic development critically depends upon her ability to import cheaper primary products. In 1961 Japan imported almost 100 per cent of her domestic consumption of such basic items as petroleum, iron ore, cotton, wool, salt, bauxite and rubber.

Among raw materials, the share of textile raw materials declined substantially while raw metals increased. This reflects the rapid shift of the industrial structure which also brought a huge increase in imports of mineral fuels (this single item accounted fo r 18 per cent in 1963) and semi-manufactures such as pig iron.

The share of imports of manufactures (machinery, transport. equipment and consumer manufactures) is still small (15.8 per cent in 1963) but has increased at a rapid rate during the last decade. New machines had to be imported in order to modernize and diversify our manufactuzlng industries. The liberalization of trade stimulated imports of consumer manufactures. We have t o increase imports of manufactures in order to expand horizontal trade but we cannot allow a larger proportion to be imported since we also have to import es- sentially primary products. How to adjust both sides of trade opti- mally is m important task for Japan’s trade policy.

1965 JAPAN’S TUE POLICY 63 Changes in Market Composition

The market composition of Japan’s exports has also experienced tremendous changes in the last decade as shown in Table VII. The mast significant change is the increased share of industrial countries (if Oceania is included in this group, 30 per cent in 1953 and 50.4 per cent in 1963) and the decreased share of underdeveloped countries. Between 1953 and 1963, our exports increased annually by 20.1 per cent to industrial countries and 26-0 per cent to Oceania (which is the highest except to Communist countries), but by only 10.4 per

100.0 28.9 19.5 18.4 9.3

70.7 1.6

TABLE VII Japan’s Ezports: Market Composition and Annual

Growth Rate: 1953-1963

(Percentages)

100.0 43.0 29.9 27.6 13.1 52.3 4.1

I. Total exports 11. Industrial countries

111 North America

11, Western Europe

I111 Aut. and N.Z. IIL Underdeveloped

countries 111- South-east Asia IIIU LatinAmerica 111s. Africa IIIU MiddleEaJt Iv. Communist colmtrier

11, U.S.A.

111. Noa-industrial countries

-. Market Composition

1953 I 1963

69-2 48-2 47.0 I 29.5 8.5 6-6

10.1 8.7 3.5 3.4 0.4 I 4-6

Annual Rate of Growth

1953-63

14.7 20.1 20.3 20.2 19.6 11.1 26-0

10.4 9.0

11.0 10.9 13.4 32-4


cent to underdeveloped countries. These changes reflect the trends in world trade and the structural alteration of the commodity composition of our exports.

&9 shown in column C of Table VIII, our exports to Oceania (1953-62) expanded 6.9 times faster than Oceanian total imports and thus the share of the former in the latter increased from 0.7 per cent in 1953 to 5 . 1 per cent in 1962. I n this sense, our exports have been most successful in the Oceanian market, although its importance in our total exports is still small (4.1 per cent in 1963). The most important market for Japan, the United States, has also been successfully developed. Our esports to Western Europe have also expanded at 20 per cent a year-as rapidly as to the United States but not as fast as Europe’s total imports, and Japan’s share is still only 1.0 per cent in 1962. This contrast suggests that there are more difficulties for Japan in expanding trade with Western Europe than with the

64 THE ECONOMIC RECORD

TULE VIII The Relation of Japan's Ezports with Total Imports

in Each Market

MARCH

I. Industrial countries . . . . I, North .\rnerica .. .. I,, U.S.A. . . .. . . I, Western Europe . . . . 11, Aust. and N.Z. . . .. 11,. South-east Asia . . . . 11,. Latin America .. .. II,, .4frica . . .. .. . . II,,Sliddle East . . .. . .

11. Yon-industrial countries . . XI, Underdeveloped countries . .

21.3 21 .6 21.3 20.3 11.4 2 7 . 4 10.7 10.1 11.4 11.8 14.3

B G W l h Rate of Total

Importr in Each Market 19SWU2

10

6 .8 4 . 7 5 . 1 7 . 7 4 - 0 4 . 0 3.9 4 . 6 2 . 8 3 . 0 7 .0

C

Ratio Of

A to B

3 . 1 4 . 6 4 . 2 2 . 6 2 . 9 6 . 9 2 .7 2 . 2 4 . 1 3 . 9 2 .0

D The Share of Japan's

Erpmtr in Total I m m in Each

Market

1953 %

0.8 1.5 2 .0 0.4 3 . 7 0.7 3 .9 8 . 5 1.5 2 . 2 2 .0

1962 x 2.4 6 . 3 7 . 9 1 . 0 7 . 1 5 . 1 7.2

14.0 3 .5 4.3 4 .2

United States and Oceania5 due to longer distance, the pattern of comparative advantages, trade restrictions, and so on.

A slower growth of our exports to undeveloped markets is another serious worry for Japan. This may be partly due to sluggish development of their trade capacity but partly also to insufEcient structural adjustment in the pattern of our exports as well as imports in relation to the underdeveloped countries.

In the market composition of Japan's imports, as shown in Table I3, advanced countries including Oceania slightly increased their share from 53.3 per cent in 1953 to 54.4 per cent in 1963, while that of the underdeveloped countries declined from 45.1 per cent to 41.5 per cent. The change is not as large as in Japan's exporta, but it has serious implications for the underdeveloped countries, particularly South-east Asia and Latin America. Our imports from Western Europe have increased in machinery.

5This can be shown more accurately by 'intensity of trade', as in the table below. which is in this case the ratio of the share of a given country in total exports (or imports) of Japan to the share of the same country in the world imports (or exports).

Japan's Intensity of Trade with Selected Countries

Japan's Exports Japan's Imports 195658 av. 1960 195658 av. 1960

E.E.C. 21 U.K. 28 Canada 48 New Zealand 44 Australia 102 U.S.A. 191 South-east Asia 61 9

16 28 59 81

170 236 663

19 21 ~- 83 83

411 180 383

15 26 98

135 501 197 515

1965

1953

100.0 ($241.0m.)

44.9 36.8 31.5 8.1 53.5 84

JAPAN’S TRADE POLICY

TABLE IX Japan’s Imports: Market Composition and Annitd

Growth Rate: 1958-1965 (Percentages)

1963

100.0 ($673.6m.)

45.6 35.6 30.8 10.0 50.3 8.8

65

48-8 31 *1 14.4 2.9 0.4 1.9

I. Total imports

11. Industrial countries

48.0 26.7 12.8 5.6 2.9 3.1

111 North America

11, Western Eurow 11,. U.S.A.

111. Non-industrial coun<riet

IIL Underdeveloued IIJi Aust. and N.Z.

countries 1111. South-east Asia 111,. Latin America 111,. Africa - IIIu Middle East

IV. Communist countries

Market Composition

45.1 41.5 26.3 I 18.0 11.0 8.4 2.3 I 3.9

Annual Rate of Growth

1953-63

11.3

11.7 10.9 11.0 15.1 10.2 13.5

10.0 6.7 7.0 17.9 18.9 19.2


If we pay attention to Japan’s imports of primary products, which comprise about 80 per cent of our total imports, a more si,4- ficant change is observed (see Table X). Reflecting the increase in imports of mineral fuels, Middle East increased its share in our total primary imports from 5-8 per cent in 1953 t o 14.8 per cent in 1963. If mineral fuels are excluded, South-east Asia and Latin America decreased their share from 45.5 per cent to 39.5 per cent, while North America and Oceania increased their share from 43.1 per cent to 48.7 per cent. This means that for many primary products competing be tween advanced and underdeveloped areas (for example, iron ore,

TABLE X Japan’s Imports of Primury Products: Market Cornposition

in 1953 and 1963 (Percentages)

Products

1953 I 1963

I TotalPrirmry Products

1963

Advanced countries North America Western Europe Aust. and N.Z. Underdmeloped countries South-east Asia Latin America Africa Middle East

1953

47.6 33.2 4.9 9.5 50.1 29.2 12.5 2.6 5.8

Commwrist countries 1 1.8

a

44.1 1 48.8 I 51.3 31.0 2.0 11.1 51-9 22-5 10.3 4.3 14.8 3.9

32.2 35.3 5.7 I 2.6 10.9 13.4


coal, copper, rice, soybean), Japan turned away from underdeveloped countries and showed preference for the cheaper and high quality products of advanced countries. This presents a dilemma for Japan, since she would be well-advised to increase her imports more rapidly from underdeveloped countries, with whom she usually has an export Burplus, than from advanced countries, with whom she has a huge import surplus. This is urgently needed since underdeveloped countries have fallen into huge deficits visd-vis advanced countries and thus the triangular settlement of balance of payments has presented difficulties.

4. Dual Structure of Japan’s Trade Japan’s export market was in 1962 directed equally towards ad-

vanced countries (North America, Europe and Oceania) and underdeveloped countries,“ as shown in Table XI, which is a summary of

TABLE XI Japan’s Ezport Matrix

upper column = 1957 lower column = 1962

A. Advanced

A, North America . .

A, Europe .. A, Oceania . .

B. Underdevel- oped countries

B, Asia .. B, Latin

America..

B, Africa ..

Countries..

C. Total ..

- Hem, dmuf. -

240 938

135 507 97

380 8

61 - 839

1.272 470 934

75 223 294 112

1,079 2,210

-

-

- L&t

h u f . - 753

1,528

503 981 193 421

67 126

934 1,025

850 879

82 126 202 220

1,687 2.563

- O h -

55 66

19 26 35 38 1 2 -

25 68 22 M

1 2 2 2

80 124

Total

1,048 2,532

857 1,514

325 839 66

179 - 1,798 2,356 1,142 1,667

168 354 498 334

2,846 4.887

- Hury. Kanuf.

8 .4 19.2

4.7 10.4 3 .4 7.8 0 - 3 1.0

29.4 26.0 18.6 19.1

2.6 4 . 6

10.3 2 - 3

37-9 45.2

- L s h t

M;muf. - 26.5 31-2

17.7 20.1

6 .8 8.8 2 - 0 2.6 -

32.4 21.0 22.8 13-9

2 - 9 2.6 7 - 1 4 - 5

59.3 52.2

-

- Including Chemicals.

our previous analysis. Japan needs, therefore, a twc

- Ochm - 1.9 1.4

0.7 0.5 1.2 0.8 neg. neg.

0.9 1.2 0.8 1.1

neg. neg. 0.1 neg.

2 .8 2.6

-

-

Total

36-8 51-9

23.1 31.0 11.4 17.2 2.3 3.7

83-2 48.1 40.1 34.1

(1.6 7.2

17.5 6.8

100.0 100.0

Eaceted trade policy for M e r e n t markets. Also, in 1962, the ratio of exports between heavy (including chemicals) and Light manufactures approached equality (45.3 per cent to 52.2 per cent). Here too we need two-

eThe importance of the underdeveloped market to advanced countries is far smaller than in the case of Japan; for example, OECD member countries directed only 2.3 per cent of thar total exports to underdeveloped market in 1961.

1965 JDAN’S TRADE mLrcy 67

faceted policies for each category of exports. How can Japan reconcile the requirements of two different groups of markets and export commodities and also h d the best solution for maximum economic growth?

As we have seen already, Japan’s exports have expanded more rapidly to advanced than underdeveloped countries and in heavy than in light manufactures.

In 1962, 19.2 per cent of Japan’s exports to advanced countries were heavy manufactures and 31.2 per cent light manufactures, while the corresponding esport percentages to underdeveloped countries were 26.0 and 21.O-the growth in exports of both commodity groups being less rapid to underdeveloped countries than to advanced countries. This is a reflection of the dual structure of Japan’s exports for which the advanced market is more important in light manufactures of the labour-intensive type while the underdeveloped market, which is unfortunately stagnating because of balance of payments difEculties, is more essential in heavy manufactures and chemicals or capital goods. The underdeveloped market is very important for certain heavy manufactures; for example, out of $539 m. exports of heavy machines (excluding ships), 83 per cent is directed towards underdeveloped areas in 1961; for chemicals the corresponding figure is 69 per cent and for steel 67 per cent.

The dual structure of Japan’s exports is a reflection of her comparative advantage in the multi-country set. Japan’s industrialization is far ahead of underdeveloped countries but is still lagging behind advanced industrial countries such as the United States, United King- dom, Germany and France. Japan’s stage of economic development lies between the underdeveloped and advanced industrial countries, although closer to the latter. According to a survey7 in 1958, the capital requirements per unit of labour input for exports to America is 243.8 thousand yen, to Europe 257.7, to &ia 333.7, and to other underdeveloped countries 555.4. This indicates that Japan’s comparative advantage is such that she exports more labour-intensive goods to advanced countries and more capital-intensive goods to underdeveloped countries.

In addition to being in the stage of moderately advanced industrialization, Japan, as we have seen, depends heavily upon imports of primary products (more than 80 per cent of total imports), and there is serious competition between advanced and underdeveloped countries as sources of supply. These facts determine and complicate the direction of trade policy.

Because of heavy dependence on primary imports and manufactured exports, vertical trade of manufactured exports versus primary imports is predominant in Japan’s trade and horizontal trade within the same category of commodity is still limited. The degree of horizontal trade is estimated in such a way that if country A’s

TAnnual Report on Foreign Trade, Ministry of International Trade and Industry, 1%1.

68 T E E ECONOMIC RECORD MARCH

exports (= country B’s imports) of a certain commodity category is equal to country B’s exports (= country A’s imports) of the same commodity category, the degree of horizontal trade is 100 and if either of them is half of the other it is 50.8 Table XI1 shows the degree of horizontal trade for Japan’s total trade and for three larger commodity categories.

TABLE XI1 Degree of Japan’s Horizontal Trade

upper column = 1956-58 average lower column = 1960

Labor-intensive manufactures ..

Capital-intensive manufactures . .

78 14 15 0 .7 58 39 10 0 .3

31 19 25 38 19 I9 54 63

----

I I I I

* Includes processed foods.

2 2

4 3

43 28

4 8

-I-

-- neg. I 0.9 neg. 1

The first point to note is that the degree of Japan’s total trade even with the United Kingdom is only 28 for 1960, which is far smaller than trade among advanced industrial countries (for example, 59 between France and Italy, 76 between United Kingdom and E.E.C., 55 between the United Kingdom and the United States and 46 between the United States and E.E.C. for 1960). Japan’s lower degree of horizontal trade, which means higher degree of vertical trade, is dne to heavy dependence on primary exports, the lag in heavy and chemical industries and strong comparative advantage in labour-intensive manufactures in relation to advanced industrial countries.

Secondly, it is interesting to find in Table XI1 that Japan’s trade with United Kingdom and E.E.C. has a higher degree of horizontal trade in labour-intensive manufactures than in capital-intensive manufactures: while with the United States, Canada, Australia and

8Kiyoshi Kojima, “The Pattern of Triangular Trade among the U.S.A., Japan, and Southeast Asia”, The Development Economies, March-August, 1962 ; Kjyoshi Kojima, “The Pattern of International Trade Among Advanced Coun- tries", Hilofsubarhi Joumol of Economics, June 1964.

Japan has a fairly high degree of horizontal trade in primary products with U.K. and E.E.C., for primary products here include manufactured food. This is not a merit but a defect, since Japan’s exports to Western Europe tend to be confined to her traditional speciality goods such as ~ e d fish, ceramics, whale oil, silk, toys, pearls, pottery, while Japan imports h e a d y from Western Europe capital-intensive heavy manufactures and chemicals and, on the whole, has a large import surplus. How to expand our sophisticated manufactures to the European market is an important target for Japanese trade policies.

1965 J U A N ’ S TRADE POLICY 69

New Zealand the degree of horizontal trade in capital-intensive manufactures is larger and increasing. To these different trends many factors besides comparative advantage, such as geographical distance, historical relations and obstacles of trade, have contributed. It suggests that there is promising room for Japan to expand horizontal trade in capital-intensive manufactures with North America and Oceania.

Thirdly, in Japan’s trade with South-east Asia, the degree of horizontal trade is negligible in all commodity categories. This is an obvious result of Japan’s specialization in manufacturing industry and Asia’s in primary production and, to that extent, trade between them is most “harmonious” and intensive. Two problems, however, arise: one is the industrialization of Asia and other underdeveloped countries, and the other is competition between underdeveloped and advanced countries as sources of our primary import supplies.

We now come to policy questions about the main directions of Japan’s trade pattern by commodity and market. What kind of adjustment is desirable and needed for the future expansion of Japan’s trade ?

F-kt, towards underdeveloped countries, Japan will have to endeavour to shift her exports further from light to heavy manufactures and, in return, to increase her imports of primary products as rapidly as possible. In other words, the major pattern of expanding Japan’s trade with underdeveloped countries should be intensive vertical trade between heavy manufactures and primary products. More- over, it will be desirable for Japan in the near future to rectify the heavy concentration of her exports on textiles and enable the textile industry in South-east Asia to play a proper role. As f o r the competition between Japan and South-east Asia in textile exports in third markets, it can be said that there is ample room for adjustment if Japan places more weight in its exports on higher quality and chemical textile products. Japan will also hare to open her market gradually to lower quality textiles and other labour-intensive consumer goods originating from underdeveloped countries.

Secondly, towards advanced rich countries the major line of international specialization mill continue to be Japan’s exports of light manufactures of the labour-intensive type in exchange for the advanced countries cheaper, high quality primary products. In the pattern of vertical trade, there are many difficulties, such as severe protection in advanced countries and increasing competition from underdeveloped countries against our exports, and our need to increase primary imports more rapidly, if possible, from underdeveloped countries rather than from advanced countries. Japan hopes, therefore, to expand horizontal trade, both in exports and imports, in heavy manufactures and chemicals mutually with advanced countries. In order to foster this, the most promising markets are the United States, Canada and Australia, while Western Europe seems to be a

70 TBE ECONOMIC RECORD MARCH

rather hard nut to crack in spite of our strenuous efforts, because of long distance, heavy obstacles to trade, and the lack of complemen- tarity in light manufactures versus primary products.

Thirdly, the first and second targets of our trade direction policies logica%y- require further acceleration of heavy industrialization and strengthening of international competitive power in Japan’s heavy and chemical industries. This will be touched upon in the following section.

Fourthly, i t is most desirable and necessary for Japan to promote horizontal trade with advanced countries in heavy manufactures and chemicals. Since these industries are such that costs can be enor- mously reduced but only with larger-scale production, some kind of agreed specializaf ion between nations, and between firms belonging to W e r e n t countries, is needed for both sides to benefit from the po- tentially huge economies of scale. To promote mass production of W e r e n t kinds of sophisticated manufactures, countries should come to some sort of agreement, reciprocally furnishing each other’s markets. Take, for example, the case of steel. Since there are many types of steel, one country might concentrate on one or two types of steel, and the other country on others, exchanging them with one another and expanding the third markets so that both could achieve large-scale production and cost reduction. There seems to be plenty of room for this in machines, tools, cars, machine parts, and similar goods. This is the most e5cient way of mutually promoting heavy industries in advanced countries and economic development of underdeveloped countries. For this purpose, capital co-operation through joint ventures and other arrangements between Japan and advanced countries, particularly the United States, Canada and Australia, will play an important role. Capital co-operation would expand and se- cure mutual markets and obtain reciprocally the gains of mass production. Capital should be allowed to move more freely between these countries. To achieve agreed specialization in heavy and chemical industries more effectively, however, further co-operation is needed between these countries-for example, by the formation of a preferential tariff area. This poses the question whether a global freer trade approach like the Kennedy Round is a sufficient measure for Japan or whether some economic integration similar to the European Common Market should supplement these measures.

Tentatively I would like to say that a large and solid integration such as an Atlantic Customs Union or Free Trade Area is unrealistic and not desirable for Japan, since she can more profitably promote free trade with countries throughout the world, given her geographical situation and stage of industrial development. Increased capital move- ments and some sectoral integration in heavy and chemical industries between Japan, the United States, Canada and Oceania might be desirable.

Fifthly, underdeveloped countries, especially in South-east Asia, and some advanced countries such as the United States, Canada and


Australia, are competitive in their exports of primary products to Japan. The advanced countries’ products have a stronger competitive power and are superior in quality, delivery, etc. This tends to make Japan’s trade liberalization result in a faster increase in imports of primary products from advanced countries and a slower increase from underdeveloped countries. Thus, Japan’s trade liberalization is apt to ‘turn its back’ on underdeveloped’countries. This natural tendency should be reversed in order to assist economic development of underdeveloped countries and to decrease both Japan’s import surplus with advanced countries and export surplus with underdeveloped countries, since the triangular settlement of balance of payments is missing. To develop markets of underdeveloped countries by providing several kinds of aid for their economic development is an urgent task of long-term policy not only for Japan but also for the advanced countries as a whole. Foreign aid policy will not be dealt with here.

5. Growth and Flucduation in Japan’s Trade The recovery and development of Japan’s trade since the war

has been very successful so far: it has attained a rapid growth in mutual interaction with domestic economic development. Japan’s trade, however, has experienced great fluctuations and balance of payments difficulties in 1953, 1957, 1961 and 1963, which acted as a bottleneck for further economic prosperity and each time required serious deflationary adjustment. We have to investigate Japan’s trade performance more closely with a view to searching for ways and means of achieving steady and rapid further development of Japan’s trade.

aS to the causes of Japan’s rapid economic growth since the war, we may mention such domestic factors as (a) a high rate of investment and saving, and (b) an abundant and efficient labour force; but we also have to emphasize (c) a favourable international economic environment which absorbed a rapid expansion of our erports. Aid from the United States, amounting to about $2,000 m. in the early post-war years, gave a strong impetus to Japanese recovery. Subse- quently, U.S. offshore purchases contributed much to the balance of payments position. In addition, Japan gained from the decline in the terms of trade for raw materials relative to manufactured goods, this decline reducing the volume of manufactures Japan had to export in order to buy materials.

Apart from these factors, the key to Japan’s successful export performances lies in her strenuous efforts a t structural adjustment in industry and exports towards those industries (a) the world demand for whose products increases most rapidly and has a high income elasticity, and (b) in which improvement of productivity is largest and international competitive power must be effectively strengthened.

As has already been illustrated, the structure of Japan’s exports shifted rapidly from Light to heavy manufactures. In the last decade, the annual rate of increase in labour productivity in light industries has been 7.6 per cent, which is a high figure in itself, but the heavy


and chemical industries show a much higher rate still of 13.4 per cent. This uneveness is associated with the change in the structure of comparative advantage which has made Japan’s heavy manufactures and chemicals exportable to an increasing degree. A rapid expansion of exports of new commodities such as transistor radios, tape-re- corders, automobiles, synthetic fibres, electric gramophones and motor- bikes, contributed a great deal : their share in the export increment in the past ten years (1951-61) was 18 per cent.

It cannot be denied that the wage level in Japan is much lower than in advanced countries as is also true of our national income p e r capita, and this has tended to give Japan’s light manufacturing industry of the labour-intensive type a strong comparative advantage. However, a low money wage does not mean cheap products unless productivity k correspondingly higher. The strength of Japan’s exports has been due to low wages in relation to labour productivity. T h e n the behaviour of labour productivity in ten major industrialized nations is compared with that of money wages for the period 1953-60 (Table X I I I ) , Japan and Italy show the greatest positive differentials between productivity and wages. In the United States and France, wages

T-LE XI11 Indexes of Labour Costs and Exports, 1960

(1953 = 100) Relative

labourwets die

81 85

105 106 110

Japan . . . . Italy . . .. u.s..4. . . . .

Exports

324 280 121 193 163

France . . . . Norway . . . . Netherlands . . Sweden . . . . Federal Republic

of Germany .. Denmark . . U.K. .. ..

159 112

183 1 137 138 119 129 1 109

130 1 106 142 122

134 116 118

Money M

(d)

148 137 128 169 151 159 140

165 123 256 150 1 129 1 161 156 132 128

Source: Compiled from United Sations Stofistical Yearbook and Yearbook of International Trade Statistics.

kept pace with the rise in productivity, while wages grew faster than productivity in other countries. The widening gap between productivity and wages in Japan resulted in relatively reduced labour costs of production and stimulated our exports faster than in other countries. This happened on a larger scale in heavy manufactures and chemicals in which productivity improved faster than in light manufactures.

The Japanese economy has not for a long time experienced a labour shortage but, on the contrary, has had a large reservoir of unemployed and underemployed workers. This reservoir and the


new working population (6O0,OOO annually) have supported the rapid growth of the Japanese economy, and almost all this labour has up to the present been absorbed in manufacturing industries. The -labour supply is, however, changing from the traditional superabun- dance to a smaller abundance, because of the great post-war change in demographic patterns and rapid economic development. Shortage of labour began to be felt keenly about 1959, and since then wage increases have been catching up on productivity improvement. The Japanese economy is being transformed from an unemployment economy to a full employment economy. This will necessitate much more investment of the labour-saving m e , a large change in ,our comparative advantage, and a further structural shift in industry and trade from labour-intensive light manufactures to capital intensive heavy manufactures and chemicals.

Although the actual promoter of exports has been private business since 1949, the government has sponsored several export promotion measures. These are tax preferences for exporters (3 per cent of export income was exempted from tax assessment: this was abolished in 1964) ; a preferential rediscount rate for export bills; financing by the Japan Export-Import Bank ; an export insurance system under the Export Insurance Act of 1950; an export inspection system; assis- tance in marketing through the Japan Export Trade Research Or- ganization (JETRO), and similar measures. Although these measures were actually effective in promoting exports, their importance should not be overemphasized. The basic factors which promoted exports have been the competitive strength of exportable goods, adaptation to the changing world demand pattern, creation of new exportable commodities, and timely expansion of supply capacity.

Japan has always supported the basic philosophy of GATT (General Agreement on Tariffs and Trade) that free, multilateral and non-discriminatory trade is the key to the development of the world economy and has enthusiastically worked with GATT for the abolition of trade barriers. The Japanese government established a positive liberalization plan in 1960 and made the utmost effort to realize the plan. The liberalization ratio of Japanese imports has risen sharply and reached 93 per cent in April 1964, practically the same level as that for the major European countries. Because of our serious war devastation, our trade liberalization started two or three years later than European countries, but our successful economic recovery and development made rapid liberalization possible. More- over, we believe, the Japanese economy benefited from liberalization through improvements in its productivity, stimulus to rationalization, and the structural transformation of industries. Actually, except for some food items, trade liberalization has not so far caused our imports to rise ahead of the rate corresponding to our economic growth.

Japan’s import restrictions still remain on automobiles and some other machinery and certain agricultural products, especially foodstuffs. Restrictions on machine imports wil l be abolished before long,


since our competitiveness has been rapidly strengthened. Restriction on food import, however, presents a d S c u l t problem for Japan’s trade policy and one which is not easy to solve politically, since abolition would be a hard blow for a large number of small-scale farmers. Per- sonally, as an economist, I would say that Japan cannot catch up with the Western standard of p e t capita income unless she liberalizes imports of foodstuffs, increasing imports of sugar, dairy products, meat, fodder for domestic animals and fruit, and concentrates agricultural production on efficient land and farmers. This is badly needed but it will take some time. However, previous trade liberalization, with its beneficial effects on our economic rationalization, is stimulating change into right direction.

Japan hopes, in return, for liberalization of the trade restrictions imposed by advanced countries upon Japanese goods, especially Western Europe’s trade discrimination of several kinds against Japan and the so-called voluntary export quotas to which Japan is forced to agree with advanced countries. It is hoped also that an overall tars reduction under the Kennedy Round will be realized and will create an atmosphere favourable to global free trade.

Japan accepted full obligations under Article XI of GATT in February 1963, shifted to so-called “Article VI I I status” of the International Monetary Fund on 1 April, 1964, and became a member of the Organization for Economic Co-operation and Development on 28 April, 1964. We believe that these events not only have epochal significance for our country in the two decades of post-war history, but will also have a great impact upon the growth and stability of Japan’s trade.

Turning to fluctuations in trade, the only factor which has pre- vented Japanese economic growth from becoming excessive and es- plosive was the balance of payments. In the period since 1950, Japan has experienced four balance of payments crises, in 1953, 1957, 1961 and 1963. Each came at the peak of domestic boom which attracted huge increases in imports. Each of these crises was quickly brought t o an end by monetary restraints. Even in the crisis pears, the rate of growth was 3 4 per cent, and the average growth for the last ten years has been 9 per cent a year. Some dzerences can be discerned, however, between the balance of payments difEculties of 1953 and 1957 and those of 1961 and 1963. The former were more of a structural nature, part of the process of transforming our economy, while the latter were more of a cyclical nature indicating the more normal operation of the market mechanism.

As has already been mentioned, during the decade 1953-63, our exports grew at an annual rate of 14.7 per cent and our imports at 11.3 per cent. This seems to suggest that Japan’s balance of trade has been fundamentally improving. But this is not true, since the export/ import position in 1953 was $1,280 m. : $2,410 m. which means Japan depended heavily upon American aid and special procurements in order to fill the gap in balance of payments. The export/import ratio


has improved but the trade deficit in absolute amount has not decreased (for example, in 1961 exports were $4,270 m. and imports $6,390 m.) .

If we consider Table 111, we find interesting contrasts. (1) Im- ports in current prices increased very rapidly for some years. Be- cause of severe monetary restriction,, imports were cut back once-for- all to a lower level from 1953 to 1954, from 1957 to 1958, from 1961 to 1962, and again from 1963 to 1964.

(2) In addition to huge cyclical changes in inventories of im. ported materials, fluctuations in import prices were one of the greatest causes of balanceof- payments difficulties.’ As shown in Figure 1,

150 r

7 0 ’ . . . . , . , . . , , . . , 50 51 52 53 54 55 56 57 50 99 60 61 62 63

FIGURE 1 Import Price Index (1960 = 100)

fluctuations of import prices were very wide. Because of the heavy concentration of our imports on raw materials and foods (more than 80 per cent of our total imports) and the low price elasticity of demand for those commodities, a rise in import prices has a serious effect on our import values. This suggests that some measures for stabilizing import prices through, for example, long-term purchase contracts with main suppliers for key raw materials, might be most desirable. For that purpose, foreign aid and bilateral agreement in the form of “development investment for import” might be needed. Since fluctuations in transport costs affect import prices seriously, measures increasing our own shipping capacity are urgently needed too.

(3) In contrast to the behaviour of imports, exports both in current and fixed prices grew rapidly from 1954 to 1958 in the recovery period, while they have shown wide cyclical fluctuations since


1958. This fact, together with several other changes, suggests that Japan’s trade has entered into a normalization period different from the recovery period. Export fluctuations came from two factors: more rapid or slower growth of domestic demand (in other words, export pressure) and fluctuations in world demand for our exports. Since our exportable commodities, especially manufactures, have high income elasticities of demand both in home and foreign markets, some cyclical fluctuations of exports might be unavoidable.

(4) Moreover, the trend rate of growth of OUT exports has slowed down from 9.0 per cent in the recovery period to 7.3 per cent in the normalization period. Such a slow-down in the trend rate of export growth is certainly of great concern for the Japanese economy.

By now it has become clear that our recent recurrent balance of payments difficulties stem from two elements. One is a trend factor in which the growth rate of exports slows down while imports continue to grow at a steady and more rapid rate than exports. As shown in Table 111, import dependence (import/national income ratio) shows a steady upward trend in real terms, which is partly due to the import liberalization, although in current prices there have been wide fluctuations. Export dependence for 1958-63, however, remains steady in real terms and shows a downward trend in current prices. The up- shot is a trend towards a widening trade gap.

The other element is cyclical fluctuation both in exports and imports. Both fluctuations work together so as to affect our balance of payments unfavourably in boom years.

In addition, Japan’s invisible trade has become very unfavourable in such items as transport expenditure, tourism, payments of interest and royalties, etc. The balance of payments (IMF formula) in 1963 was in deficit on current account by an amount of $778 m. which was covered by net borrowing of capital, long-term as well as short-term, amounting to $590 m., borrowing from international organizations, and a loss of foreign exchange reserves.

To cope with wide fluctuations in the balance of payments, Japan has to accumulate larger foreign exchange reserves, which are now about $1,900 m. or a quarter of our annual imports. It is also hoped that the international monetary system wi l l be improved so as to pro- vide international liquidity more abundantly and elastically without loss of confidence in the system.

In order to rectify a trend towards long-run deterioration in Japan’s balance of payments, serious arguments are under debate a t present. One side takes a pessimistic view and recommends a slowing down of our economic growth until the relative trend rates of growth of exports and imports are reversed. It is hoped, however, that Japan’s economic growth will continue to be as rapid as possible in order that Japan may catch up with the higher income levels1° and mod- ernized mays of living of Western countries. Unless she does so, Japan

10 Japan’s per capita income reached $509 in 1%3, which is stit! less than one- half of U.K., France, Germany or Australia.

1965 JAPAN’S TRADE POLICY 77 cannot be an equal partner of the free world economy, contributing her efforts to world prosperity and sharing the responsibility of assisting in the economic progress of the underdeveloped countries. All these require Japan to be much closer to the Western advanced countries in her economic capacity, income level, ways of living and ways of thinking. The Japanese economy has to grow up further so that the Japanese and their Western partners feel greater a E t y to each other.

The other more optimistic view is that the Japanese economy grew very rapidly in the recovery period, and that it was because of this rapid growth that we could keep the balance of payments in sustained equilibrium; for the faster our rate of economic growth, the less de- pendent we become on imports, and the more rapid is our adaptation to the changing world demands and the improvement in our competitive power.“ We can and should do it again in the coming five to ten years, although the rate of economic growth may not be so high as it was in the recovery period and may be kept a t much the same level as in the past normalization period. In order to carry this out successfully, a fairly large volume of borrowing of long-term capital to fill the gap in the balance of payments is not only unavoidable but also to be welcomed as a measure for diversifying our manufacturing industries further, improving productivity (since many heavy and chemical industries are still in the infant stage) and creating and broadening foreign markets for new commodities. After five years or so, new investments assisted by foreign capital will successfully increase our exports.

Personally, I would like to support the second view since these are worthy objects for a capable and ingenious nation in a favourable. growth-minded and prosperous world environment.

Hitotsubashi University, Tokyo

KIYOSHI~KOJIMA

11For a more formal analysis of the aiternative views, see H. G. Johnson, “Increasing Productivity, Income-Price Trends and the Trade Balance”, Eco- nomic Journal, Vol. LXIV, September 1954.

japan's trade policy

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