FOREIGN TRADE 1946-1956

Prior to World War II Japanese trade amounted to 5 percent of world trade. The intricate web and fabric of commerce which Japan had built up so skilfully and laboriously was destroyed completely in World War II, as a result of Japan’s own action. In the first postwar year (1946) Japan’s exports amounted to a mere $100 million. In the course of the next decade they grew to $2.5 billion (1956). This 25-fold increase was of course a remarkable achievement. It was aided by the very substantial expansion of total world trade over this period—a decade of unprecedented world prosperity.³ The stimulus provided by the Korean War brought a $500 million increase in Japanese exports in 1950-51, while the period from the end of 1953 through 1956 saw Japan’s exports double.

But despite these substantial achievements there was less cause for rejoicing than might, at superficial glance, be apparent. In every year from 1945 through 1956 Japan had an unfavorable balance of trade. Its exports increased but its imports rose faster. The total trade gap over the 11-year period amounted to $6,016 million, a deficit which Japan would have been unable to incur had it not been for U.S. aid and “special procurement.”⁴ Over the same period these amounted to $6,233 million, just covering the trade gap.

TABLE VII-1. JAPANESE TRADE AND PAYMENTS, 1946-1957

Sources: Ministry of Finance, Customs Division, Tokyo; Foreign Exchange Statistics, Bank of Japan, Tokyo.

During the first half of the postwar decade Japan received direct aid from the United States amounting to $2,111 million, while over the latter half “special procurement” amounted to $4,122 million (see Table VII-1). It was thus the expenditure of over $6 billion of U.S. funds which permitted Japan not only to incur and meet a continuing trade deficit of major proportions, but also to build up its foreign exchange reserves to $1.5 billion. Never, in the annals of history, had a vanquished nation received such a helping hand from the victor.

Yet despite this material assistance Japan has not yet regained its prewar share of world trade. As Table VII-2 indicates, it had by 1956 only a little more than half the share of total world exports it had before the war. Before World War II Japan was fourth among world exporting nations; in 1956 it was eighth. Thus Japan has not yet succeeded in restoring its position in international trade. The ratio of exports to national income, which was 18 percent before the war, had by the end of 1956 risen to only 12 percent. Some observers, noting the lower percentage of exports to national income, erroneously conclude that Japan is less dependent on foreign trade than it was in the thirties. Nothing could be further from the fact.

On a volume basis, Japanese exports in 1956 were 85 percent of the 1937 level, while industrial production was 172 percent. When it is remembered that over the same period Japan’s population increased from 70 million to over 90 million, it is clear that exports have failed to keep pace. Imports rose more rapidly in 1956 than either exports or production. Imports of raw materials, which account for more than 65 percent of Japan’s total imports, increased $641 million in 1956, a rise of 43 percent over the previous year, which far exceeded the increase in production. In 1957 raw material imports rose by $809 million, or 37 percent, above 1956. The principal reason appears to be that there was little elasticity in the supply of domestic raw materials. For example, the rates of increase in the consumption of imported scrap iron and steel, iron ore, and coking coal all exceeded the rate of increase in iron and steel production. Increased demands for energy resulted in a 10 percent increase in coal output and a 15 percent increase in the supply of electricity; but imports of petroleum rose 25 percent. The Economic Planning Agency observed: “During the past six years, the industrial production went up 100 percent, whereas the imported raw material consumption increased by 134 percent, indicating that Japanese industry has a deep-rooted tendency toward higher dependence on imports.” And the White Paper on Foreign Trade stated: “Thus, the more production rises, the more Japan needs raw material imports that exceed production. This is a sorry situation resulting from her natural resources.”⁵ Japan in the postwar period is thus more, not less, dependent on foreign trade than ever before.

TABLE VII-2. JAPANESE AND WORLD TRADE, 1938, 1952-1956

Source: Monthly Bulletin of Statistics, United Nations, October 1957.

The trade results for 1953-56 were, however, encouraging. Over this period world exports rose 24 percent. West Germany’s exports rose 67 percent. Japan’s exports rose 95 percent. Or, as the Japanese Economic Planning Agency observed: “The percent increase in the world’s total exports was four percent in 1954, nine percent in 1955, and 10 percent in 1956. In the case of Japan, the percentage increase in fiscal 1954 was 28 percent, that in fiscal 1955, 24 percent and in fiscal 1956, 22 percent.”⁶ Yet if exports were growing, imports were growing faster. In 1956 imports rose by $1 billion.⁷ In 1957 imports again rose by an additional billion dollars over 1956. The 32 percent increase in imports contrasts with a 14 percent increase in exports.

THE BALANCE OF PAYMENTS, 1950-1956

Except for 1953, Japan’s position has been comfortable as regards its balance of payments, largely by reason of U.S. special procurement expenditures—despite an unbroken postwar series of annual deficits in both trade and normal invisible items. As Table VII-3 reveals, Japan achieved a surplus in its balance of payments from 1950 to 1956, except for 1953. Special procurement constituted the largest component of invisible receipts.

TABLE VII-3. FOREIGN EXCHANGE RECEIPTS AND PAYMENTS, JAPAN, 1950-1957

Source: Foreign Exchange Statistics Monthly, Bank of Japan, Tokyo, December 1957.

The London Financial Times remarked in 1957:

Japan’s international solvency is still dependent upon special United States Government spending. The nation’s $293 million foreign exchange surplus for 1956 comes as a result of these official expenditures. It represents a substantial drop from 1955’s $494 million favorable balance. Although Japan’s commodity exports increased about 25 percent during the year, net overseas purchases soared 35 percent compared with 1955. . . .

However, Japan’s deficit in commodity trade and normal invisible accounts was more than offset by $595 million in special dollar earnings. This figure includes $278 million from yen sales to American military personnel stationed in Japan, $187 million in military supply orders, and $124 million in ICA [International Cooperation Administration] purchases, principally for third countries receiving United States aid.

Although these earnings cannot be considered a normal part of Japan’s trade, most officials are not unduly concerned that the favorable trade balance hinges on official American spending. It is generally felt that while yen sales and military orders may gradually decline, large orders will be placed in Japan for goods destined for other Asian nations under the United States aid programme.⁸

The inflationary impact of the Korean War, and the increase in industrial activity and employment resulting from the special procurement expenditures engendered therefrom, spread through the economy with multiplier effects, raised incomes and purchasing power, and culminated in the domestic consumption boom of 1953. In that year imports increased by some $400 million while exports were stagnant. Consequently, despite special procurement expenditures of more than $800 million in 1953, a deficit of $194 million was incurred in the balance of payments, compared with the previous year’s surplus of $314 million (achieved through special procurement expenditures of $824 million) .⁹

The rise in prices, the unfavorable trade trends, and the loss of foreign exchange (see Table VII-4) alarmed the Japanese authorities, and in the fall of 1953 vigorous policies of monetary and fiscal restraint were adopted, designed to reduce government expenditures for investment, to curtail imports, and, by reducing domestic prices, to stimulate exports. The policy was effective. Between 1953 and 1955, exports rose $800 million, or 69 percent. As a result of this gain in exports, of prosperous and expanding world trade, and of the record rice output (which made it possible to hold food imports in check), Japan in 1955 attained a surplus of $494 million—its best balance of payments position since the war.

TABLE VII-4. JAPANESE FOREIGN CURRENCY HOLDINGS, 1950-1957^a

a These figures exclude gold and silver holdings.

Source: Bank of Japan, Tokyo.

In view of these favorable developments, of the rise in foreign exchange reserves to over $1.5 billion, and of world prosperity, which promised continuance of a very high and expanding level of world trade, the Japanese decided to permit a much greater volume of imports than previously. Foreign exchange allocations for imports were increased sharply,¹⁰ and as a result, in 1956 imports were some 30 percent higher than in 1955. Since exports rose by $500 million, while special procurement expenditures remained roughly the same as the year before, the payments surplus in 1956 was $200 million less than in 1955, as Table VII-3 indicates. During 1957 Japan incurred a trade deficit of $1.4 billion and lost over $500 million in foreign exchange. As a result imports had to be curtailed, money tightened, and new investment restricted.

In seeking to determine whether Japan will be able to double its exports by 1965, it may be useful to examine the causes of the 1954-56 trade boom. It is, of course, neither possible nor desirable to isolate a few out of many elements in the picture and make dogmatic pronouncements regarding cause and effect. One can only suggest the probable importance of certain factors. Of possible significance were (a) Japan’s internal disinflationary policies, (b) special export incentive schemes, such as the link system, subsequently discontinued, (c) rising world demand and expanding world trade, (d) relaxation of sterling area restrictions, (e) improvements both in the quality of Japanese exports and in the efficiency of Japanese industry, and (f) the not insignificant fact that Japanese foreign traders, perhaps for the first time since 1937, were on their own, relatively unrestricted and unfettered.¹¹ An examination of the direction of Japanese trade and of its composition will help to make these factors apparent.

THE DIRECTION OF TRADE

In the 1950’s the dollar area provided, on the average, half of Japan’s annual imports, or double the percentage supplied before the war. The dollar area, mainly the United States, replaced the yen bloc as the main source of Japan’s imports. It took, however, only a little more than a third of Japan’s exports. The resultant dollar gap was tenable only because of U.S. special procurement expenditures.¹²

The sterling area, on the other hand, took over a third of Japan’s exports during the 1950’s but provided only one-quarter of its imports. Hence, from time to time, when sterling balances appeared to be accumulating too rapidly in Japanese hands, the British imposed restrictions on sterling purchases of Japanese goods. Trade, consequently, has been erratic. As Table VII-5 reveals, the British restricted imports of Japanese goods in 1953, and as a result Japan’s exports to the sterling area fell to half of the previous year’s figure. At the same time Japanese imports from the sterling area reached a new high, almost double the exports. So unfavorable was their balance of trade that the Japanese were forced to use dollars to purchase sterling from the International Monetary Fund. The following year, 1954, they reduced their sterling area imports sharply while Britain, on the other hand, relaxed restrictions. The result was a very favorable balance for Japan, the reverse of the previous year. Since then Japan and Britain have been, by agreement, attempting to balance their trade at new and higher levels.

TABLE VII-5. JAPANESE EXPORTS AND IMPORTS BY SETTLEMENT CURRENCY, 1950-1957

a All other includes Canadian dollar, Swiss franc, German mark, and Swedish krona for 1955 and 1956, and for 1957 also French francs and Dutch guilders.

Source: Foreign Exchange Statistics Monthly, Bank of Japan, Tokyo, December 1956.

The Japanese, aware of the continuing possibility that their supply of American dollars, in the form of special procurement expenditures, might be curtailed, have attempted from time to time to shift to sterling area sources of supply. While they have not succeeded in reducing dollar imports, they have expanded both their sterling area imports and their exports to the dollar area. Between 1951 and 1956, as Table VII-5 shows, imports from the dollar area rose only 20 percent, while imports from the sterling area increased by 100 percent. Over the same period exports to the dollar area rose 263 percent while shipments to the sterling area increased by 60 percent.

An examination of the direction of Japan’s trade on a country by country basis reveals that the outstanding feature of Japan’s growing export trade is increasing diversification both as to markets and as to products.¹³ Except for the United States, no one country now absorbs more than 10 percent of total Japanese exports. Only three countries bought more than 5 percent, each, of the total. This is an advantageous development for Japan because it means that Japan is flooding no one country with excessive quantities of goods. It tends to reduce the degree of foreign resentment and retaliation which Japan is likely to encounter as its trade expands.

The most significant change in the direction of Japan’s trade since the war appears to be the relative decline in the importance of Asia and the rise of North America, South America, and Africa. The change in Asia’s position is due, of course, to the war, which shattered the old commercial relations between Japan and China on the one hand and between Japan and Korea on the other. In contrast, Japanese trade with Southeast Asia and with the United States has expanded significantly (see Tables VII-6 and VII-7). A number of industrial raw materials and foodstuffs which Japan formerly obtained from nearby areas are now supplied by either Southeast Asia or the United States. Since Japan’s trade with the United States, with Southeast Asia, and with Communist China is treated in detail in the subsequent chapters, it is sufficient to note here that the shift has had important consequences for Japan’s balance of payments, even though it was due more to political than to economic forces.

TABLE VII-6. JAPANESE EXPORTS BY MARKETS, 1935, 1950, 1955-1956

Source: Ministry of Finance, Tokyo.

TABLE VII-7. JAPANESE IMPORTS BY MARKETS, 1935, 1950, 1955-1956

Source: Ministry of Finance, Tokyo.

The increased trade with Latin America was largely the result of the adoption of a bilateral clearing system in trade with Argentina and Brazil. The sharp increase in the importance of Africa in Japan’s export picture is mainly the consequence of the export of ships to companies maintaining Liberian registry. Of total Japanese exports to Africa in 1956, Liberia accounted for over 50 percent. Of total Japanese exports of ships, 80 percent went to Liberia in 1956; 70 percent in 1955. In 1956 Japan’s exports to Liberia amounted to $225.6 million; imports from Liberia to but $1.3 million.¹⁴ On the other hand, in trade with Australia, because of its very large wool purchases, Japan’s imports in 1956 totaled $248.4 million; its exports were only $30.8 million.¹⁵

One should not, however, lose sight of the overall picture. Japan’s imports come primarily from North America and from Southeast Asia (56 percent combined in 1956), while its exports go mainly to those two areas (51 percent in 1956). This may be seen from the tabulation on page 121 of the leading countries in Japan’s trade.

COMMODITY COMPOSITION OF
JAPANESE TRADE

The bulk of Japan’s imports are essential commodities such as foodstuffs and industrial raw materials necessary to sustain the Japanese economy (see Table VII-8). Over the last five years the Japanese have had to pay more than $600 million annually to import food needed for domestic consumption. Another $650 million annually has been, and indeed must be, spent for textile raw materials. Other industrial raw materials such as metallic ores, fuel, minerals, chemicals, etc., cost Japan $1.5 billion in 1956.

Of food imports, rice comes from Thailand, the United States, Burma, Formosa, and Communist China (listed in order of importance as suppliers to Japan); wheat from the United States and Canada;¹⁶ sugar from Formosa, Cuba, Indonesia, Brazil, and Australia. Raw cotton comes from the United States, Mexico, Pakistan, Brazil, India, and Egypt: wool mainly from Australia. Malaya, the Philippines, and India are the chief sources of Japanese iron ore imports, while the United States provides the bulk of the coking coal. Two-thirds of Japan’s imports of machinery (by value) are obtained from the United States; more than half of its imports of phosphate ore come from the dollar area, as do half its imports of crude oil. Even in hides and skins Japan obtains 70 percent of its import requirements from dollar sources. Crude rubber comes primarily from the sterling area, salt from Communist China, soybeans two-thirds from the U.S. and one-third from Communist China. Most of Japan’s lumber imports come from the Philippines. For balance of payments reasons Japan would prefer sterling area and open account countries as sources of imports, but during the last decade the greater availability of supplies and relatively lower prices in dollar countries have provided a strong economic incentive for the private Japanese business purchaser to buy in the most advantageous market.

TABLE VII-8. JAPAN’S DEPENDENCE ON IMPORTS, 1934-36, 1950-1956

a Calculated by dividing the volume of imports by the sum of imports and domestic production.

b Prewar figures include imports from Japanese dependencies.

c The figures for staple food represent the quantity of rice, wheat, barley, rye, etc., in terms of rice.

d Crude oil imports in 1934-36 include heavy oil.

Source: Ministry of International Trade and Industry, Tokyo.

The changing industrial structure in Japan, described in chapter V, is reflected in the changing composition of Japan’s exports. During the 1930’s consumer goods, especially textiles, predominated (see Table VII-9). The pattern is shifting, however, in response to the requirements of foreign markets.¹⁷ Japan had 40 percent of the world trade in cotton textiles in 1938, 23 percent in 1955. In 1955 capital goods exports accounted for very nearly the same percentage of Japan’s total exports as textile products. In 1956, because of a large increase in exports of ships, capital goods exports forged ahead, supplying 37.2 percent of the total, against 34.8 percent for textiles. Exports of textiles are still of major importance in Japan’s trade. In fact, in 1956 cotton fabrics ranked first among export products, totaling $266 million and accounting for 10.7 percent of total exports. But ships were second, amounting to $260 million, 10.4 percent of total exports, and iron and steel products, totaling $223 million (8.9 percent) were third in importance¹⁸ (see Table VII-10). In 1955 the value of iron and steel exports exceeded that of cotton textiles. In 1956 steel exports fell to third place because the industry, barely able to meet the domestic demand, lacked both the capacity and the incentive for exports.

One-half of the total increase in exports in 1956 was accounted for by metal products and machinery (70 percent being ships). Textile products, which amounted to one-third of total exports, accounted for one-quarter of the total increase in shipments. If the capacity of the iron and steel industry had been sufficient to maintain exports on a scale comparable to 1955, the heavy and chemical industries might have supplied 50 percent of total exports in 1956. The extent to which the capital goods industries have been eclipsing the light industries in export expansion may be seen in Table VII-9.

Compared with the thirties, textile exports have lagged badly, with the exception of synthetic fibers. Only 9.6 million pounds of raw silk were exported in 1956, compared with an annual average of 69 million pounds in 1934-36. In silk fabrics only 48 million square yards were exported in 1956, compared with 85 million in the midthirties. Exports of cotton yarn amounted to only 27 million pounds in 1956, compared with 53 million pounds in 1934-36. Cotton fabric exports totaled only 1,262 million square yards in 1956, against an annual average of 2,945 million square yards in 1934-36.¹⁹

TABLE VII-9. STRUCTURE OF JAPANESE EXPORT TRADE, 1934-36, 1947, 1950, 1952, 1954-1956

a Textile products include chemical fiber products (including raw materials).

Source: Ministry of Finance, Tokyo.

TABLE VII-10. JAPANESE EXPORTS BY MAJOR COMMODITIES, 1934-36, 1950, 1955-1956

a Excluding machinery.. . Not available.Source: Ministry of Finance, Tokyo.

This change in export markets and export patterns creates a problem for the Japanese, for, as was noted in chapter V, they are higher-cost producers in most categories of iron and steel, metal products, and machinery, in contrast with their advantageous cost position in textiles. The Japanese, of course, are well aware of this. The Ministry of Finance observed recently:

The decline in the importance of textile goods and the rise in that of heavy and chemical manufactures characterize the postwar commodity pattern of Japanese export trade. Such a change in Japanese trade patterns responds to the industrialization of underdeveloped countries in neighboring Asia, and indicates that in Japanese export trade emphasis is shifting from consumer goods which are to compete with products manufactured by underdeveloped countries to capital goods which are to contribute to the development of industries in these countries. It cannot be denied, despite considerable amount in investments for the purposes of industrial rationalization, that our capital goods are weak in export competition in the international markets, whereas textile manufactures are stronger in the competitive market. Therefore, in order to secure a stable market to meet the structural change in the world economy, even futher efforts will be necessary.²⁰

COSTS, CAPITAL, AND FOREIGN INVESTMENT

While the cost disadvantage in the heavy industries is due in part to the higher cost of raw materials because of the need to bring iron ore, coking coal, etc., long distances (see chapter V, Table V-8), it is due also to outmoded and inefficient machinery, excessive subcontracting,²¹ and methods of production that are not up to date. Japan has recognized this and has attempted to do something about it, but is, to some extent, handicapped, despite a high rate of capital formation, by the shortage and high cost of capital. In the postwar decade Japanese industry has been dependent on external borrowed funds. Reliance on commercial banks has been especially heavy, proportionately 13 times as great as in the United States. Interest rates are high in Japan, as the following table shows:

COST OF FUNDS IN JAPAN
(percent)

Sources: (a) Tokyo Bankers’ Association, (b) “Securties White Paper,” by Fujiwara and Kimura, (c) the Tokyo Stock Exchange.

Mortgage loans now cost between 9 and 10 percent in Japan. Corporate debentures yield 8 to 9 percent. Commercial bank lending rates for good risks are from 7.5 to 9 percent. Japanese government bonds yield 6 to 7 percent.

Under the circumstances it would seem logical for the Japanese to attempt to supplement their domestic capital resources by importing foreign capital. They have, however, been more successful in obtaining foreign technical assistance, both public and private, than they have in obtaining capital. The total volume of foreign capital invested in Japan from January 1, 1946 through March 31, 1957 was $320 million. Of this amount, loans totaled $269 million. The total number of technical assistance contracts concluded up to March 31,1957 was 662. Of this number two-thirds were with United States firms. The capitalized value of the 662 agreements amounted to over $400 million (see Table VII-11).

The Japanese have been disappointed by the results of their effort to encourage foreign capital investment in Japan. The basis of this disappointment may be seen by an examination of the figures for the fiscal years 1950-57. Japan paid back $63 million on the $320 million of the foreign capital investment and an additional $84 million on the foreign technical assistance contracts. This total payment of $147 million compares with new foreign investment in Japan over the period of $320 million plus the technical assistance contracts (see Table VII-12).

TABLE VII-11. FOREIGN CAPITAL INDUCTION, JAPAN, 1950-1956

Source: The Oriental Economist, Tokyo, August 1957, p. 403.

TABLE VII-12. FOREIGN EXCHANGE REMITTANCES UNDER THE FOREIGN INVESTMENT LAW, JAPAN, 1950-1956

Source: Ministry of Finance, Tokyo.

The chief obstacle to more extensive foreign capital investment in Japan seems to be the provision in the Japanese Foreign Investment Law permitting the repatriation of equity capital only over a seven-year period. There is an initial waiting period of two years, after which one-fifth of the capital may be repatriated each year.²² Foreign investors are reluctant to submit to such conditions, especially when there are more attractive and less restricted opportunities available elsewhere (as in Canada, for example). On the other hand the Japanese contend that their foreign exchange reserves are not adequate to permit a sudden large drain, such as they fear might occur on some occasion if they permitted unrestricted withdrawal of foreign capital. They point to the experience with foreign exchange reserves in 1953 and again during the first half of 1957. In the latter instance foreign exchange reserves, which exceeded $1.5 billion at the end of 1956, had by mid-1957 dipped below $1.0 billion. Deducting $270 million owed Japan by Indonesia and Korea, and $390 million held for monetary purposes by the Bank of Japan, available foreign exchange was reduced to $320 million by mid-1957, according to the Ministry of Finance.

Apart from foreign technical assistance and foreign private capital, a variety of other measures, including loans from the International Bank for Reconstruction and Development²³ and the U.S. Export-Import Bank, and loans made to the Japanese government under the U.S. program of disposal of agricultural surpluses, have been utilized in an effort to modernize plant and equipment. Japan, however, with its high rate of capital formation and strong propensity to save, has also been plowing back business profits for renewal and expansion of facilities. How successful the effort will be remains to be seen, but in such sectors as shipbuilding, iron and steel, and chemicals, real progress is apparent.

COMMERCIAL POLICY

In the early postwar years all foreign trade was conducted on a government-to-government basis. The restoration of foreign trade to private enterprise was made gradually, and by early 1950 may be said to have been complete. Thus the very rapid expansion of Japanese foreign trade in the 1950’s was largely the work of private traders. In anticipation of the transfer of trade to private enterprise, the Foreign Exchange and Foreign Trade Control Law (No. 228) was passed on December 1, 1949, providing for exchange control, import licensing, and export control.²⁴ The necessity of such controls in view of Japan’s continued imbalance of trade is seldom argued. In 1951 Japan revised its tariff schedule to eliminate obsolete and unrealistic prewar rates.

The current level of the Japanese tariff is considered moderately protective. Rates on an ad valorem basis range from 15 to 50 percent. As a result of Japan’s accession to the General Agreement on Tariffs and Trade (GATT) in 1955 and the multilateral tariff negotiations under it, some Japanese rates have been revised downward on a reciprocal basis. Japan’s accession to GATT was an important step in its re-entry into normal world trading relationships, since it carried with it assurances of most-favored-nation treatment. The advantage was somewhat limited, however, by the fact that fourteen countries, including the United Kingdom, Australia, New Zealand, the Union of South Africa, India, Benelux, France, and Brazil invoked Article 35 of the GATT agreement, under which a contracting party can escape from the application of the General Agreement between itself and another contracting party.

Except for most dollar area countries, however, Japan’s main markets and sources of supply are covered by bilateral trade agreements.²⁵ As of June 1956 there were 26 of these. More than half provided for open account arrangements. There has been some evidence that this bilateralism, which was useful at first in helping Japan re-enter world markets, has tended in recent years to restrict rather than foster trade. Aware of this criticism, Japan moved during 1956 to liberalize its trade practices. Since the end of 1955 open account arrangements with five nations have been abolished and further moves in this direction are contemplated. Of this development the London Financial Times declared:

It is evident that Japan, after refusing for a long time to participate in the world-wide movement away from bilateral trade and payments practices, has now taken the first steps toward the reorganization of her external economic affairs on a multilateral basis.

This is the significance of recent Japanese moves to recast payments agreements with the so-called “open account” countries to provide for cash settlements. “Open account” countries for the purpose of Japanese exchange control arrangements are those falling outside the sterling and dollar areas. So far as the sterling and dollar areas are concerned, Japan has been prepared to agree for some time now that her bilateral scruples could be satisfied by arranging her trade and payments relations with countries in these regions in such a way as to achieve a broad balance with each of the areas as a whole. But in the case of other countries she has tended to insist that the aim should be to maintain payments in equilibrium with each individual state.

To this end, the Japanese authorities have periodically negotiated trade agreements providing for a flow of trade of approximately the same order in each direction with each of the countries. And as an additional precaution, they have required all payments arising from transactions with these countries to be channelled through “open” or clearing accounts, the intention being to ensure that Japanese purchases from these countries were paid for in a form of foreign exchange that could be utilized only for financing spending within Japan itself.

Japan still appears anxious to arrange her trade with non-sterling and non-dollar countries in such a way that no major disequilibrium develops in her transactions with any one of them. But, as existing financial agreements with open account countries fall due for renewal, she is consenting to the replacement of the clearing account method of payment by one which provides for cash settlement in some mutually acceptable medium of exchange. This will ensure that if, for any reason, Japanese imports from another country cannot be kept in equilibrium with exports to that country, the difference will be settled in a form of foreign exchange that can be utilized for financing payments transactions with other countries.

To the extent, therefore, that the bilateral intention underlying most of her trade agreements cannot be realized, Japan will be operating in some measure on a multilateral payments system during the period ahead. And it seems quite likely that Japan will subsequently be found less disposed to press for a bilateral balance in her trade agreements. Thus, the policy departure that Tokyo has recently made could lead to the establishment of the country’s external economic arrangements on a fully multilateral basis in the space of a year or two.

It would be as well to recognize in this connection, however, that the speed at which Japan can move away from the bilateral principle in trade relations with other countries may not be determined solely by the ability of her external payments to stand the resulting additional strain. For it seems that, in some instances at least, adherence to bilateral practices is due as much to the wishes of Japan’s trading partners as to those of her own Government. Thus, for internal political considerations or similar reasons, some countries are not at present prepared to grant more than very limited access to their markets to Japanese traders. This often means that Japan’s exports to such countries have to be restricted to about the same amount as her purchases from them. In other words, plans for developing Japanese trade as a whole by building up exports to some countries to the point of creating payments surpluses that can be utilized for exanding imports elsewhere are difficult to put into effect.²⁶

The increases in import quotas, the multilateral negotiations at GATT meetings, the gradual liberalization of policy as regards the foreign exchange markets,²⁷ and permission for foreign exchange holdings by private companies were all steps in the direction of a less restrictive trade policy, from which Japan hoped to obtain mutual advantage.²⁸

The exchange crisis which developed in 1957, however, set back this effort. The expansion of exports failed to keep pace with the rapid increase in imports, and the resultant sharp decline in Japan’s foreign exchange holdings necessitated the reimposition of a number of restrictions on imports. The purpose of these was to tighten the belt around Japan’s swelling imports, to conserve foreign exchange for the importation of raw materials that can be processed for reexport, and to shut off the increasing flow of so-called luxury items for domestic consumption.

Broadly, however, Japan is still attempting to widen its trading relationships in an effort to diversify both export products and export markets. In the words of a former Japanese Ambassador to the United States: “This will help to stabilize Japan’s export trade by avoiding undue dependence upon a particular market. It will also help to disperse the effect of export trade increases that must be realized if Japan is to remain solvent.”

SHIPPING AND SHIPBUILDING

In pursuit of its ultimate objective of balancing its payments at new and higher levels, Japan has not overlooked the field of shipping. Before World War II the sale of shipping services and exports of ships provided Japan with an important source of foreign exchange. By 1940 the Japanese merchant fleet totaled 6.1 million tons and Japan carried 68 percent of its imports and 75 percent of its exports in its own vessels. The wartime destruction of the merchant fleet reduced Japanese carrying capacity to a little more than a million tons, and as a result, as late as 1950, Japan was able to carry only 25 percent of its imports and 15 percent of its exports in its own ships. During the next six years the merchant fleet was expanded to 4.3 million tons, and by the end of 1956 Japan carried over 50 percent of its imports and 44 percent of its exports in its own vessels.²⁹ However, since its expenses for ocean transportation are still double its income from ocean transportation, Japan has a good distance to go in restoring its shipping services. In 1956, for example, Japan spent $234 million for marine freight but earned only $117 million.

The task should not be difficult, however, since shipbuilding is now among the most vigorous of Japanese industries. From seventh place among world shipbuilding nations in 1954 Japan moved to first place in 1956 and 1957, even exceeding Great Britain in the launching and exporting of ships.³⁰ According to Lloyd’s Register of Shipping, Japan’s construction of ships (steel vessels of 100 gross tons and over) rose from 377,000 gross tons in 1954 to 1,480,000 in 1956 and to 2,424,000 in 1957. Under the circumstances it should not take Japan long to reconstruct its merchant marine.

HOW MUCH MORE TRADE DOES JAPAN NEED?

The question of Japan’s future economic viability is essentially a problem of foreign trade. One approach was suggested at the beginning of this chapter: finding the volume of exports needed to pay for imports adequate for a level of industrial output that could absorb all prospective additions to the labor force. As we have seen, this would require additional exports of some $2.5 billion (in 1955 prices) by 1965, on the assumption that $5 billion of imports will be needed by that time. If, however, the import component of Japan’s gross national product can be reduced to less than the present 13 percent, then a smaller volume of both imports and exports will be sufficient. By the greater development of plastics and synthetic fibers and indigenous fuels such as hydro-electric power, it may be possible to reduce the import component and thus reduce somewhat the need to expand exports. It is also possible to put aside the goal of full employment and to economize in some sectors of imports, such as sugar, wool, etc. All these measures combined might make it possible to hold the amount of exports needed to $4 billion. This would be only $1.5 billion above the present level.

In the nine-year period 1948-56 inclusive, world exports rose from $52.7 billion to $91.9 billion, a gain of 72 percent. If we assume a similar gain over the next nine years, 1957-65 inclusive, the volume of world exports should reach $156.5 billion by 1965. If Japan does no better than maintain its 1956 share of world exports—2.7 percent—its export volume in 1965 would be $4.2 billion. If Japan were to regain its prewar share of world exports—5 percent—then its export volume in 1965 would be $7.8 billion. If we make a more reasonable assumption, namely, that Japan’s share of world trade rises by 1965 to a modest 3.5 percent, then Japanese exports in 1965 will amount to $5.4 billion. Thus a realistic range of the probable level of Japanese exports by 1965 is between $4.2 and $5.4 billion, on the assumption that total world trade continues to expand over the next nine years as it has over the past nine. Within the context, then, of expanding world trade Japan can achieve and maintain a viable economy.