IX

Japan and Southeast Asia

The world should, instead of spending its money on arms, turn to building up underdeveloped countries so that the basic causes of misery and conflict could disappear. If one-tenth of the effort put into arming were applied to improvement it would change the face of the earth. There would be fresh hope for millions and millions.

—JAWAHARLAL NEHRU

NOT ONLY has the last decade seen a redirection of Japan’s trade which has somewhat lessened the total importance of Asia in its trading pattern, but there is also an essential difference in the nature of Japan’s Asian trade before and after the war. Before World War II, as Table IX-1 indicates, 58 percent of Japan’s exports went to Asia and 52 percent of its imports came from this area. In 1956 only 36 percent of Japan’s exports went to Asia and only 26 percent of its imports were derived from Asia. (The above figures exclude Middle Eastern countries.)

TABLE IX-1. GEOGRAPHICAL DISTRIBUTION OF JAPAN’S FOREIGN TRADE, 1934-36, 1954-1956

Sources: Ministry of International Trade and Industry and Ministry of Finance, Tokyo.

TABLE IX-2. JAPAN’S EXPORTS TO ASIAN COUNTRIES, 1935, 1954-1956

a Country figures do not add up to Asian totals because Afghanistan, Mongolia, and Nepal are not shown separately but are included in totals. The same is true for regional totals. Total exports to these countries amount to only 0.4 percent of grand total.

b Includes Central America.

Source: Ministry of Finance, Tokyo.

The larger part of Japan’s prewar Asian trade was with the areas it dominated. It obtained rice and sugar from Formosa and Korea; raw cotton, salt, soybeans, coking coal, and iron ore from North China and Manchuria; timber, pulp, fish, and coal from Sakhalin and the Kuriles. In return Japan shipped consumer goods, principally textiles, some machinery and equipment, and railroad rolling stock.

By contrast, Japan’s prewar trade with the colonial areas of South and Southeast Asia^* was relatively restricted by the fact that most of the countries of this area were colonies of Western powers. The Philippines traded mainly with the United States; the Dutch East Indies with Holland; Indochina with France; and India, Malaya, Burma, Ceylon, etc., with Great Britain. Japan’s marginal trade with these areas was carried on only upon sufferance of the metropolitan powers. Japan bought rice, jute, rubber, cotton, tin, and petroleum and sold primarily cotton goods and other consumer items. The area was not a large importer of capital goods and when it did buy such goods it seldom bought them from Japan.

Recent years have witnessed a very marked change. Japan’s trade with South and Southeast Asia has become considerably more important than its trade with former empire areas. Japan lost the favored position it once possessed in East Asia. Pakistan, India, Indonesia, etc., have become more important markets and sources of supply than China, Korea, and Formosa. On an overall basis, as Tables IX-2 and IX-3 reveal, South and Southeast Asia now absorb over a quarter of Japan’s exports as compared with less than a fifth before the war. Japanese traders, largely cut off from the nearby mainland, until recently, have been zealous in cultivating this market.¹

Within these totals, however, there have also been some very marked shifts. The structure of Japanese trade with South and Southeast Asia has changed. Textiles are becoming relatively less important than before the war, capital goods more significant. As the underdeveloped countries of South and Southeast Asia move to industrialize, the textile industry is usually the first to grow.² Consequently the demand for imported textiles diminishes. India and Pakistan are cases in point. In 1935, 80 percent of Japan’s exports to India (including Pakistan) consisted of textiles.³ In 1956, 71 percent of Japan’s exports to India consisted of metal and metal products, principally iron and steel.⁴

Indeed, India has now become a leading competitor of Japan in textile exporting and there is some debate as to which country has the lowest production costs in textile manufacture. The following table indicates that Japan’s competitive disadvantage from having to use imported raw materials is not offset by economies in processing and that even though India’s position is distinctly better than Pakistan’s, both are superior to Japan’s.⁵

COTTON YARN: PRODUCTION COST OF JAPAN, INDIA, AND PAKISTAN
(dollars per 400-lb. bale of 20 count yarn)

Source: Monthly Report of Japanese Cotton Spinning Industry, All-Japan Cotton Spinners’ Association, No. 100, April 1955, p. 17.

In terms, however, of labor productivity as measured by the average number of spindles handled by one worker, India’s figure, 380, stands far below Japan’s (1,600-2,400).⁶

In contrast with the decline in the demand for foreign textiles in South and Southeast Asia, there has been a sharp increase in the demand for capital goods. Most of the countries of the area obtained independence since 1945 (India, Pakistan, Ceylon, Burma, Nepal, Indonesia, Malaya, Cambodia, Laos, South Vietnam, and the Philippines) and a number promptly embarked upon ambitious development programs designed to raise living standards.⁷ Such programs stimulated and enlarged the demand for foreign capital goods, since these countries were determined to industrialize but, ofcourse, lacked the capacity for machine-building essential to this process and therefore had to turn abroad for the necessary equipment. Capital goods imports into South and Southeast Asian countries are now running in excess of one billion dollars a year.

TABLE IX-3. JAPAN’S IMPORTS FROM ASIAN COUNTRIES, 1935, 1954-1956

a Country figures do not add up to Asian totals because Afghanistan, Mongolia, and Nepal are not shown separately, but are included in totals. The same is true for regional totals. Total imports from these countries amount to only 0.4 percent of the grand total.

b Includes Central America.

Source: Ministry of Finance, Tokyo.

Before World War II most countries of South and Southeast Asia had an export surplus in their international balance of payments (see Table IX-4). The region’s excess of imports in trade with Japan and Europe was covered by an excess of exports in trade with the United States. Thus, when currencies were convertible, Japan could use its earnings from trade with South and Southeast Asia to pay for imports from the dollar or sterling area. In the postwar period, however, not only was convertibility ended, but the region itself was confronted with a persistent excess of imports over exports. This resulted from a variety of factors, a very important one, of course, being the increased level of expenditures and the higher level of imports resulting from the new development programs. Of perhaps equal importance, however, was the fact that during the postwar years, except 1951, the ECAFE countries^* (excluding Japan) had a smaller share of total world exports than before the war (1938). Their share had fallen from 10.3 percent in 1938 to 6.4 percent in 1956. World exports in 1956, compared with 1950, rose by 68 percent, whereas those of ECAFE countries (excluding Japan) increased by only 9 percent. World exports in 1956 were 24 percent higher than in 1951, but those of the ECAFE countries (excluding Japan) were lower by 22 percent.⁸

Thus, since the war, the region has suffered recurrent imbalances in trade and payments. Even in trade with the United States, imports have tended to exceed exports. Because of its adverse trade with Europe and Japan as well as its large expenditures for development, the area has not been able to live within its means but has financed its deficits by drawing on sterling balances accumulated during the war, by loans from the International Bank, by grants and credits from the United States, and by more modest sums received through the Colombo Plan.

In the face of such conditions the Japanese, over the last decade, have made strenuous efforts to build their trade with South and Southeast Asia to compensate for the decline in trade with East Asia. The Japanese placed large hopes upon the expansion of their trade with South and Southeast Asia, and they generated an extravagant and unrealistic enthusiasm about the complementarity of the economies of Japan and this area. It was the old story of the Greater East Asia Co-prosperity Sphere all over again. In modern postwar dress, the argument ran that Japan needed the raw materials and resources of the region and would pay for them with exports of manufactured goods, which the region would need in ever larger quantities.⁹ To a certain extent there has always been, and remains, a large element of firm fact in this view. But there are also certain limiting factors which have made the actual development of trade less spectacular than the Japanese had expected.

TABLE IX-4. POSITION OF ECAFE^a COUNTRIES IN WORLD TRADE, 1938, 1949-1956

a U.N. Economic Commission for Asia and the Far East. Countries for which data are available include Burma, Cambodia, Ceylon, China (Taiwan), Hongkong, India, Indonesia, Japan, Laos, Malaya, Pakistan, Philippines, Thailand, and Vietnam.

b Excluding China (Taiwan).

Sources: Economic Survey for Asia and the Far East, ECAFE, 1957, and U.N. Worksheets on Direction of International Trade for 1956.

Japan found that some of the materials which it hoped to obtain from the area were either not available in sufficient quantities, or were priced higher than in dollar area sources, or both. Some commodities, such as Pakistan raw cotton¹⁰ and Indian coking coal, were not forthcoming in adequate amounts because of the growing demand for them in the producing countries; others, like Indonesian oil, continued to flow mainly to western Europe, despite the end of colonial ties. On the other hand, those Japanese who had rubbed their hands in glee at the prospect of a billion-dollar capital goods market in South and Southeast Asia forgot, only to be quickly and ruefully reminded, that other major industrial countries, especially lower cost-producers of capital goods than Japan, would compete vigorously for the market. Japan’s principal competitors in capital goods trade with the region turned out to be the United Kingdom, the United States, and West Germany, especially the latter in marginal situations. They supplied 53 percent, 32 percent, and 9 percent respectively of capital goods exports to the region, while Japan accounted for only 6 percent.¹¹

The tendency of South and Southeast Asian imports to shift from textiles to capital goods has worked against Japan, since its cost disadvantage has been greater in the latter category. In trade with India, for example, where the changing nature of imports has been most noticeable, Japan’s share of Indian imports fell from 9.9 percent in 1938 to 0.9 percent in 1948 and then rose to 4.4 percent in 1955, while West Germany’s fell from 8.7 percent in 1938 to 0.3 percent in 1948 but rose to 8.1 percent in 1955. In Japan’s trade with Pakistan, its exports of cotton fabrics fell from $16.5 million in 1954 to $2.3 million in 1956; its exports of textile machinery fell from $22.7 million to $1.7 million over the same period. On the other hand, its imports of raw cotton rose from $24.6 million in 1954 to $40.8 million in 1956.¹²

Japan’s trade drive in South and Southeast Asia has also been handicapped by the region’s heavy reliance on grants, loans, etc., necessitated by its unfavorable trade balance and expensive development programs. This has pushed the trade of the newly independent Asian states toward Western and especially former metropolitan countries, which were able to assist by long-term credits or grants. For example, in the case of India, Britain took 34.4 percent of India’s exports in 1938 and 33 percent in 1954; its share of India’s imports was 31 percent in 1938 and 25 percent in 1954. In the case of Burma, the British took 14 percent of Burma’s exports in 1938 and only 6.4 percent in 1954, but 25 percent of Burma’s imports were supplied by Britain in 1954 compared with 18 percent in 1938—an actual increase.¹³ The Philippines sent 82.7 percent of its exports to the United States in 1938 and obtained 68.4 percent of its imports from that country. In the postwar period, 72.7 percent of Philippine exports went to the United States, which supplied 67.6 percent of its imports.

The shortage of foreign exchange in South and Southeast Asia in the postwar period led to the continuance of a multiplicity of trade and exchange controls, quotas, newly imposed tariff barriers designed to protect infant industries, bilateralism, lack of convertibility, etc. All these restraints on trade not only restricted Japanese exports to the area, but meant that the prewar surpluses of foreign exchange which Japan formerly earned and used to buy dollar goods were no longer available for this purpose. The persistent foreign exchange shortages of Asian countries led to a tendency to restrict non-essential imports in order to conserve foreign exchange for priority items.¹⁴ This means a curtailment of consumer goods imports in favor of capital goods. Thus Japan’s ability to sell its low-cost consumer manufactures in South and Southeast Asia was reduced by the shortage of foreign exchange.

Japan suffers from the disadvantage of not being a member of any trading bloc or currency area. The difficulties which arise are well illustrated in the case of Japan’s trade with Indonesia. Japan’s exports to Indonesia fell from $123 million in 1954 to $68 million in 1955¹⁵ because Indonesia had been unable to pay off its previously accumulated debt to Japan either in goods or in foreign exchange. For 1956 Japan carefully balanced its trade with Indonesia, providing exports ($75.7 million) just about sufficient to pay for what it could buy from Indonesia ($77.7 million).¹⁶ Thus trade is being balanced at a much lower level than would be the case if (a) currencies were convertible, (b) Indonesia were to sell more of its oil to Japan and less to metropolitan countries, (c) Indonesia’s payments situation were improved.

Perhaps the overriding reason for the disappointing performance of South and Southeast Asia in absorbing Japanese exports is its very low purchasing power. Per capita incomes, while rising in recent years, are meager, even by Japanese standards. In time, development programs now under way will increase purchasing power, but this is likely to be a long, slow process, with inflation and growing population absorbing some of the gains.¹⁷

Until recently the reparations problem has been a further factor retarding trade development because of the inhibiting influence it had on what otherwise might have been a Japanese desire to extend credit or undertake long-range investments in certain countries in the area. However, agreements have been concluded with Burma, the Philippines, Thailand, and Indonesia and now only the Vietnam settlement remains to be arranged.

In an agreement concluded in November 1954, effective April 1955, Japan agreed to pay Burma $200,000,000 in goods and services over a ten-year period, and in addition another $50 million will be made available over ten years for joint enterprises. Thus the way was opened for extensive Japanese investment in Burma. Thailand is to receive $41,666,666 in cash, goods, and services over a period of years. The Japan-Philippines reparations agreement, signed in May 1956 after years of sporadic negotiation following the original Philippine demand for $8 billion of reparations, provides for payment by Japan to the Philippines of a total of $550 million over 20 years—$25 million annually during the first ten years and $30 million annually over the remaining ten years. Reparations will consist principally of capital goods. In addition the Japanese government agreed to facilitate the offer of $250 million in private loans for Philippine economic development. The arrangement is that yen loans equivalent to $250 million will be extended on a commercial basis by private Japanese firms and individuals to private Philippine interests.¹⁸ Thus this settlement, like the others, serves to encourage Japanese investment in the economic development of Southeast Asia.

The Indonesians originally set a claim of $17.3 billion for war damages. Not much progress was made for a long time, as so large a figure was an unrealistic basis for discussions. On December 8, 1957, however, after long negotiations, a reparations agreement was reached with Indonesia. It provided that: (1) Japan is to pay $225,444,000 in goods and services as reparations to Indonesia in 12 annual installments. (2) Japan is to renounce its right to claim a $175-million trade debt from Indonesia. (3) Japanese firms are to invest and advance commercial loans totaling $400 million to Indonesia over a 20-year period. (4) The peace treaty between the two countries is to include a provision for mutual most-favored-nation treatment.

Increasing economic ties can be expected as a result of this settlement. An early manifestation of this was seen in the Indonesian call to the Japanese to supply ships for Indonesian inter-island trade and communications in late 1957 and early 1958, when the anti-Dutch campaign resulted in the withdrawal of a large number of Dutch-owned ships which had handled the bulk of inter-island commerce.

Total reparations settlements with Asian countries add up to a little more than $1 billion in outright payments. Since the United States is not expected to remit more than two-thirds of the $2 billion rehabilitation and occupation debt which Japan still owes, the financial burden resulting from World War II, perhaps amounting to more than $1.5 billion dollars, will be felt in Japan for many years to come.

On the other hand the investment aspects of the reparations agreements, coupled with the small but growing flow of Japanese capital into other countries in the area, cannot fail to have a beneficial effect on trade relations between Japan and Southeast Asian countries. The need of these countries for capital is so great that far larger Japanese contributions than are now being made would be helpful.¹⁹

A Japanese economist declared:

We have a calculation made by the United Nations group of experts on the rate of savings and the amount of capital needed for economic development in under-developed countries.²⁰ Although this calculation is rather general and idealistic, it gives us an idea of the relation between the rate of growth of output and the amount of capital needed. Taking the figures relevant to Asia from this calculation, we can form some idea of the scale and speed of economic development in Asia as a whole.

The total amount of domestic savings in 1949 in South Central Asia and the Far East (excluding Japan) was only $1.9 billion, representing less than 4 percent of the total national income of $50.4 billion. In order to raise the level of income by 2.5 percent per annum, the total amount of capital needed is estimated to be $12.9 billion, partly for industrialization ($10.9 billion) and partly for better agricultural production ($2.0 billion). This amount of capital required represents more than six times as much as the capacity of domestic savings and in order to meet this requirement, an extremely large amount of capital must be imported from abroad (10.9 billion per annum).²¹

In most of the countries of South and Southeast Asia the rate of capital formation ranges between 5 and 10 percent. In contrast, in Japan, the rate in recent years has varied from 15 to 20 percent. The maintenance of a high rate of saving and capital formation in Japan, and a flow of Japanese capital to South and Southeast Asia, would therefore be mutually beneficial. There are encouraging signs that such a flow, although small at present, has already started. A Bank of Japan survey as of mid-1956 showed a total of $30 million in overseas investment, of which some 33 percent or $10 million was concentrated in Asia.²² Of the $10 million, $7 million had been invested in mining enterprises in the Philippines and Malaya. Generally speaking, the investment takes three forms, joint enterprises, technical assistance contracts, and loans, with the first predominating.

A Japanese firm, Ishiwara Sangyo, has provided 49 percent of the capital for a joint Indonesian-Japanese bank, the Indonesian National Rehabilitation Bank, capitalized at 50 million rupiah. Private Indonesian investors provided the other 51 percent.²³ In the case of the Cheang Para tin mines of Thailand, Japan has invested $270,000 in cash, or 49 percent of a total capital of 11 million bahts, under an agreement which provides for payment to Japan of a 20 percent dividend and for long-term purchases by Japan of tin ore at 4 percent less than market prices. In South Vietnam a Japanese firm, Nippon Koei Co., signed a contract to design and plan a hydroelectric power plant at Da Nhim, about 12 miles south of Dalat. In another category is an agreement between Japan and India whereby Japan supplies 75 locomotives to haul iron ore from Indian mines to ports and takes 2 million tons of the ore in payment. Japan has already become India’s main supplier of railroad equipment, a field that used to be virtually a British monopoly. Taiyo Fisheries contracted with India to establish an Indo-Japanese fisheries company. The Kokan Kogyo Co., a Japanese mining firm, signed an eight-year contract with the Chowgule Co. of Portuguese Goa for the exploitation of the latter’s iron mines there. The same Japanese company has a 21-year contract for mining iron ore in Kelantan State, Malaya. Asahi Glass arranged to complete construction of a half-finished glass plant in India and subsequently took over its operation. The company was capitalized at 7 million rupees ($1,470,000), with Asahi holding 51 percent of the shares. The Kobe Steel Works provided 20 percent of the capital of the Indonesian General Mining Corporation formed to exploit the mineral resources of South Kalimantan (Borneo) and Halmahera in Indonesia. Kinoshita Shoten aided the Philippines Iron Mines, Inc. in the development of the Larap Mines.

The Overseas Construction Association of Japan, made up of 120 Japanese construction firms, handles projects such as railroads, housing, highways, schools, harbor facilities, hotels, etc. Japanese engineers completed a basic survey and design for a 20-mile-long subway in Bombay and are bidding for the entire project. Kobe Steel Works is scheduled to build a $34 million fertilizer plant in Pakistan. Furukawa Electric Co. plans to set up an electric wire and cable company in the Communist-controlled state of Kerala in India. The Japanese will hold a 45 percent ownership and the Kerala government the rest.²⁴

Much of the Japanese expansion abroad is aimed at digging up new sources of raw materials. The Japanese often offer their own equipment and technical assistance in exchange for a mining royalty and a long-term contract to purchase the mine’s output. Mitsubishi Metal Mining Company, for example, recently negotiated a four-year contract with Atlas Mine Development Co. of the Philippines. Mitsubishi will supply $2 million in cash and $500,000 in machinery, enabling Atlas to double production of copper ore to 15,000 tons monthly, on which Japan will have first call up to 8,000 tons. Ore shipments will be credited against the loan, and to round out the deal Mitsubishi will sell finished copper wire to an Atlas subsidiary.²⁵

Examples could be multiplied, particularly in the case of technical assistance.²⁶ Essentially, in this process, Japan is acting like a kind of transformer converting the high voltage of the West to the lower voltage of Asia. In small projects with less investment than would ordinarily interest an American firm, Japan is bringing capital and knowhow to the less developed countries of Asia. In early 1958 the Japanese established a $15 million fund to grant long-term, low-interest loans in Southeast Asia. The fund is the fulfillment of Prime Minister Kishi’s promise of aid to leaders of countries of the region. He had hoped for a larger project involving both U.S. and Japanese funds for his “Asian Plan,” combining U.S. funds and Japanese technical assistance.

A particularly significant development was Japan’s agreement with India in February 1958 to grant a $50 million loan and the signing of a commercial treaty granting Japan most-favored-nation treatment for two years. The yen loan is repayable in seven years and is to be used by India for the purchase of Japanese capital equipment, including rolling stock, ships, and textile, mining, and hydroelectric equipment. The agreement also provides for the establishment of a Japanese technical aid unit to train Indians in pottery and light industries. India hopes to repay most of the loan with iron ore exports to Japan.

In forging stronger ties of trade and investment with South and Southeast Asia, the Japanese must pursue a wary course. There is still some suspicion and bitterness toward Japan in most of the area. If the Japanese appear to be flooding these countries with products or with too many offers of technical assistance, if they seem to be trying to move ahead too fast, fear of domination will develop and barriers will quickly rise. If, on the other hand, they fail to be resourceful, energetic, and quick to seize or develop an opportunity, the Chinese, Germans, Indians, or British can be expected to move in and Japan will lose out. There is, of course, as the Japanese perceived long before World War II, a complementary relation between Japanese industrial capacity and the rich resources of the southern regions, but if the Japanese are too obvious in exploiting it for their own ends they are likely to develop a hostile reaction from now independent nations.

If the Japanese can obtain from South and Southeast Asia, at competitive prices, the resources which they formerly drew from empire areas and in more recent years from the United States—iron ore, coking coal, mica, and manganese from India; cotton and wheat from Pakistan; oil, tin, coal, asbestos, and bauxite from Indonesia; rice from Burma and Thailand; salt from Thailand and Cambodia, Laos and Vietnam; iron ore and copper from the Philippines; and iron ore and rubber from Malaya—they will have come a long way toward a balanced trade, since these areas can absorb Japanese machinery, electrical equipment, appliances, etc., in payment. From a long-range point of view this Asian trade is most important to the Japanese economy, and the Japanese government indicated its awareness of this when in its five-year plan (promulgated in December 1955) it stressed the importance of gradually changing over from the dollar area to South and Southeast Asia as the principal source of Japanese imports.

During 1957 a major Japanese “economic diplomacy” drive was started in South and Southeast Asia. The London Financial Times remarked:

The reparations agreement Japan has concluded with Burma and the Philippines as well as other indemnities paid for losses in World War II, have helped to erase Asian antagonism toward Japan and have eliminated some, though by no means all, of the lingering mistrust of the former enemy. Japan today feels the time is ripe for a more positive economic policy with regard to South East Asia. This bolder approach is one of the major policy planks of the new Kishi administration.

In concrete terms a number of moves are in progress or being planned to strengthen Japan’s economic ties with South East Asia. The Foreign Office will bolster its diplomatic staff throughout Asia with young technical experts. These will advise the senior Japanese diplomat in each country on the drafting and implementation of economic cooperation schemes. The experts may also assist local industrialists and Government officials in planning economic development. The overall aim of this policy is to convince South East Asia that Japan is ready and able to help in developing it—and better suited than any other nation to do it.²⁷

The countries of the area, however, reacting strongly against the old colonialism, feel, whether rightly or wrongly, that they have too long had their resources “developed” for the benefit of other nations. They now want industrialization, not further expansion of purely extractive industries, and will tolerate the latter only insofar as it can be shown that this process will benefit them by, for example, greater earnings of foreign exchange with which to buy more foreign capital goods to advance industrial development. These countries cannot be approached in terms of the needs of Japan. They are, understandably, interested in their own needs. There is growing evidence that the Japanese realize this and are aware that their attitude must be one of fostering mutual assistance for mutual benefit.

____________

*By South Asia is meant Afghanistan, Pakistan, India, Ceylon, and Nepal. Southeast Asia includes Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam, the Philippines, British Borneo, Malaya, and Singapore. At times either of the terms “South Asia” or “Southeast Asia” has been used in a broad sense to include all the countries of both sectors.

*Includes Burma, Cambodia, Ceylon, Taiwan, Hongkong, India, Indonesia, Laos, Malaya, Pakistan, Philippines, Thailand, and Vietnam. Excludes Communist China, Afghanistan, British Borneo, Korea, and Nepal, for which data were not available.