The Rising Yen: The Impact of Japanese Financial Liberalization on World Capital Markets 9789814379007

Table of contents :
Contents
List of Figures
List of Tables
Preface
Ackno\Niedgements
I. EVENTS LEADING TO LIBERALIZATION
II. RECENT LIBERALIZATION MEASURES
III. INTERNATIONALIZATION OF THE YEN
IV. IMPACT ON WORLD CAPITAL MARKETS
V. CONCLUSIONS
Glossary
Bibliography
Index

Citation preview

-The-

RISING _.¥EN

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of1tustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the ~nstitute, coming under the overall supervision of the Director who IS also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic ~hange and political developments in ASEAN. The day-today op.erahons o:the Unit are the responsibility of the Co-ordinator. ~ ReglOnal AdVIsory Committee, consisting of a senior economist rom each of the ASEAN countries, guides the work of the Unit.

---The---

The Impact of Japanese Finandal Liberalization on World Capital Markets RICHARD S.,THORN Uniuersity of Pittsburgh

ASEAN ECONOMIC RESEARCH UNIT

INSTITUTE OF SOUTHEAST ASIAN STUDIES

Cover Photo Special commemorative coin struck to celebrate the Emperor Hirohito's Sixtieth Anniversary of Reign (¥10,000)

Published by Institute of Southeast Asian Studies Heng Mui Keng Thrrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1987 Institute of Southeast Asian Studies Cataloguing in Publication Data

Thorn, Richard S. The rising yen: the impact of]apanese financial liberalization on world capital markets. 1. Finance-Japan. 2. Capital market-Japan. 3. Japan-Economic policy. 4. Yen. 5. Currency question-Japan. 6. International finance. I. Institute of Southeast Asian Studies. II. Title. HG187 J3T49 1987 ISBN 9971-988-74-7 (hard cover) ISBN 9971-988-75-5 (soft cover) The responsibility for facts and opinions expressed in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy ofthe Institute or its supporters.

Typeset by The Fototype Business Printed in Singapore by Chong Moh OffSet Printing Pte Ltd

7b my siste r

judy Bonn ie Thor n

Contents

List of Figures List of Tables Preface Acknowledgements I.

EVENTS LEADING TO LIBERALIZATION 1. Economic Slowdown in Japan Breakdown of the Japanese Economic Strategy Cause of the Slowdown Increased Dependence on Exports Wage Restraint Policy Fiscal Policy Search for a New Economic Strategy 2. Financial Rigidities in Japan Growth of Government Debt Indirect Finance of Japanese Business

X

xi xiv xviii 1 2 3 4 4 9 11

13 16 16 17

Contents

viii

II.

III.

The Keiretsu The Bureaucracy 3. Implications of Change

18 20 21

RECENT LIBERALIZATION MEASURES 1. Pre-1984 Liberalization and Internationalization Measures Expansion of Japanese Banks Abroad Internationalization Measures of the Seventies Domestic Capital Market in the Seventies Reforms of the Eighties The Black Ships 2. Current Status of Japanese Capital Markets Short-'Ierm Capital Markets Call and Bill Discount Markets Gensaki Market Swap Funding Operations Foreign Exchange Market Negotiable Certificates of Deposit Money Market Certificates Large Time Deposits Small Time Deposits Long-'Ierm Capital Markets The Bond Market Formation of Interest Rates Qualification of Issues Shift to Overseas Bond Financing The Stock Market Liberalization of Financial Business 3. Summary Appendix: Recent Deregulation Measures

24

INTERNATIONALIZATION OF THE YEN 1. Some Theoretical Considerations 2. The Yen in Current ltansactions Imports International Reserves 3. The Yen in International Financial'Itansactions Yen-Denominated Capital ltansactions

25 26 26 26 27 29 33 36 36 39 39 39 40 41 41 42 42 43 44

44 44

45 47 48 52 57 58 59 60 61 63 63

contents

Fund Raising by Non-Residents The Growth of the Euroyen Market Investment in Japan 4. Summary IV.

v.

IX

63 69 72 72

IMPACT ON WORLD CAPITAL MARKETS 1. Changes in the Japanese Saving Behaviour 2. Impact on Foreign Exchange Markets 3. Impact on Banks Bank Assets Bank Liabilities Competitiveness of Japanese Banks 4. Impact on Size of World Lending Impact on Market Share of Financial Centres Intra- First-Tier Shares Impact on Offshore Markets The Thkyo Offshore Market The Future of Offshore Markets Impact on Flow of Capital to Developing Countries

75 78 82 85 86 87 89 90 92 94 96 98 102

CONCLUSIONS

109

Glossary Bibliography Index

103

114 116 119

List of Figures

I-1

Japanese Average Annual Growth Rates, by Components of GDP, 1979-85 I-2 Indices of Real Wages, Productivity, and Real GNP in Japan, 1969-85 (1975 = 100) I-3 Share of Central and Local Government Revenues and Expenditures in GNP 11-1 Bond Issues by Japanese Corporations, FY1975-86 III-1 Selected Fund Raising by Non-Residents, 1980-85 III-2 Samurai and Euroyen Bond Issues, 1975-86 IV-1 Long-'Ierm Japanese Gross Capital Outflow by 'I)rpe, 1980-86 IV-2 Deposit Banks' Share in Foreign Liabilities, 1980-86 IV-3 Financial Flows from Japan to Developing Countries and Multilateral Agencies, 1981-85

5

10 12 46 65 70

77 93 105

List of Tables

I-1 I-2 I-3 I-4 II-1 II-2

II-3 III-1 III-2

Gross Domestic Product of japan, 1973-86 Distribution of japanese Exports, by Region Share of Exports in GN(D)P of Five Industrialized Countries Ownership Structure of japanese Industrial Groups, 1974-82 Comparison of Yen/Dollar Committee "Report" and the Ministry of Finance's "Prospects" Brief Description of the Japanese Money Market Fund Raising by Japanese Corporations through Selected Instruments, 1985 Use of the Yen in japanese Export and Import 'Transactions Share of National Currencies in Official Holdings of Foreign Exchange, 1977-85, End of Year

6 8 8 19 34 37 43 59 62

List of Tables

xii

III-3 III-4 III-5 IV-1 IV-2 IV-3 IV-4 IV-5 IV-6 IV-7 IV-8 IV-9 IV-10 IV-11

IV-12 IV-13 IV-14

Comparison of Market Shares of Major Currencies in Internationai Financial Markets Yen-Denominated Fund Raising and Investment by Non-Residents Abroad External Bond Offerings in Yen japanese Net Purchases of Foreign Securities by Market Rate of Growth of Selected Personal Assets, by 'I)rpe Holdings of Foreign Securities by Financial Institutions Average Daily Foreign Exchange Thrnover, 1984-86 International Assets of Banks by Nationality of Bank Japan's Net External Financing of Long-1erm Capital Flows Recent Acquisitions of Banking Institutions by japanese Banks Share of Exports to the United States in National Economic Growth Relative Share in World Financial Liabilities of First-Tier Financial Centres International Liabilities Booked in London, by Bank Nationality Groups, End September 1985 Share in Deposit Banks' Foreign Liabilities of M~or Offshore Banking Centres in Developing Countries, 1980-86 International Comparison of Offshore Markets, End of 1985 Japanese Direct Investment in Asia, 1951-85 Indicators Related to Overseas Direct Investment by M~or Countries

64 67 71 79 80 81 84 86 88 91 92 95 95

98 100 104 106

Statistical Note: 1. The reader should be aware that the data available on international financial flows are less reliable than the corresponding national data. The geographical and transaction coverage has improved over the years so that almost none of the time series data are consistent. There are significant differences between the concepts of international transactions employed by the International Monetary

~

:st of lables

xiii

Fund and the Bank for International Settlements, the two principal statistical sources. I have not burdened the text by listing these qualifications except on rare occasions where I thought it particularly necessary. I have taken pains not to place a burden on the data that it would not bear, in spite of the conventional use of decimal places. It would take a book to detail all the necessary qualifications to what appear to be simple straightforward time series. Fortunately, such a book has been written by Dennis (1984) and is essential reading for those who would gain a full appreciation of the value of the data. 2. At a yen/dollar exchange rate of 150: ¥1 billion US$6.67 million ¥1 trillion = US$6.67 billion

Preface

The japanese financial district, Marunouchi, is situated directly south of the Imperial Palace, separated from it by a great moat rimmed with the outer gardens of the palace. 1b the east lie the important government ministries and the Japanese Diet, and to the north and west lie the business and residential quarters of the city. This grand panorama of the Emperor, the symbol of national unity, surrounded by his ministers, prosperous subjects, and bankers, conveys a sense of the harmony comparable to that one experiences on seeing a Japanese garden. No profound economic study is necessary to inform one that this financial centre is different. In place of the crowded, narrow, littered streets of Wall Street, full ofhawkers, office workers, and messengers rushing about, or the strange ·mixture of old and new of the city in London with its equally bustling streets, one finds in Marunouchi, quiet streets lined with neat, conservative, low, monolithic buildings.

Preface

XV

Along its sunlit ways bordered by small hedges and gardens, neatly dressed gentlemen in their dark blue suits stroll briskly to their appointments. It is difficult to believe that one is standing in the midst of the financial heart of the world's second largest economy and largest international lender. The Japanese Miracle Twice

Japan has risen from what today we call a less developed country, to become a world economic power, confounding not once but twice in this century, those pundits who argue that it is impossible for backward nations to close the gap with the industrialized nations ofthe West. Not only has Japan closed the gap, but it has also gone to the head of the file; and each time this has brought it in conflict with the West and wrought enormous social and political strains. First, Japan wrenched a feudal economy into the twentieth century after the Meiji Restoration in 1868. It performed the miracle a second time as it arose from the ashes of World War II. Japan's Imperialist Adventure

Japan's adventure into war in the 1930s may be viewed as a last desperate attempt to counter the imperialist advance of the Western powers, which not only had established a political and economic hegemony over Asia but also attempted to introduce Western values to colonial peoples. Japan in its imperialist initiative emulated the Western powers and attempted to inculcate Japanese values in a much more forceful manner than anything attempted by the Western powers. In the process, japan alienated the colonial peoples, who instead of welcoming Japan as a liberator, saw it as a worse kind of oppressor. Japan hastened the demise of colonialism in Asia but not in a manner which created any bond of gratitude so that when]apan began its reconstruction it was relatively isolated from its neighbours. Like any people who lived apart for a long period of time, Japan developed its own peculiar set of financial institutions and financial arrangements. These were not always compatible with those of their Western counterparts. To counter its isolation, the Japanese took refuge in their enduring citadel of nationalism.

xvi

Preface

The Re-emergence of Japan

Thday, japan has re-emerged as a world economic and financial power, but not in a balanced manner. It has taken its place alongside London and New York as a first-tier financial centre. It is in the process of adapting rapidly its institutions to this new international role. However, this swift adjustment in the international sphere has not been matched by an equally speedy adjustment of its domestic financial institutions. This is causing friction as the international transformation causes ever greater strains on domestic financial markets. There is no question either in, or outside of, Japan that japanese domestic financial institutions will become transformed, at least to the extent that even ifthey do not fully accept Western norms, they will become compatible with them. How to make this adaptation in a harmonious manner is the central problem that faces the japanese authorities. "Harmony" is a very important word in Japan. The group that was charged with studying the problem ofintegrating the japanese economy with the world economy was called "The Advisory Group on Economic Structural Adjustment for International Harmony" ("Maekawa Report"). This goal of achieving change in a harmonious manner without untoward disruption to individuals is a difficult, if not impossible, goal to attain. It explains, however, what seems to outsiders like a great deal of foot dragging on the part of the Japanese. This foot dragging also reflects an insensitivity on the part of the Japanese for the need of1Nestern nations to preserve their own domestic harmony. This book is confined to the financial aspects of the economic restructuring that is taking place in japan. However, one can only fully understand this restructuring in the context of the larger political adjustment that is taking place as Japan's role in Asia and the world is being redefined and its post-war isolation is coming to an end. Japan today is searching for an acceptable way to reconcHe its nationalistic values with its role as a world power. ]a pan's leaders are being challenged not only to solve the immediate problems of enormous current account imbalances but also to develop an international financial system that will produce world prosperity. As this is being written, the international trading system is headed towards a crisis with major protectionist legislation directed against Japan almost certain to be passed later this year by the United States and the European

Preface

xvii

Community (EC). Prime Minister Nakasone's search for a harmonious solution will be severely tested. There is no time for gradual adjustment, but a need for bold, new measures by the three key parties, Japan, the United States, and the European Community to devise not only a new trade relationship among themselves but also a co-ordinated policy towards the Third World. It is in this context that the liberalization of Japan's capital markets is evaluated in the pages that follow.

The organization of this book is as follows: Chapter I presents an analysis of the broad problems faced by the japanese economy which led it to revise its highly successful post-war economic strategy including a reversal of its attitude towards the control of international capital transactions. It then provides a brief description of the Japanese financial structure which is being deregulated. Chapter II describes the deregulation measures taken thus far and the objectives they hoped to attain. Those not interested in the details need only read the first half of the chapter. This is followed by Chapter III, which examines the progress that has been made in the internationalization of the yen and its implications for the future. Chapter IV looks at the impact of the financial liberalization measures taken thus far on Japanese and world capital markets and how this has affected the flow of capital to the developed and less developed countries, with special emphasis on Asia. june 1987

R.S. Thorn

Ackno\Niedgements

This work was only made possible by the willingness of a great many people to share their knowledge and experience with the author. It is not possible to acknowledge this debt in detail because it is a large one. I would, however, like to single out three people who made the writer's visit to japan in November 1986 extremely productive in not only sharing their profound knowledge of Japan and the Japanese economy but also taking the time out from their busy schedules to introduce and arrange appointments with a much wider group of persons than the author could ever have accomplished on his own: the three are Kazuo Nukazawa of the Keidanren, Teruhiko Mana of the Bank of Tokyo, and Eisuke Sakakibara ofthe Ministry of Finance. Earlier drafts of this work were read by Mukul Asher and Lee Sheng-Yi of the National University of Singapore, all of whom offered valuable comments. Lim Hua Sing, also of the National University of Singapore, made the author aware of some of the japanese literature which he might have otherwise missed. Thkeshi Mori of the

Acknowledgements

xix

Institute of Developing Economies, Tokyo, also read an early draft and called the author's attention to several subtleties in the japanese economy that might have been overlooked otherwise. This work was completed while the author held the Tim Chin Than Chair of Banking and Economics at the National University of Singapore. I would like to thank Lim Chong Yah, Head of the Department of Economics and Statistics, my colleagues, librarians, and secretarial staff at the University for their generous assistance. Partial financial support for this study was received from the Institute of Southeast Asian Studies, Singapore, and the Alex C. Walker Foundation of Pittsburgh.

0 Events Leading to Liberalization

The japanese decision to liberalize its capital markets was motivated by the economic slowdown that occurred in the second half of the seventies, the failure of the economy to adjust adequately to an overabundant supply of savings, and a d~cline of domestic investment opportunities. This in turn provided both the incentives and the opportunity to expand exports, which eventually produced the large current account surpluses in the balance of payments beginning in 1981. These surpluses, further reinforced by the appreciation of the U.S. dollar, led to increasing friction between Japan and the United States, which at times overshadowed the basic economic problems confronting both countries. Recognizing this basic scenario enables one to tie together the seemingly disparate events that have occurred since 1982, involving the evolution of the yen/dollar exchange rate, the large international payments imbalances that subsequently occurred, and the continued lack of co-ordination of U.S. and Japanese economic policies.

CHAPTER I

2

The Japanese decision to liberalize its capital markets is often described in the context of a response to American pressure to decrease the Japanese-U.S. current account balance of payments deficit and to change the yen/dollar exchange relationship (Frankel1984). While this played an important role in the timing and order of the decisions which were taken, it was not the driving force underlying the Japanese policy decision. The Japanese perspective on the problem is focused largely on internal factors and is related to the search for a new economic growth strategy to guide the nation into the next millennia. The ''American Problem" is looked upon more as an acute but transitory situation which has its roots largely in American domestic economic policies.

I. Economic Slowdown in Japan Beginning in 1970 the Japanese economy slowed down dramatically from its phenomenal double-digit growth of the sixties. The real growth rate nearly halved in the decade of the seventies and further declined in the early eighties. In 1976, for the first time in more than twenty years, the unemployment rate reached 2 per cent, a figure most countries would envy, but a level which caused grave concern inJapan. This striking turn of events forced a rethinking ofthe basic Japanese investment-led export-growth economic strategy, which had been so successful for nearly two decades. The cornerstone of this policy was the beliefthat a modern industrial state required a capital goods industrial base and a sufficient level of exports so that economic growth would not be limited by an inability to import essential raw materials. This meant that many low-profit industries, such as the steel industry, were encouraged to expand although in a free capital market, they might have had difficulty in raising funds. Export industries were given priority across the board in the allocation of financial capital. The principal economic policy instrument that was used to implement this strategy was the setting of the rate of interest well below the market clearing level and the rationing of credit through the banking system and specialized government financial institutions (Suzuki 1980). In establishing this method of implementation of government planning, the Japanese authorities- mainly the Ministry of Finance (MoF) and the Ministry oflnternational 'frade and Industry (MITI) -

Events Lead1ng to LiberaliZatiOn

3

rejected, in the domain of investment policy, the Anglo-Saxon faith in the ability of private capital markets to allocate financial resources efficiently. This was done in a pragmatic way and not as a matter of principle, although there was ample historical precedent for such a policy. 1 The price system and free markets were given wide sway over the allocation of resources except for investment resources. Th implement this policy of credit allocation, the japanese authorities maintained one ofthe most restrictive systems of capital controls both domestically and internationally of any industrialized nation. The functions of each type of financial institution were rigidly specified and there was little transfer of resources between them. In the international sphere, all capital transactions in foreign currencies by Japanese residents prior to 1980 were prohibited except as authorized by the MoF when found to be in the national interest. Financially, Japan was as closed to foreigners as it had been during the exclusion period. The slowdown in japanese economic growth was to change all this.

Breakdown of the Japanese Economic Strategy Confronted with the decline inJapanese growth in the mid-seventies, the authorities' initial reaction was to modify, rather than abandon, its post-war strategy. Japanese growth, it was reasoned, was being hampered by the slowdown in world economic growth, which was partly initiated by 1. the first oil crisis {Japan imports almost all its oil requirements); 2. the increased resistance being met by Japanese exports in Ameri-

can and EC markets; 3. the world-wide inflation in the second half of the seventies; 4. the appreciation of the yen/dollar rate, which rose steadily from 358 yen to the dollar in 1970, to 297 in 1975, and to 227 in 1980. The first reaction of the Japanese authorities and businessmen was to attempt to maintain the rate of growth of exports to compensate for the domestic slowdown, in spite of the deceleration of world economic growth. They intended to accomplish this firstly, by diversifying Japan's export markets both geographically and by commodity, particularly towards hi-tech goods, and secondly, by increasing productivity to maintain its international competitiveness.

4

CHAPTER I

This policy was relatively successful. Japan was able to weather the oil crisis better than any other industrialized country. Investment slowed significantly in the early eighties; yet japan was able to maintain a respectable growth rate of 4 per cent in real gross national product (GNP) in the period 1972-79. Cause of the Slowdown

The principal factor causing economic slowdown in japan was the sharp decline in the rate of growth of domestic investment, as shown in Figure 1-1. Imports, consumption, and government expenditure all grew at approximately the same rate as gross domestic product (GDP). All things being equal, the rapid decline in investment should have resulted in a more pronounced decline in output than had actually occurred. Output, however, was sustained by a remarkable increase in productivity following the recession in 1974. Productivity in manufacturing grew at an average annual rate of 9.2 per cent during the period 1975-79 while aggregate demand was sustained by the rapid growth of exports, which grew at an average annual rate of17.9 per cent in nominal terms during 1973-79. Increased Dependence on Exports

One may distinguish two stages in the growth of exports. The share of exports in japanese GDP hovered around 9 per cent in the first half of the seventies, jumped to around 12 per cent in the second half of the seventies, and then leaped to more than 16 per cent in the first half of the eighties. During the same period the share of imports in GDP fluctuated slightly but showed no trend, so that on average fully 7 per cent of the rise in aggregate expenditure was accounted for by the growth in exports. See Thble l-1(b). While japan was extremely successful in expanding its exports, it failed to diversify them significantly either by commodity, or by country. Its heavy dependence on the U.S. and EC markets, where it was meeting increasingly heavy political resistance, grew. The U.S. share in total japanese exports rose from 20 per cent in 1975 to 24 per cent in 1980 while the EC share rose from 10 to 13 per cent (Thble 1-2). japanese exports, while not a large percentage of GDP when

FIGURE I-1 Japanese Average Annual Growth Rates, by Components of GDP, 1979-85 (In percentage) 12 11

10 9 8 f-t

u~

-

7

6

~

~ 5

-

4

3 2

-

1

0

Exports

Imports

Government Investment Inventories COMPONENTS OF GDP

Consumption

SouRcE: Bank of Japan, Economic Statistics Annual, various issues.

GDP

TABLE l-1(a) Gross Domestic Product of Japan, 1973-86 (In trillion yen)

Exports Imports Imports excluding petrol c.i.f.

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

10.4 -12.1

12.1 -20.7

19.4 -20.3

20.3 -22.7

23.8 -22.6

25.6 -20.5

27.9 -29.6

35.7 -37.9

41.8 -40.3

44.5

43.5

50.0

-42.4

-38.2

1983

1985

1986

-41.3

52.1 -40.1

-28.8

1984

43.4

-8.4

-14.5

-14.1

-15.8

-15.7

-15.1

-21.3

-24.8

-27.4

-29.6

-27.3

-30.5

-30.4

-24.6

Balance

-1.7

-8.6

-0.9

-2.4

1.2

5.1

-1.7

-2.2

1.5

2.1

5.3

8.7

12.0

14.6

Government consumption Gross investment Increase in stocks Private consumption

9.3 40.9

12.2

14.9

16.4

18.2

19.8

21.5

23.6

25.6

26.8

28.0

29.4

46.7

48.0

51.9

56.2

62.4

70.2

75.8

78.9

80.0

79.2

83.0

31.0 87.6

93.0

GOP

32.6

1.9

3.4

0.5

1.1

1.2

1.0

1.8

1.6

1.4

1.2

0.2

1.3

2.1

1.5

60.2

72.8

84.6

95.1

105.8

115.9

130.1

141.3

149.4

159.6

167.8

176.1

185.0

190.5

112.4

134.2

148.0

165.9

184.5

202.6

221.5

240.2

257.4

269.6

280.3

298.1

317.7

330.8

NOTE: c.i.f. = cost, insurance, freight. SouRCE: IMF, International Financial Statistics, various issues.

TABLE I-1{b)

Gross Domest ic Produc t of Japan, 1973-86 (In percent age) 1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

9.3

13.1

13.4

14.9 15.8

16.2

12.2

12.6 10.1

12.6

13.7

12.2 13.7

12.9

10.8

9.0 15.4

15.7

7.5

10.8

9.5

9.5

8.5

7.4

9.6

10.3

Balance

1.5

6.4

0.6

1.4

0.7

2.5

0.8

0.9

Governme nt consumpt ion Gross investmen t Increase in stocks Private consumpt ion

8.3

9.1

10.1

9.9

9.9

9.9

9.9

10.0

34.8

32.4

31.3

30.5

9.7 31.7

9.8

36.4

9.8 30.8

31.6

30.7

29.7

28.3

Exports Imports Imports excluding petrol c.i.f.

GOP

NaTE: c.i.f.

1984

1985

1986

16.5

15.5

13.1

13.6

16.8 13.9

16.4

15.7

12.6

8.7

10.6

11.0

9.8

10.2

9.6

7.4

0.6

0.8

1.9

2.9

3.8

4.4

9.9

9.8

27.8

27.6

9.9 28.1

1.7

2.5

0.3

0.7

0.7

0.5

0.5

0.4

0.1

0.4

54.2

0.7

57.2

0.5

57.3

57.3

57.2

0.8 58.7

0.7

53.6

58.8

58.0

59.2

59.9

59.1

58.2

57.6

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

cost, insuranc e, freight. SOURCE: IMF, Internat ional Financial Statistics , various issues. =

19R3

CHAPTER I

8

TABLE I-2 Distribution of japanese Exports, by Region (In percentage)

United States EC Asiab Rest of the world Thtal

NOTES:

1975

1980

1985

1986

1987a

19.9 10.1 22.5 47.5

24.2 12.8 23.8 39.2

37.2 11.4 18.9 32.3

38.5 14.7 19.9 26.9

39.2 18.2 20.8 21.8

100.0 (55.8)

100.0 (129.8)

100.0 (175.6)

100.0 (205.6)

100.0 (188.3)C

Figures within parenthesis are in billions of US$.

a 1b the month of february.

Excluding the People's Republic of China. Annual rate. SouRcE: Bank of Japan, Balance of Payments Monthly. b

c

compared with either Europe or the United States, played an increasingly important role in sustaining its rate of economic growth (Th.ble I-3). Where did Japan get the goods to export without reducing its domestic living standard? The answer lies largely in the sharp reduction of the share of investment in GDP and the remarkable increase in productivity. The rate of investment fell drastically by 8 per cent, from 36 per cent of GDP in 1973 to 28 per cent in 1985. The 4 per TABLE I-3 Share of Exports in GN(D)P of Five Industrialized Countries (In percentage)

Japan United States Germany france United Kingdom

1975

1980

1985

13 8 27 18 26

15 10 29 21 28

16 7 35 24 29

SouRCES: IMF, Yearbook; Bank ofJapan, Monthly Statistics ofjapan.

Events Leading to Liberalization

9

cent rise in the rate of consumption from 53.6 per cent to 57.6 per cent in the same period (see Thble 1-1) was insufficient to absorb the decline in investment. The reduction in the rate of investment would have resulted in a sharp decline in output. However, the effect on output was offset in part by the rise in productivity so that a respectable rate of growth of output was sustained. However, domestic consumption plus domestic investment was insufficient to absorb the total output ofthejapanese industry which made the necessary goods available for export and, in fact, gave producers strong incentives to export. Another implication of this set of circumstances was that the growth in domestic investment opportunities did not keep pace with the growth in domestic savings and the private sector sought new outlets for its savings. Wage Restraint Policy

The growth of real wages slowed down with the decline in the rate of economic growth and productivity experienced in 1973-75 following the first oil shock. However, when economic growth resumed in 1976, the growth rate of wages still lagged behind. Whereas wages had moved closely with changes in real output and labour productivity prior to 1976, they exhibited a radically different behaviour after that (Figure 1-2). The conservative wage policy that was followed after 1975 can be ascribed to the continued dedication of Japan to investment-led export-growth strategy and the fear that Japanese exports were losing their competitiveness as a result of the appreciation of the yen. This fear was heightened by the sharp rise in prices induced by the first oil shock in 1972 and the huge wage increases of 1974, where some wages rose by as much as 33 per cent. In the ensuing inflation, consumer prices rose by 24 per cent in 1974. This made businessmen and the government extremely cautious in their wage policy. Through a policy of austerity, involving a cutback in government spending in 1975, tight money, and wage restraint, inflation was brought under control. Consumer prices rose by only 9 per cent in 1976 and declined steadily thereafter. Despite that, the policy of wage restraint was maintained. Real wages in manufacturing rose by only an average of 1.6 per cent per annum from 1976 to 1985 compared to a growth of 4.5 per cent in real output (Figure I-2).

FIGURE 1-2 Indices of Real Wages, Productivity, and Real GNP in japan, 1969-85 (1975 = 100) 190-.--------------------------------------- --------------------------------------, /

180 -

Manufacturing productivity

170 -

Real wages in manufacturing

160 -

Real GNP

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