Multimedia Mania/abacus-multimedia-mania.iso/dp/0036/00363.txt

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$Unique_ID{bob00363}
$Pretitle{}
$Title{Japan
Economy}
$Subtitle{}
$Author{International Society for Educational Information, Inc.}
$Affiliation{Embassy of Japan, Washington DC}
$Subject{economy
economic
growth
japan
japan's
oil
japanese
period
investment
world
see
tables
}
$Date{1989}
$Log{See Table 3.*0036301.tab
See Table 4.*0036302.tab
}
Title:       Japan
Book:        The Japan of Today
Author:      International Society for Educational Information, Inc.
Affiliation: Embassy of Japan, Washington DC
Date:        1989

Economy

Postwar Development

     The economy of Japan is a thriving complex of industry, commerce,
finance, agriculture, and all the other elements of a modern economic
structure. The nation's economy is in an advanced stage of industrialization,
served by a massive flow of information and highly developed transportation
networks. One feature of Japan's economy is the major contribution of
manufacturing and services, such as transport, wholesale and retail commerce,
and banking, to the country's net domestic product, in which such primary
industries as agriculture and fisheries now have a minor share. Another
feature is the relative importance of international trade to Japan's economy.

     Japan is an island country, poorly endowed with natural resources and
supporting a population of over 120 million in a relatively small area. Yet
despite these limiting conditions and the devastation of its manufacturing
base during World War II, Japan has managed not only to rebuild its economy
but to become one of the leading industrial nations in the world. At the same
time, however, this process of rapid industrial expansion, along with changes
in domestic and international economic conditions over the past few years, has
created various economic problems that the nation must now face.

Postwar recovery

     For some years following Japan's defeat in World War II, the nation's
economy was almost totally paralyzed from wartime destruction, with severe
food shortages, runaway inflation, and rampant black-marketeering. The nation
had lost all of its overseas territories, and its population had soared beyond
the 80-million mark with the addition of some 6 million repatriates from
abroad. Factories had been burnt down in air raids. Domestic demand dropped
with the halt of military procurements, and overseas trade was restricted by
the Occupation forces. But the Japanese people set about rebuilding their
war-devastated economy, initially assisted by rehabilitation aid from the
United States. By 1951, the gross national product had recovered to the
1934-36 level. Population growth inhibited the recovery of the nation's per
capita income, but by 1954 this indicator also had regained its 1934-36 level
in real terms. Demobilized military personnel and returning civilians joined
the labor force, providing an ample supply of workers for economic
reconstruction in the early postwar period.

     Various social reforms carried out after the war helped shape a basic
framework for subsequent economic development. The postwar demilitarization
and the prohibition of rearmament written into the new Constitution eliminated
the heavy drain of military spending on the nation's economic resources. The
breakup of the zaibatsu (large business trusts) set loose the forces of free
competition, and the ownership of farmland was redistributed on a wholesale
basis among former tenant farmers, giving them fresh incentives to improve
their lot. Barriers to labor union activities were also removed, with the
result that workers' job security became better protected and the way was
opened for a steady rise in wage levels.

     Under the "priority production system," stress was placed on increased
output of coal and steel, the two main focuses of the nation's industrial
endeavor. An upswing in steel production laid the foundation for an overall
takeoff of production, featuring a surge in capital investment sustained by
the recovery of consumption. Production subsequently increased not only in the
key material industries, such as steel and chemicals, but also in new
industries producing consumer goods, such as television sets and automobiles.

Rapid economic growth

     Japan's economy continued to expand rapidly from the mid-1950s through
the 1960s, experiencing only two short recessions, in 1962 and 1965. The
annual growth rate averaged close to 11% in real terms for the decade of the
1960s. This compared with 4.6% for the Federal Republic of Germany and 4.3%
for the United States in the period from 1960 to 1972. And it was well above
twice Japan's own average prewar growth rate of about 4% a year.

     It is generally agreed that the rapid expansion of Japan's economy from
the late 1950s through the 1960s was powered by the vigorous investment of
private industry in new plant and equipment. The high level of saving of
Japanese households provided banks and other financial institutions with ample
funds for heavy investment in the private sector. The upsurge in capital
spending was associated with the introduction of new technology, often under
license from foreign companies. Investment for modernization made Japanese
industries more competitive on the world market, created new products, and
brought Japanese enterprises the benefits of mass production and improved
productivity per worker.

     Another factor behind Japan's economic growth during this period was the
availability of an abundant labor force with a high level of education.
Reasonably large numbers of young people entered the labor force every year,
and there was also a heavy migration of agricultural workers to manufacturing
and service jobs located mostly in the larger cities.

     As best exemplified in the 10-year Income-Doubling Plan announced in
1960, the Government's economic policies at the time aimed to encourage
saving, stimulate investment, protect growth industries, and promote exports.
Japan benefited from an expansionary world economic climate and the
availability of an abundant supply of relatively cheap energy from abroad
throughout this period.

     After a short recession in 1965, the Japanese economy enjoyed a long
period of prosperity until around the summer of 1970, with the real growth
rate during this period averaging close to 12%. The main factor behind this
growth was rising capital investment, used for major outlays designed to
bring about economies of scale, build additional facilities to increase
export capacity, and acquire equipment needed to respond to changes in the
economic and social environments, such as labor-saving tools and
pollution-cutting devices. Increases in exports due to the stronger price
competitiveness of Japanese products also supported the sustained rise in
business activity.

Economy at the crossroads

     With the rapid expansion of its gross national product, by 1968 Japan
had come to rank second only to the United States among the market economies
in terms of national economic scale. At the same time, however, this fast
growth gave rise to various problems and imbalances: a relative delay in
modernizing such areas as agriculture and smaller businesses; a sustained
upward trend in consumer prices; a shortage of housing and infrastructure like
roads and other facilities for daily use; environmental pollution and the
destruction of nature; and the depopulation of rural areas and overcrowding
in the cities.

     Japan's sustained prosperity boosted its international standing, but the
rapid increase in its exports and the growing surplus in its balance of
payments led to increased moves toward protectionism in other countries.
Changes in the international and domestic circumstances surrounding the
Japanese economy that had built up quietly during the latter half of the
1960s suddenly surfaced in the period from 1970 to 1975. In August 1971 the
United States announced the suspension of the dollar's convertibility into
gold, in effect bringing an end to the Bretton Woods international monetary
system, which had been one of the major pillars supporting the economic
development of the free world in the postwar period. In February 1973 the
world's major countries, including Japan, switched to a system of floating
exchange rates. The turmoil in international monetary affairs contributed to
a worldwide bout of inflation.

     Within Japan, inflationary tendencies were aggravated by the loose
monetary policies adopted to stimulate economic activity and to reduce the
country's current account surplus. The first oil shock, in the fall of 1973,
fanned the flames of inflation even higher, and consumer prices rose more than
20% in 1974.

     In response the Government raised interest rates, cut back on public
investment, and took other steps to rein in total demand, causing a sharp drop
in economic growth. Real growth in fiscal 1974 (April 1974-March 1975) fell
to -0.4%, and the country found itself in the most serious economic straits it
had experienced since the early postwar years. The oil shock highlighted the
fragility of Japan's economy, which had come to rely heavily on imported oil
as a source of energy. In the years that followed, economic activity recovered
somewhat but never reached the levels of the rapid-growth period. And the
fiscal picture was clouded by the fall in tax revenues that resulted from the
sluggishness of the economy. In its supplementary budget for fiscal 1975 the
Government was forced to resort to deficit financing for the first time since
the war, and the budget has remained in the red ever since.

     Late in 1978, just as Japan was finally showing signs of recovering from
the effects of the first oil shock, the revolution in Iran set off a second
round of oil price hikes. Learning from its experience in the first shock, the
Government countered quickly with tight money and other steps to keep
inflation from getting out of hand, and by the summer of 1980 prices had more
or less stabilized. But the economy entered a recessionary phase as businesses
cut inventory levels and reduced capital spending and as individuals reduced
their consumption spending and housing investment. High interest rates in the
United States further prolonged the recession in Japan.

Current Economic Situation

Macroeconomic trends

     The double-digit real economic growth rates that Japan had maintained
during the 1960s and early 1970s ended with the first oil crisis in 1973-74,
and growth rates of less than 4% have been common since the second oil crisis
(1979-80). Japanese industry, facing dramatic increases in both energy and
labor costs as a result of the oil crises, made desperate efforts to reduce
energy and labor requirements and to introduce new technology. These efforts
have actually placed Japan in a stronger competitive position internationally
than before the oil crises.

     In the early 1980s, a global economic recession caused oil consumption to
slump and sharply weakened the solidarity of the Organization of
Petroleum-Exporting Countries. OPEC cut its posted prices in March 1983, and
this marked the start of a period of cheaper oil.

     The combination of these developments with other factors, such as a
strong dollar and a weak yen and a recovery in the U.S. economy, also had a
beneficial effect on the Japanese economy in the early 1980s. Dramatic
increases in private-sector capital investment and growth in export sales
finally brought the economy out of the long tunnel of recession, and the real
growth rate climbed to a generally satisfactory level of 5.1% in fiscal 1984
(April 1984-March 1985) and 4.3% in fiscal 1985.

     In September 1985 the five major industrial nations agreed on joint
action to bring down the excessively high dollar. In the following 12 months
the dollar dropped dramatically from over (Y)240 to under (Y)160. The
deflationary impact of this increase in the yen's value had a serious effect
on the Japanese economy.

     Though the growth rate has had its ups and downs, Japan's economy
continues to rank second in the free world in total size. According to
estimates released in September 1987 by the Organization for Economic
Cooperation and Development, Japan's gross national product in 1986 totaled
$1,958.5 billion, surpassed only by the U.S. GNP of $4,166.8 billion. Japan's
per capita GNP of $16,127 is the fourth highest among the 24 OECD nations.
This figure compares with $17,246 for the United States and $22,800 for
top-ranking Switzerland. Japan's per capita GNP ranking is substantially
higher today than in 1968, when it first overtook the Federal Republic of
Germany to become the second largest economy in the Western world on a GNP
basis. At that time it ranked only nineteenth on a per capita basis, lagging
significantly behind the United States and the West European nations.

[See Table 3.: Per Capita GNP Rankings]

     During 1985 Japan became the world's largest creditor nation, and by the
end of 1986 its net overseas assets had reached $180.4 billion. The United
States, previously the world's top creditor, had become a debtor by the end of
1985, with net liabilities amounting to $111.9 billion, and by the end of 1986
these liabilities had swollen to $263.6 billion.

     Policy coordination and structural adjustment by the major industrial
nations are essential in order to correct these imbalances in the world
economy and achieve sustained growth without inflation. Participants at the
1986 Tokyo summit agreed to step up their efforts in these areas, and they
decided to have the "Group of Seven," the finance ministers and central bank
governors of the seven nations represented at the summit, consult periodically
to ensure the effectiveness of policy coordination. They also decided to set
up a system of multilateral surveillance of exchange rates and other economic
indicators.

     During 1987, at Group of Seven meetings, OECD ministerial conferences,
and the Venice summit, participating nations agreed to reinforce their policy
coordination, and they spelled out the responsibility of countries with
surpluses in their balance of payments to formulate policies designed to
strengthen domestic demand and reduce their external surpluses and of
countries with deficits to reduce their fiscal and external imbalances.

     Japan is currently working to redress its external imbalances as quickly
as possible through a steady process of structural adjustment toward an
economy led by domestic demand rather than exports. The Government is placing
special emphasis in this context on the expansion of domestic demand in the
categories in which Japan has lagged behind the advanced nations of North
America and Western Europe, particularly housing and infrastructure.

     In May 1987 the Government announced a package of emergency economic
measures that included an additional public works expenditure of (Y)5 trillion
and income tax cuts worth more than (Y)1 trillion. And in its fiscal 1988
budget the Government increased public works spending by about 20% over the
level in the initial fiscal 1987 budget. The private sector is also working to
maintain Japan's standing in the international community through the
development of an industrial structure oriented toward domestic demand.

[See Table 4.: National Accounts]