country report · contents 3 summary 4 political structure 5 economic structure 6 outlook for...

COUNTRY REPORT

Japan

2nd quarter 1999

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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ISSN 0269-6681

Contents

3 Summary

4 Political structure

5 Economic structure

6 Outlook for 1999-2000

14 Review14 The political scene20 Economic policy23 Trends in demand28 Industry and construction32 Transport, communications and infrastructure 34 Employment, wages and prices37 Money and finance42 Foreign trade, payments and aid

46 Quarterly indicators and trade data

List of tables10 Economic results and forecasts11 Global assumptions12 Current-account forecasts13 Forecast summary15 Results of the Tokyo gubernatorial election, Apr 11th 199916 Results of prefectural assembly and large city assembly elections16 LDP faction strengths22 New accounting rules23 Public-sector finances23 Expenditure on gross domestic product, year on year24 Expenditure on gross domestic product, quarter on quarter25 Bank lending25 Contribution to real GDP growth26 Retail sector indicators28 Tankan survey results28 Machinery orders29 Industrial production and shipments30 Land prices31 Construction industry34 Employment35 Retrenchment plans of selected companies listed on the Tokyo Stock Exchange35 Wages, productivity and costs

Japan 1

EIU Country Report 2nd quarter 1999 © The Economist Intelligence Unit Limited 1999

36 Results of annual wage negotiations in selected industries37 Inflation indicators38 Money supply growth39 Public fund injections for Japan’s 15 largest banks and changes in bank

capital-adequacy ratios41 Financial market indicators42 Exchange rates42 Bilateral trade flows43 Exports of selected commodities, Jan-Mar44 Imports of selected commodities, Jan-Mar44 Trade values, volumes and prices, 199945 Balance of payments, IMF basis46 Quarterly indicators of economic activity47 Foreign trade48 Trade with main partners

List of figures8 The lagged impact of economic stimulus packages

13 Gross domestic product13 Yen real exchange rates24 Household savings27 New car sales38 Postal savings and bank deposits outstanding38 Japan premium over 3-month Libor

2 Japan


May 13th 1999 Summary

2nd quarter 1999

Outlook for 1999-2000: The LDP will remain the largest party in parliament,even if it fails to secure a majority in the 2000 election. The government willadopt one more stimulus package in 1999, while monetary policy will remainloose. Real GDP will fall by 1.1% in 1999 but grow by 0.8% in 2000, as theimpact of financial reforms begins to be felt. The yen will remain broadly stableagainst the dollar, and the current-account surplus will average 3.2% of GDP.

The political scene: The government’s popularity ratings have risen. TheLDP lost the Tokyo gubernatorial election in April, and all major politicalparties fared poorly in the provincial elections the same month. North Koreanspy boats strayed into Japanese waters at the end of March, prompting thegovernment to mobilise the Maritime Self-Defence Force. Relations with SouthKorea have warmed.

Economic policy: The Economic Strategy Council has proposed a ten-yearprogramme for restoring Japan to economic health and large-scale scrapping ofcapital stock. But vested interests will ensure that many of the proposals are notimplemented. New accounting rules are being introduced. “Consumptionvouchers” worth some ¥700bn ($5.8bn) have been distributed since January.

Trends in demand and sectoral trends: Real GDP fell by 3% year on yearin the fourth quarter of 1998, bringing the decline for the year to 2.9%. Retailindicators have continued to slump. The central bank’s latest Tankan surveyshowed business sentiment becoming marginally less pessimistic. Mini-vehiclesales are growing rapidly, but at the expense of sales of larger vehicles. Public-sector construction orders rose in year-on-year terms in March, but housingstarts remained weak.

Employment, wages and prices: Unemployment rose to a record high of4.8% in March. Nominal wages have continued to fall. The government plansto create 770,000 jobs over the next two years. Wholesale prices have con-tinued to fall, while consumer prices in Tokyo fell in February-April.

Money and finance: The central bank announced in February that it wouldguide the unsecured overnight call rate down to 0.15%. Progress on bankingreform has eliminated the “Japan premium”. Banks have started unwindingtheir cross-shareholdings. Western investment has pushed up the benchmarkNikkei average. The yen has remained relatively strong.

Foreign trade, payments and aid: Japan’s merchandise trade surplus (fob-cif) rose by 2.8% year on year, to ¥3trn, in the first quarter. The surplus with theUS remained steady. Exports of iron and steel have fallen in both value andvolume terms as Japanese companies have curtailed exports to the US. Thecurrent-account surplus contracted by 9% year on year in January-February.

Editor: Robert WardAll queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

Next report: Our next Country Report will be published in August

Japan 3


Political structure

Official name Japan

Form of government Representative democracy

The executive The prime minister is chosen from a ballot of the Diet (parliament) and appoints acabinet, a majority of whose members must also be members of the Diet

Head of state Emperor Akihito

National legislature Bicameral Diet comprising the 500-member House of Representatives, elected everyfour years, and the 252-member House of Councillors, elected for six-year terms, withhalf of its number elected every three years. Under 1994 legislation, there are300 single-seat constituencies and 200 seats filled by proportional representation inthe House of Representatives

Legal system A US-style Supreme Court, appointed by the cabinet, heads a legal system of lessercourts divided into four arms: the High Court, district courts, family courts andsummary courts

National elections Last elections held in October 1996 (House of Representatives); July 1998 (half ofHouse of Councillors). Next elections due by October 2000 (House of Representatives);July 2001 (House of Councillors)

National government As of May 13th 1999 the Liberal Democratic Party (LDP) held 266 seats and the LiberalParty held 39 seats in the House of Representatives. Minshuto (Democratic Party ofJapan) held 93 seats. The second largest opposition group, New Komeito/HeiwaKaikaku, held 52 seats. A new cabinet was installed in January 1999

Main political organisations The government is a coalition of two parties, the LDP and the Liberal Party.Opposition parties include: Minshuto; New Komeito/Heiwa Kaikaku; JapanCommunist Party (JCP)

Main members of the cabinet Prime minister Keizo Obuchi (LDP)Chief cabinet secretary Hiromu Nonaka (LDP)

Key ministers Agriculture, forestry & fisheries Shoichi Nakagawa (LDP)Construction Katsutsugu Sekiya (LDP)Finance Kiichi Miyazawa (LDP)Financial reconstruction Hakuo Yanagisawa (LDP)Foreign affairs Masahiko Komura (LDP)Home affairs Takeshi Noda (Liberal Party)International trade & industry Kaoru Yosano (LDP)Justice Takao Jinnouchi (LDP)Labour Akira Amari (LDP)Post & telecommunications Seiko Noda (LDP)Transport Jiro Kawasaki (LDP)

Directors-general ofgovernment agencies

Defence Hosei Norota (LDP)Economic planning Taichi Sakaiya (LDP)Environment Kenji Manabe (LDP)Management & co-ordination Seiichi Ota (LDP)Science & technology Akito Arima (LDP)

Central bank governor Masaru Hayami

4 Japan


Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998

GDP at market prices (¥ trn) 479 483 501 508 495

Real GDP growth (%) 0.7 1.4 5.2 1.4 –2.9

Consumer price inflation (av; %) 0.7 0.0 0.0 1.7 0.7

Population (m; Oct 1st) 125.0 125.6 125.9 126.2 126.6a

Exports fob ($ bn) 385.7 428.7 400.3 409.2 373.3

Imports fob ($ bn) 241.5 296.9 316.7 307.6 251.3

Current-account balance ($ bn) 130.3 111.1 65.9 94.4 120.5

Reserves excl gold ($ bn) 125.9 183.3 216.6 219.6 215.5

General government balance (% of GDP) –2.30 –3.60 –4.19 –3.29 –6.13

General government debt (% of GDP) 69.4 76.0 80.9 87.2 100.3

Exchange rate (av; ¥:$) 102.21 94.06 108.78 120.99 130.90

May 13th 1999 ¥120.9:$1

Origins of net domestic product 1997 % of total Components of gross domestic product 1998 % of total

Agriculture, forestry & fishing 1.7 Private consumption 61.5

Mining & quarrying 0.2 Government consumption 10.1

Manufacturing 24.3 Private housing investment 4.1

Construction 9.7 Private plant & equipment investment 14.3

Electricity, gas & water 2.9 Government investment 7.9

Wholesale & retail trade 12.2 Stockbuilding 0.3

Banks, insurance & real estate 18.6 Exports of goods & services 11.2

Transport & communications 6.6 Imports of goods & services –9.2

Other services industries 17.7 GDP at market prices 100.0

Government services 8.0

Imputed rent etc –5.6

NDP at factor cost incl others (market prices) 100.0

Principal exports 1998 $ bn Principal imports 1998 $ bn

Motor vehicles 59.5 Mineral fuels 42.9

Semiconductors 28.3 Food, beverages & tobacco 41.2

Office machinery 27.9 Chemicals 20.8

Chemicals 27.1 Textiles 18.9

Metals 24.5 Office machinery 16.3

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total

US 30.5 US 23.9

Taiwan 6.6 China 13.2

Hong Kong 5.8 Australia 4.6

China 5.2 South Korea 4.3

Germany 4.9 Indonesia 3.9

a EIU estimate.

Japan 5


Outlook for 1999-2000

Arguments over thetiming of the LDP

leadership election—

Japan’s next important election is that for the presidency of the ruling LiberalDemocratic Party (LDP), which is due to be held by the end of September 1999.The contest is important in its own right, but also because, by tradition, thepresident of the LDP becomes prime minister when the party is in power. Somemembers of the LDP want to capitalise on the relative popularity of the incum-bent, the prime minister, Keizo Obuchi (see The political scene), by bringingthe election forward. Others are proposing that the election should be delayedto give Mr Obuchi a full unchallenged two years in post. (Mr Obuchi is cur-rently serving out the remainder of the term of the former prime minister,Ryutaro Hashimoto, who was re-elected party president in September 1997.)

—will not prevail Neither camp is likely to prevail, however, mainly owing to the opposition thatwould be generated from powerful opponents of Mr Obuchi on the party’sconservative wing. During his time as prime minister, Mr Obuchi has takengreat pains to defuse tensions between the party’s liberal wing, to which hebelongs, and its conservative wing. He will therefore be unwilling to bringtensions to the surface and suffer the long-term consequences of party disunityfor the sake of short-term electoral gain.

Mr Obuchi will facechallengers—

Mr Obuchi’s main challenger in the election in September will be a formersecretary-general of the party and now the leader of the second largest faction,Koichi Kato. Mr Kato’s position as unofficial successor-designate to Mr Obuchi issuggested by the dynamics of the last election for the LDP presidency, in July1998, in which his supporters in the then Miyazawa faction (now the Katofaction) voted for Mr Obuchi in return for an apparent pledge from Mr Obuchi’sfaction to support Mr Kato next time round. However, Mr Kato has yet to holdan important cabinet position, and this could damage his chances. He may alsodecide to defer his bid if Mr Obuchi’s current popularity holds.

—from both wings ofthe party

A further challenger, also on the LDP’s liberal wing, will be a former chairmanof the party’s influential Policy Affairs Research Council and current leader ofthe fifth largest faction, Taku Yamasaki. Mr Yamasaki has already started cam-paigning, proposing among other things, to remove Article 9 of the constit-ution, in which the right to war and to possess offensive military potential arerenounced. The factions on the party’s conservative wing, who feel they havebeen largely frozen out of government, are also likely to put forward candi-dates. Although Mr Obuchi remains the favourite to win the election by dint ofhis popularity, the chances of his challengers will be strengthened if his prom-ised economic recovery does not materialise in the coming months.

Disappointment with thecurrent coalition—

The leader of the Liberal Party, Ichiro Ozawa, took his party into coalition withthe LDP in January 1999 for several reasons. Among the most important washis expectation that, once in coalition, the LDP would work with his party todevelop a joint election scheme for the next lower house election which wouldenable more members of the Liberal Party to win parliamentary seats. The LDPhas, however, not fulfilled its part of the bargain: instead, it has been largelyignoring the Liberal Party, while trying to bring another opposition party, New

6 Japan


Komeito, into the governing coalition in order to boost its position in theupper house, where it does not have a majority.

—will tempt Mr Ozawa toally himself with the

LDP’s conservative wing

Thus frustrated, Mr Ozawa seems to be leaning towards his old strategy ofallying his party ever more closely with the LDP’s conservative wing, in orderto strengthen his own position within the coalition. If Japan’s economic con-dition does not improve soon, Mr Ozawa may be tempted to sharpen hisattacks on the government in general and on the LDP’s liberal wing in partic-ular. He is, however, unlikely to want to leave the coalition in the run-up to thenext lower house election, largely because remaining close to the LDP offers thebest chances of electoral survival; his party’s poor performance in recentelections will reinforce this point.

Minshuto will remainlargely irrelevant

The largest opposition party, Minshuto (Democratic Party of Japan), will con-tinue to struggle to present itself to the LDP as a credible party of government,owing both to its lack of ideological cohesion—the party includes former mem-bers of both the Social Democratic Party and the LDP—and to the inability ofits leader, Naoto Kan, to recover the prestige he lost in the wake of a sex scandallast year. Minshuto may also try to ally itself with New Komeito in order toboost its strength in the Diet—it currently only has 93 seats in the lower housecompared with the LDP’s 266. New Komeito’s recent co-operation with theLDP in passing the revised US-Japan defence guidelines (see The political scene)suggests that it may be more willing to do a deal with the LDP than withMinshuto.

The next lower houseelection will be held

in 2000

Japan’s next election to the lower house of parliament must be held by mid-October 2000. Although the government’s popularity ratings are currentlyhovering at just under 40%—a stellar level by Japanese standards—it is unlikelyto want to bring the election forward to this year. The party performed rela-tively poorly in the recent Tokyo gubernatorial, provincial and large city elec-tions (see The political scene) and the economic outlook remains uncertain.One possible date for an election may be March 2000, after the fiscal year2000/01 (April-March) budget has been passed by the Diet and before the newlong-term nursing-care insurance (Kaigo Hoken) is introduced in April, which,because it will raise compulsory medical insurance premiums, may prove un-popular with voters.

The LDP will remain thelargest party after the

election

The LDP will remain the largest party in the lower house after the next election,even if it fails to win enough seats to allow it to govern alone. There are tworeasons behind this assumption. First, the opposition parties in general, andMinshuto in particular, will remain weak and divided. This will be reinforcedby the current electoral system, which allocates 200 of the 500 seats in the Dietby proportional representation, thereby encouraging a proliferation of smallerparties. Second, despite its recent problems, the LDP still has one of the strong-est grass-roots party organisations of any of Japan’s political parties. It willtherefore be better positioned than most other opposition parties to mobiliseits supporters come election time.

Japan 7


The government willadopt another stimulus

package—

The government’s economic policy will be largely motivated by short-termpolitical considerations for the remainder of 1999 and the early part of 2000.With the election for the party presidency and the next lower house electionboth looming, Mr Obuchi will be anxious to maintain the momentum of fiscalstimulus in the short term. For this reason, despite assurances to the contraryfrom both Mr Obuchi and the finance minister, Kiichi Miyazawa, a furthereconomic stimulus package is likely to be adopted in the latter part of 1999.The package is likely to centre on extra public works projects, which willdirectly benefit key LDP supporters, such as the construction companies.

—probably in September On the assumption that the next lower house election will be held in March2000, the most likely timing for the introduction of a supplementary budget willbe September 1999. Assuming that there is the usual four- to five-month delaybetween announcement of the stimulus package and the actual implementationof the public works projects it contains, the maximum impact of the packageshould be felt around February 2000, just ahead of the election.

Although some senior members of the government have called for anotherstimulus package of around ¥20trn ($165bn at the forecast average exchangerate for 1999 of ¥121:$1), worries about the effect such a large package wouldhave on long-term interest rates and about the government’s deterioratingfiscal position suggest that this is unlikely. A package of ¥5trn-8trn ismore realistic, of which, judging from past packages, about 40% will be freshspending.

More public funds willhave to be injected

into banks

Japan’s large commercial banks have strengthened themselves in recent monthsby selling off non-performing loans and announcing restructuring programmesin exchange for the government’s financial support. Much remains to be done,however. The Ministry of Finance (MOF) estimates that 30% of the country’splant and equipment is excessive, and most of this has been financed throughbank credit. Thus, the impending elimination of excess capacity will entail stillmore loan defaults and a steady stream of additional non-performing assets. Norhas the government yet recapitalised Japan’s 150 or so regional banks, althoughthese institutions’ finances are every bit as fragile—if not more so—as those ofthe biggest banks. Meanwhile, owing to the stagnation of the South-east Asian

-40

-20

0

20

40

60

. .Oct. . Jan . .Apr . . Jul . .Oct. . Jan . .Apr . . Jul . .Oct. . Jan . .Apr . . Jul . .Oct. . Jan .

Public works starts

Public works orders

The lagged impact of economic stimulus packages

Sources: Ministry of Construction; EIU.

19951995199519951995199519951995199519951995199519951995199519951995199519951995199519951995199519951995199519951995 98989898 99991995 981995 981995 981995 981995 981995 981995 981995 981995 981995 98 9999991995 98 9996961995 98 99961995 981995 98 9996 979797

(b)¥12.8trn package announced¥12.8trn package announced

¥16.7trn package announced

¥24trn package announced¥24trn package announced

Supplementary budget passed


(b)(b)¥12.8trn package announced

Supplementary budget passedSupplementary budget passed ¥16.7trn package announced

¥24trn package announced

Supplementary budget passedSupplementary budget passed


8 Japan


and South Korean economies, a large volume of Japanese lending to thesecountries, too, will become problematic. In the light of these facts, much moremoney will be needed to keep the financial sector stable and, in the long run,the industry will have to undergo a very substantial consolidation.

Monetary policy willremain broadly

expansionary

With the banking sector still very weak, deflationary pressures mounting andbusiness investment depressed, there is little reason to expect the Bank of Japan(BOJ, the central bank) to tighten monetary policy over the forecast period. TheBOJ will also be under pressure from MOF—which is now issuing more short-term bonds in order to ease pressure on long-term interest rates—to keep nomi-nal short-term interest rates as low as possible. The BOJ’s preferred means ofdoing so will probably continue to be to supply enough liquidity to the systemto keep the overnight call rate well below the 0.5% official discount rate (ODR,the rate at which the BOJ lends to commercial banks). The BOJ’s targeting ofmarket interest rates in this way suggests that the ODR is losing its status asJapan’s benchmark interest rate. The EIU does not, therefore, expect the ODRto be lowered further in 1999-2000.

Inflation targeting willnot be adopted

Despite rising inflationary pressures, the BOJ will not adopt an inflation target-ing policy, hoping instead that sufficient inflationary pressures can be generatedby the government’s massive fiscal stimulus packages. In part, the BOJ’s reluc-tance will be motivated by the logistical difficulty of generating inflation, giventhe current problems in Japan’s banking system, particularly with regard tocredit creation, and the current depressed state of consumer sentiment. The BOJwill also be concerned that, even if it were able to generate inflation, this mightprove difficult to contain once unleashed. We continue to believe that the BOJwill resist demands by some politicians to underwrite government bond issuesdirectly for the reasons outlined in our last report (1st quarter 1999, page 8). Thisstance has received additional support from the Economic Strategy Council in itsfinal report on revitalising Japan’s economy (see Economic policy).

The economy willremain fragile—

Even with the current high level of government investment, we expect Japanto record a second year of economic contraction in 1999, with real GDP shrink-ing by 1.1%. Assuming that financial sector reforms are broadly successful inrestoring confidence in Japan’s financial system, economic growth should re-sume in 2000—albeit weakly—with real output expanding by 0.8%. Althoughwe expect resolution of the non-performing loan problem to be well under wayby 2000, Japan’s banks will still be weak and therefore unable to act fully ascredit intermediaries. The banking sector will thus continue to act as a drag onoverall growth until well beyond the end of the forecast period.

—and structural problemswill not be addressed

The persistence of serious structural problems, particularly in the non-tradablesectors of the economy such as contraction and retail, will also slow the pace ofrecovery and ensure that large swathes of Japan’s industry remain inefficient.With important elections approaching, the government will not address theseproblems over the forecast period, as to do so would hurt many of its mostimportant supporters.

Japan 9


Economic results and forecasts(¥ trn at constant 1990 prices; % change year on year in brackets unless otherwise indicated)

1997a 1998a 1999b 2000b

Private consumption 285.3 282.1 281.9 283.6 (1.0) (–1.1) (0.0) (0.6)

Public consumption 45.0 45.3 45.8 46.3 (1.5) (0.6) (1.0) (1.2)

Gross fixed investment 150.0 136.5 130.8 131.7 (–2.1) (–9.0) (–4.2) (0.7)

Private housing 21.6 18.6 16.6 16.9 (–15.9) (–14.0) (–10.5) (1.9)

Private plant & equipment 88.8 78.8 70.7 71.7 (7.2) (–11.3) (–10.3) (1.4)

Public investment 39.6 39.2 43.5 43.2 (–11.3) (–1.2) (11.2) (–0.9)

Final domestic demand 480.4 464.0 458.5 461.6 (0.0) (–3.4) (–1.2) (0.7)

Stockbuilding 2.3 1.6 0.6 0.0 (0.0)c (–0.1)c (–0.2)c (–0.1)c

Total domestic demand 482.7 465.6 459.1 461.6 (0.0) (–3.5) (–1.4) (0.6)

Foreign balance 9.6 12.5 13.9 15.0 (1.4)c (0.6)c (0.3)c (0.2)c

GDP 492.3 478.1 473.0 476.7 (1.4) (–2.9) (–1.1) (0.8)

Exports of goods & services 67.3 65.7 65.3 67.8 (11.6) (–2.3) (–0.7) (3.9)

Imports of goods & services 57.7 53.2 51.4 52.8 (0.6) (–7.7) (–3.5) (2.7)

a Actual. b EIU forecasts. c Contribution to GDP growth.

Companies will continuecutting investment—

Domestic demand will remain depressed over the forecast period, shrinking by1.4% in 1999 and growing by just 0.6% in 2000. With many industries suffer-ing from significant overcapacity and the outlook for profits still uncertain,even those companies that have sufficient funds are likely to maintain a verycautious attitude towards undertaking new capital investment. The reluctanceof the banks to make new loans to less creditworthy companies as they con-tinue improving the quality of their asset portfolios will also make it difficultfor smaller companies to find funds for new capital investments. We expectprivate investment in plant and equipment to contract by 10.3% in 1999 andthen to grow by a modest 1.4% in 2000. Despite this small recovery, however,in absolute terms business investment will remain well below 1995 levels.

—which will prevent arebound in consumer

sentiment

Investment cutbacks, together with more general corporate restructuring, willinevitably drive unemployment to levels unprecedented in Japan’s recent past.This, coupled with falling or stagnant wages in both nominal and real terms,will militate against a strong rebound in consumer confidence over the forecastperiod. Likely revelations about the huge underfunding of corporate pensionfunds from fiscal year 2000/01 as new accounting rules come into effect (seeEconomic policy), together with forecast continuing falls in residential landprices, will also deter many Japanese consumers from boosting spending in theshort term. We therefore expect private consumption to remain stagnant in

10 Japan


1999 and to grow by just 0.6% in 2000. The weakness of private consumptionwill also manifest itself in weak demand for private housing investment, whichis forecast to decline by 10.5% in 1999 and to grow by just 1.9% in 2000.

Public investment will bemaintained at high levels

Public investment will be one of the few bright spots in Japan’s economy in1999, growing by 11.2%. This will largely reverse the contractions of 1997-98,bringing public investment back to just below the 1996 level in absolute terms.A large proportion of this growth will be accounted for by the carryover into1999 of some of the ¥24trn ($183bn at the average 1998 exchange rate of¥131:$1) economic stimulus package announced in November 1998. Our fore-cast for a 0.9% contraction in public investment in 2000 takes into account ourassumption that there will be a further economic stimulus package in the latterpart of this year, much of which will be spent in early 2000. The initial 2000/01budget is also likely to contain generous allocations for public works.

Global assumptions(% unless otherwise indicated)

1997a 1998a 1999b 2000b

Real GDP growthUS 3.9 3.9 3.4 1.8 EU 2.6 2.9 1.8 2.2 Asia excl Japan 6.7 2.7 3.5 4.8

World trade growth 10.6 3.0 3.3 5.2

$ effective exchange rate (1990=100) 104.4 109.5 106.9 104.6

Consumer price inflation (OECD average) 2.1 1.5 1.3 1.7

a Actual. b EIU forecasts.

Source: EIU.

Export performance willbe weak by recent

standards

Exports of goods and services will contract again in 1999, by 0.7%. In part thiswill be the result of the yen’s forecast annual average appreciation against thedollar in both nominal and real effective terms during 1999, which will erodethe competitiveness of Japan’s goods on international markets. Exporters will,however, also be under pressure to cut merchandise export volumes to the USduring 1999 (and possibly into 2000 as well) in order to lessen bilateral tradetensions. Exports of goods and services will begin to recover in 2000, growingby 3.9%, as accelerating demand for Japan’s goods in Asia, in particular, helpsoffset slower merchandise import growth in the US. The yen’s slight weakeningagainst the dollar in 2000 in annual average terms will also help lift merchan-dise export volumes. Although exports of goods and services will post a rela-tively poor performance in 1999-2000, this will be more than offset by an evenworse performance by imports of goods and services. We therefore expect theforeign balance to make a positive contribution to overall GDP growth in bothyears of the forecast period.

The yen will weaken inannual average terms—

The yen will weaken against the dollar in the remainder of 1999 and the earlypart of 2000, owing mainly to continuing worries about Japan’s economic out-look. The yen’s downward momentum could accelerate if the government’spromised economic recovery does not materialise by the latter part of 1999, or if

Japan 11


the prime minister’s promise of 0.5% growth in 1999/2000 looks unachievable.Assuming that financial sector reform has been largely successful, the yenshould start to appreciate again in late 2000, albeit very slowly. Increased in-flows of capital from abroad as Japan’s financial assets become more attractiveagain, together with narrowing long-term interest-rate differentials betweenJapan and the US, which may reduce capital outflows from Japan, will help liftthe yen. The currency is forecast to average ¥121:$1 in 1999 and ¥125:$1 in 2000.

—and inflationarypressures will be absent

The size of the output gap, which we estimate at over 7% of GDP, together withmounting downward pressure on prices as deregulation accelerates and com-panies cut their prices to woo customers, suggests that inflationary pressureswill be largely absent during the forecast period. Although some upward pres-sure on prices will be generated in 2000 as the weakening of the yen raises theprice of imports, the effect on consumer price inflation will be modest. Giventhe expected weakness of consumer sentiment, many companies are likely toabsorb higher import costs themselves, rather than pass them on to theircustomers. We expect consumer prices to fall by 0.2% in 1999 and to remainflat in 2000. Consumer price inflation in Japan will therefore be considerablylower than the OECD average.

The merchandise tradesurplus will rise—

Very weak growth in merchandise imports in both value and volume terms willresult in large merchandise trade surpluses in both 1999 and 2000, of around$133bn-134bn. These will be the highest trade surpluses since 1994 and arecertain to irritate the US, particularly in the run-up to the US presidentialelection at the end of 2000. Merchandise export growth will outpace merchan-dise import growth in value terms, but will nevertheless be disappointing byrecent standards, owing both to exchange-rate movements (see above) and tofierce competition from South Korea, in particular, which will force Japaneseexporters to keep prices down in order to maintain market share.

Current-account forecasts($ bn unless otherwise indicated)

1997a 1998a 1999b 2000b

Goods: exports fob 409.2 373.3 382.7 405.5

Goods: imports fob –307.6 –251.3 –249.4 –271.6

Trade balance 101.6 122.0 133.3 133.9

Services: credit 69.3 62.4 67.7 67.9

Services: debit –123.5 –111.7 –108.7 –113.6

Services balance –54.1 –49.4 –41.0 –45.7

Income: credit 222.2 209.4 203.1 209.5

Income: debit –166.4 –152.9 –156.0 –161.2

Income balance 55.7 56.6 47.1 48.3

Current transfers: credit 6.0 5.5 5.9 5.7

Current transfers: debit –14.8 –14.2 –15.2 –14.8

Current transfers balance –8.8 –8.7 –9.3 –9.1

Current-account balance 94.4 120.5 130.1 127.5 % of GDP 2.2 3.2 3.2 3.2


12 Japan


—helping keep thecurrent-account surplus

at a high level

The services deficit will start to widen again in 2000, reaching nearly $46bn,after falling in both 1998 and 1999. The rise will mainly be due to the begin-nings of a recovery in private consumption, which will boost outward tourismand import-related services, pushing up services debits. The income surpluswill remain steady at $47bn-48bn in both years of the forecast period. Prevail-ing low interest rates and the beginnings of large-scale restructuring by somelarge Japanese companies will subdue outflows of interest, profit and dividendsin 1999 and 2000. Income inflows, meanwhile, will fall in 1999, mainly as aresult of poor returns from Asian investments. This should be reversed in 2000,as faster world economic growth lifts international equity prices, boostingdividend inflows. The net result of these movements will be current-accountsurpluses of $130bn in 1999 and $128bn in 2000. As a percentage of GDP,however, these will remain steady at 3.2% in both years.

Forecast summary($ bn unless otherwise indicated)

1997a 1998a 1999b 2000b

Real GDP (% change, year on year) 1.4 –2.9 –1.1 0.8

Consumer prices (av; % change, year on year) 1.7 0.7 –0.2 0.0

Unemployment rate (%) 3.4 4.1 4.9 5.5

Exports fob 409.2 373.3 382.7 405.5

Imports fob 307.6 251.3 249.4 271.6

Current-account balance 94.4 120.5 130.1 127.5 % of GDP 2.2 3.2 3.2 3.2

Average exchange rate (¥:$) 121.0 130.9 121.0 125.0


100

110

120

130

140

150

1990 91 92 93 94 95 96 97 98 99 2000

Yen real exchange rates (c)1990=100

¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$¥:$

¥:DM

¥:$

¥:DM¥:DM¥:DM

97 98 99(b) 2000(b)97 98 99(b) 2000(b)

¥:$

¥:DM

¥:$

¥:DM¥:DM

97 98 99(b) 2000(b)97 98 99(b) 2000(b)97 98 99(b) 2000(b)

¥:$

¥:DM

¥:$

¥:DM

¥:$

¥:DM

¥:$

¥:DM

¥:$

¥:DM

¥:$

¥:DM

¥:$

¥:DM

¥:$

¥:DM

¥:$

¥:DM

¥:$

¥:DM

97 98 99(b) 2000(b)97 98 99(b) 2000(b)

-3

-2

-1

0

1

2

3

4

5

6

1996 97 98 99(b) 2000(b)

JapanOECD average (a)

Gross domestic product% change, year on year

(a) Excl Iceland and Luxembourg. (b) EIU forecasts. (c) Nominal exchange rates adjusted for changes inrelative consumer prices.Sources: EIU; IMF, International Financial Statistics.

Japan 13


Review

The political scene

A raft of policyinitiatives—

On coming to power in July 1998, the prime minister, Keizo Obuchi, and hiscabinet enjoyed popularity ratings of less than 20%. Since then Mr Obuchi hasformulated a ¥24trn ($183bn at the average 1998 exchange rate of ¥131:$1)economic stimulus package, enacted a ¥60trn financial reform scheme, estab-lished a parliamentary alliance with the Liberal Party, and shepherded thebudget for fiscal year 1999/2000 (April-March) through the Diet (parliament) inrecord time. Partly as a result of these initiatives, the sense of crisis aboutJapan’s economy has receded—at least for the time being—and the Tokyostockmarket has risen.

—increases thegovernment’s popularity—

These developments have quietened some of Mr Obuchi’s critics within theruling Liberal Democratic Party (LDP) and pleased many voters. Meanwhile,the intrusion of two North Korean vessels into Japan’s territorial waters (seebelow) and persistent disagreements with China have encouraged a sense ofunity among many Japanese that has also worked to Mr Obuchi’s advantage.Indeed, recent opinion polls have shown public support for the prime ministerand his cabinet nearing 40%, a level that has not been seen by a Japanesegovernment for many years.

—but the LDP’s electoralfortunes are mixed—

This relative popularity notwithstanding, the LDP has performed poorly inrecent elections. As is well known, the ruling party has long been vulnerable inJapan’s urban centres. In the upper house election in July 1998, for example,the party had some of its worst results in Osaka and Tokyo (3rd quarter 1998,pages 12-14). This weakness has persisted into 1999, for example in theApril 11th election for the governorship of Tokyo, a position of enormoussymbolic significance given the city’s status as the national capital.

—as difficulties in findinga candidate—

Aware of its lack of appeal to urban voters, the LDP initially sought an alliancewith the largest opposition party, Minshuto (Democratic Party of Japan), inwhich it would have endorsed Minshuto’s candidate for the governorship,Kunio Hatoyama. Minshuto, however, believing that co-operation with theLDP might damage its own electoral chances, both in this and in later elec-tions, declined the offer. Thus isolated, the LDP belatedly nominated YasushiAkashi, a former cabinet minister and UN official with little public following—or appeal—as its candidate; for the LDP, Mr Akashi’s appeal lay in his closeconnections with the lay Buddhist organisation Soka Gakkai, which supportsthe third largest opposition party, New Komeito, and can mobilise some 10%of Tokyo’s voters.

—help it lose the Tokyogubernatorial election—

The LDP’s problems were compounded by two further events. First, a seniorparty member and former foreign minister, Koji Kakizawa, who had longnursed an ambition to become Tokyo’s governor, decided in mid-February torun against Mr Akashi as an independent. Then, shortly afterwards, anotherformer member of the LDP, Shintaro Ishihara, announced that he, too, would

14 Japan


run as an independent. Senior members of the LDP feared, rightly as it turnedout, that the candidacies of Mr Kakizawa and Mr Ishihara would erode itsalready weak base of support in Tokyo still further.

—to Shintaro Ishihara In the event, Mr Ishihara won the election easily, garnering 30.5% of the votescast. In large part his victory was due to a strong campaign, which, amongother things, called for radical reform of the bureaucracy and was highly criti-cal of the established political parties. The implications of his victory are,however, uncertain. Like his predecessor, Yukio Aoshima, who was also anindependent, Mr Ishihara will face a hostile metropolitan assembly dominatedby the LDP and New Komeito, both of which are certain to work to preventhim from implementing many of his campaign promises.

Results of the Tokyo gubernatorial election, Apr 11th, 1999

Candidate Party No. of votes % of vote

Shintaro Ishihara Independent 1,664,558 30.5

Kunio Hatoyama Minshuto 851,130 15.6

Yoichi Masuzoe Independent 836,104 15.3

Yasushi Akashi LDP 690,308 12.6

Mitsuru Mikami Japan Communist Party 661,881 12.1

Koji Kakizawa Independent 632,054 11.6Sources: Nihon Keizai Shimbun, April 13th 1999; EIU.

All major parties farepoorly in the provincial

elections—

The limits to the LDP’s popularity were further demonstrated in its less thanstellar performance in the 44 elections for prefectural assemblies and the11 elections for large city assemblies that were also held on April 11th (see tableon page 16). The LDP derived some comfort, however, from the fact that mostof the other main parties fared even worse. In the first nationwide electionsthey have contested since their formation in 1998, both Minshuto and theLiberal Party turned in disappointing performances, suggesting that muchneeds to be done to strengthen their respective local-level organisations. Al-though New Komeito gained seats in both sets of elections, the scale of theincreases was less than might have been expected, given the party’s recentprominence in contributing to policy formation in important areas, such asfinance and defence.

—except the JapanCommunist Party

Of the major political parties, the only real winner in the provincial electionswas the Japan Communist Party (JCP), which increased its representation in theprefectural and city assemblies by 55.1% and 30.4% respectively. The JCP ap-pears to have benefited both from dissatisfaction with the mainstream politicalparties—it is the only party that does not include politicians who either wereonce members of, or were in coalition with, the LDP—and from the quickeningdecline of the Social Democratic Party (SDP), which has lost considerable sup-port as a result of its recent alliances with the LDP, both within and outside thecabinet. The pattern was broadly repeated in further, albeit less prominent,elections for smaller city, town and village assemblies on April 25th.

Japan 15


Results of prefectural assembly and large city assembly elections

Prefectural Large city assembly elections assembly elections

1995 1999 1995 1999

LDP 1,304 1,288 240 233

Minshutoa – 170 – 114

New Komeito 160 166 128 132

Liberal Partya – 20 – 1

Japan Communist Party 98 152 92 120

Social Democratic Party 282 94 99 15

Independents & others 709 779 167 164

Total 2,699b 2,699 785b 779

a Minshuto and the Liberal Party were formed in 1998. b Totals do not add because some of theparties that ran candidates in 1995 have since ceased to exist.

Sources: Asahi Shimbun, April 12th 1999; Nihon Keizai Shimbun, April 13th 1999.

Mr Ozawa may be usinghis recent alliance

with the LDP—

One factor behind the recent stability of Mr Obuchi’s government has been thealliance that the LDP’s chief cabinet secretary, Hiromu Nonaka, helped negoti-ate with the Liberal Party at the beginning of this year (1st quarter 1999,pages 13-15). The support of the Liberal Party’s leader, Ichiro Ozawa, for theprime minister is, however, uncertain. Mr Ozawa’s goal has always been to splitthe LDP, bringing its conservative factions into his own camp and leaving theliberal groupings to fend for themselves. Popular thinking holds that the accre-tion of so many members of the LDP to his own party would eventually enablehim to mount a viable campaign for the office of prime minister himself. Talkof such scheming has clearly been impolitic since the formation of the coali-tion, and as a result Mr Ozawa has generally been behaving more moderatelythan in the past.

LDP faction strengthsa

No. of members No. of cabinet posts

Obuchi faction 93 4

Kato faction 71 5

Mori faction 62 1

Murakami-Kamei factionb 60 1

Yamasaki faction 31 2

Former Komoto faction 17 2

Kono group 15 2

Total 349 17c

a As at early May 1999. Includes LDP members from the upper and lower houses. b Formed onMarch 18th 1999 by 38 members of the former Watanabe faction and 22 members of the Kameigroup. The faction is led nominally by Masakuni Murakami, but real power lies with the deputyleader, Shizuka Kamei. c Includes the prime minister.

Sources: Nihon Keizei Shimbun, May 9th 1999; EIU.

—to shift policy tothe right

His recent good behaviour notwithstanding, Mr Ozawa has been increasing thepressure on the government to enact more conservative policies. He has, forexample, joined with the right wing of the LDP in urging the government to

16 Japan


make the de facto national anthem, Kimigayo, and the de facto national flag, theHinomaru, official symbols of Japan. (Japan has hitherto refrained from doingso largely out of concern for relations with other Asian countries; bothKimigayo and the Hinomaru are strongly associated with Japan’s imperial andmilitaristic past.) Similarly, Mr Ozawa recently sent one of his senior advisersto a conference of the LDP’s newest and most conservative faction, theMurakami-Kamei (see table on page 16 for faction strengths), signalling hissupport for them in their struggle against Mr Obuchi’s cabinet and the party’sliberal wing.

Electoral reformresurfaces as a topic of

debate—

Several years ago Japan adopted a new electoral system in order to reduce therole of money in politics—so-called kinken seiji—and to make the system moreaccountable to voters. These efforts have not, however, had their intendedeffect, and interest in further change has subsequently resurfaced. Some of theresulting suggestions are rather trivial. The LDP, the Liberal Party, Minshutoand New Komeito, to take one example, are currently drafting plans to reducethe number of seats in the upper house by between 10 and 25. While this effortmay save modest amounts of money and make the government slightly moreefficient, it is unlikely to yield any meaningful benefits to Japan’s overallpolitical system.

—but plans only reflectnarrow political interests

Other initiatives are, however, more important. Debate has recently resumed,for example, over how members of the Diet are elected. The LDP and theLiberal Party are content with the current system of proportional repre-sentation within provincial districts, since it strengthens conservative ruralconstituencies relative to the more liberal cities. Minshuto, by contrast, wouldprefer a nationwide consistency regime, which would increase the power ofurban voters and thereby enhance the likelihood that it could unseat the LDPand its partners. New Komeito represents yet another pole in this debate: itwould like replace the lower house’s current 500 seats—300 of which areelected on a first-past-the-post basis and 200 of which are elected by propor-tional representation—with 150 medium-sized constituencies, each returningseveral members of parliament; this would be similar to the system that existedbefore the electoral reforms of 1994.

Politicians try to wrestmore power from the

bureaucrats—

Japan’s bureaucrats have always been very powerful relative to their politicalmasters. The legislation that the cabinet submits to the Diet, for example, isdrafted by the bureaucracy. Vice-ministers, who are bureaucrats, routinely at-tend parliamentary committee meetings to answer questions on behalf ofcabinet ministers. Reform of this system of government, in which there is nodirect accountability to voters, received a strong fillip from Ryutaro Hashimoto,who in 1998, while he was prime minister, decided to eliminate several ministriesand reduce the role of the bureaucracy in the cabinet’s liaisons with the Diet.

—by pushing throughreforms

Mr Obuchi’s government has continued with many of Mr Hashimoto’s plansfor administrative reform, and plans to submit a package of related bills to theDiet for enactment, possibly before the current session ends in June. Importantareas of reform include reducing the number of ministries and agencies fromthe current 22 to 13; cutting the number of central government employees by

Japan 17


25%; replacing the current vice-ministers with deputy ministers chosen fromthe Diet; and empowering the prime minister to propose important policies atcabinet meetings—at present, the prime minister merely chairs cabinet meet-ings, while executive power rests with government ministers. The practice ofbureaucrats answering questions on behalf of ministers in the Diet is also likelyto be phased out.

MOF retains partialcontrol of financial sector

regulation—

The Ministry of Finance (MOF) has also been the target of calls for reform, bothfor its alleged mismanagement of the economy in recent years and for a succes-sion of scandals in which it has been involved. Accordingly, along with plansto reduce the number of ministries and agencies, the government also an-nounced reforms which, if implemented, will go some way towards reducingMOF’s influence. Among the most important of these is the establishment of anew Financial Agency (Kinyucho) in mid-2000 to replace the current FinancialSupervisory Agency. The new agency will be responsible for policy planning inthe financial sector, authority for which currently lies with MOF’s FinancialSystem Planning Bureau. As a concession to the bureaucrats, however, theFinancial Agency will share responsibility for managing financial crises withMOF. The prime minister is likely to have the final say in case of disagreementbetween the two bodies.

—but will have to changeits name

Although they have failed to strip MOF entirely of its regulatory powers of thefinancial sector, opponents of the ministry have achieved one outright success.From 2001 MOF’s name will change from Okurasho (literally “StorehouseMinistry”), which refers to the imperial tradition of collecting taxes in the formof rice, to the more humble Zaimusho, which translates as Treasury Ministry—although the official English name has yet to be decided. This may not seemsignificant to outsiders, but it is regarded in Japan as a profoundly symbolicchange. It also represents a considerable defeat for MOF’s old guard, whofought hard for the name to be kept on the grounds that it was an integral partof Japan’s historical tradition.

US-Japan defenceguidelines are passed by

the lower house—

US-Japan security ties grew closer when on April 26th—in a move that wasconveniently timed before Mr Obuchi’s departure for a state visit to the US onApril 29th—the lower house passed bills relating to the implementation of therevised guidelines for bilateral defence co-operation. Originally formulated inSeptember 1997, the new guidelines enhance US-Japanese defence co-operationby allowing the Self-Defence Forces (Japan’s military) to give rear-area logisticalsupport to US forces, to conduct search-and-rescue missions for military person-nel, and to supply US forces with food, fuel, transport and medical supplies inthe event of an emergency in the region.

—as the governmentcompromises with

New Komeito

The government made three main concessions in order to gain the support ofthe traditionally pacifist New Komeito, which it needed if it was to push the billsthrough the upper house, where it does not have a majority. First, it agreed todraft a separate bill relating to the question of allowing the Maritime Self-Defence Forces (Japan’s navy) to conduct at-sea inspections of foreign ships,although no deadline has been set for when the legislation will be drawn up.Second, it agreed that Self-Defence Force missions would need prior Diet

18 Japan


approval in principle, although this could be obtained retroactively in emergen-cies. Third, although still undefined in geographical terms, the scope of US-Japan defence co-operation has been narrowed to situations that, if left un-checked, could lead to an attack on Japan itself. That this presumably stillincludes Taiwan—as, for example, Mr Ozawa insists it does—was suggested byChina’s angry reaction to the guidelines. Taiwan, by contrast, welcomed them,saying that they would help promote regional security.

The US threatens toimpose sanctions on

Japanese steel—

Predictably, the growing imbalance in bilateral merchandise trade has evokedan angry response from sensitive industries in the US. The clearest example ofthis is the steel industry, where a surge of imports into North America causedthousands of workers to lose their jobs in 1998 and engendered considerableprotectionist sentiment. The US president, Bill Clinton, responded to this byre-authorising the controversial Super 301 provision, which allows the US toimpose sanctions on countries it suspects of unfair trading practices. Not to beoutdone, in March Congress enacted a law that would impose tariffs of 35-67%on Japanese hot-rolled steel coil.

—prompting Japan tocurb steel exports

Concerned about this nascent protectionism, Japan has offered a variety ofexplanations for the surge in steel exports. In February 1999, for example, ahigh-ranking executive at Japan’s (and the world’s) largest steelmaker, NipponSteel, claimed US producers had specifically requested that Japanese firmsincrease their sales to US companies to make up for a deficit in domesticproduction. Few believed this improbable argument, however, and Japan’sgovernment has indeed begun twisting arms. Thus steel exports to the USdropped off dramatically at the start of 1999: in February, for example, totalsteel exports fell by 49.4% year on year.

North Korean ships strayinto Japanese waters—

In August 1998 North Korea launched a ballistic missile—North Korea claims itwas a satellite—over Japanese territory and into the Pacific (4th quarter 1998,page 19). This infuriated Japan’s government, which had been providing foodand helping to build two light-water nuclear reactors in North Korea as part ofthe Korea Peninsula Economic Development Organisation consortium. Bilateralrelations worsened further at the end of March this year, when Japanese militaryplanes spotted two ships, which had Japanese markings but which were bristlingwith antennae, in Japan’s territorial waters. The ships refused to respond whenhailed and, instead, turned tail and headed for North Korea.

—and the navy isdispatched in pursuit

For the first time in living memory the government sent Maritime Self-DefenceForce destroyers in pursuit of the intruders; they were, however, not allowed tofire directly at the ships, as Japan’s law forbids its military to fire except inself-defence. Immediately after the incident Japan signalled its anger by reject-ing an appeal from the UN for more food aid to North Korea and calling on theUS to adopt a more forceful attitude in its dealings with the country. Althoughmore show than substance, these measures elicited condemnation from NorthKorea, which declared that its relations with Japan had entered their “worsephase”. North Korea has persistently denied all knowledge of, or connectionwith, the ships.

Japan 19


Relations with SouthKorea improve

Although Japan and South Korea have always been awkward allies, Japan’seconomic problems and shared concerns about North Korea may be bringingthe two countries closer together. Not only did Mr Obuchi propose that Japanand South Korea establish a free-trade area for the region centred on the twocountries in his recent state visit to South Korea—as well as offering SouthKorea the most fulsome apology yet for Japan’s brutal colonisation of theKorean peninsula in 1910-45—but the two countries also agreed in February toconduct their first ever joint maritime exercises in July or August this year. TheNorth Korean problem is also increasing Japanese and South Korean interest inparticipating in the theatre missile defence (TMD) programme with the US—apossibility that would entail much more intimate interaction in military,industrial and logistical co-operation between the three states, thereby increas-ing North Korea’s isolation.

Economic policy

The Economic StrategyCouncil delivers its

final report—

At the end of February 1999 the Economic Strategy Council (ESC), an advisorybody appointed by the prime minister, Keizo Obuchi, in August 1998 to plot astrategy for restoring Japan to economic health, submitted its final report.Among more than 230 separate recommendations made by the ESC was onefor a ten-year recovery programme, which would be divided into three phases:

• 1999/2000-00/01 would be dedicated to setting the economy on a path ofself-sustained recovery, by promoting the disposal of non-performing loansand maintaining expansionary fiscal and monetary policies;

• 2001/02-02/03 would be dedicated to consolidating Japan’s expected returnto self-sustained economic growth. Fiscal policy would become neutral, whilemonetary policy would remain accommodating; and

• 2003/04-08/09 would be dedicated to fiscal reconstruction, with the aim ofbalancing the primary budget by the end of the period. This would be comple-mented by a neutral monetary policy.

—and suggests scrappingcapital stock—

Although the above recommendations were generally welcomed by Japan’spolitical and corporate elite, this was not the case with all the ESC’s proposals.Perhaps the most controversial was its recommendation that the focus ofgovernment policy to promote economic recovery should be shifted from thedemand-side measures favoured hitherto to supply-side restructuring. Specifi-cally, the ESC advocates large-scale scrapping of excess industrial capacity inorder to bring production into line with domestic demand and thereby closethe widening output gap. The ESC also suggests the government undertakespecific measures, which it claims will expedite the process of scrapping excesscapital stock (see box).

—which provokescontroversy

Although the suggestion represents an important step forward in Japan’s eco-nomic policy debate, echoing as it does a similar proposal from the Ministry ofInternational Trade and Industry at the end of 1998, the government is un-likely to implement it, at least in the short term, both for political and foreconomic reasons. With a lower house election due by October 2000, it will be

20 Japan


reluctant to subject the economy to the severe short-term contractionary pres-sures that would be unleashed by large-scale scrapping of capital stock. Tocounteract such pressures, the government would doubtless be forced to imple-ment huge fiscal stimulus packages, which would worsen its already poor fiscalposition and accelerate the rise in long-term interest rates. Worried about theimpact of such restructuring on the workforce, Japan’s normally moderateunions have made their objections to the plan very clear.

Many proposals may notbe implemented

Other controversial proposals can also be expected to meet with oppositionfrom vested interests, including plans to cut the central and local governmentbureaucracies and to consider abolishing the Fiscal Investment and LoanProgramme, which has traditionally been used by politicians and bureaucratsto channel funds to favoured constituents. Ironically, Mr Obuchi’s decision toexclude bureaucrats from the ESC in order to increase its independence—andthus the authority of its recommendations—could well make it more difficultto persuade bureaucrats to accept them. This, in turn, is likely to mean thatconsiderably fewer of the proposals are implemented than either Mr Obuchi orthe ESC hopes.

Consolidated accountingis introduced

Plans formulated by Mr Obuchi’s predecessor, Ryutaro Hashimoto, to improveJapan’s famously opaque accounting rules are being implemented, albeitgradually. One of the most important of these, the shift from optional tomandatory consolidated accounting, came into effect on April 1st. This changeshould prevent companies from shifting losses to subsidiaries and affiliates,and so help investors to assess the true worth of these companies. The prob-lems caused by the previous parent-only accounting system were highlightedwhen DaimlerChrysler pulled out of talks to take a stake in Nissan Motor,

Key recommendations of the Economic Strategy Council

• Introduce a taxpayers’ code.

• Reduce top income tax rate below the effective corporatetax rate.

• Raise the consumption tax.

• Enhance tax revenue of local governments and reduce taxtransfers from the central government to local governments.

• Balance the primary budget by around 2008/09.

• Disburse vouchers of up to ¥1trn per person to helpcertain categories of unemployed retrain.

• Reform the Fiscal Investment and Loans Programme witha view to abolishing it.

• Reduce the number of local authorities from the current3,200 to 1,000.

• Cut the number of central government bureaucrats by25% by 2009; similar cuts are to be made in the numbers oflocal government bureaucrats.

• Fund the basic pension from tax revenue alone.

• Privatise the employees’ pension insurance system byaround 2030.

• Extend the carry-over period for losses from the current five years to ten, to facilitate disposal of excessfacilities.

• Implement very low-interest loans from governmentfinancial institutions to help companies disposing of excessfacilities.

• Liberalise land-use regulations to help companies sellunused land arising from facility disposal.

• Apply cost-benefit analysis to public works projects;announce evaluation of public works projects aftercompletion.

• The Bank of Japan (the central bank) should notunderwrite government bonds.

Japan 21


owing to uncertainties about the real size of the firm’s liabilities. The change isalso prompting many companies to rationalise their operations by shuttingunviable subsidiaries and affiliates. Japan’s third largest trading company,Sumitomo Corporation, reportedly plans to close as many as 70 poorly per-forming affiliates during fiscal year 1999/2000 (April-March).

The state of corporatepension funds will have to

be disclosed

A further important change in Japan’s accounting rules will come into force in2000/01, when companies will be encouraged to disclose shortfalls in theircorporate pension schemes. This will become mandatory from 2001/02. Owingboth to the poor performance of the Tokyo stockmarket since the economicbubble burst at the beginning of the 1990s and to the current very low interestrates, many corporate pension funds are severely underfunded and may not beable to meet their payment obligations. Estimates suggest that Japan’s corpor-ate pension schemes could be underfunded by as much as ¥50trn-100trn(roughly $400bn-800bn at the forecast average exchange rate for 1999 of¥121:$1). Under the new rules companies will have ten years to make good anyunderfunding through injections of cash or by issuing securities. Many com-panies are therefore likely to have little choice but to undertake massive re-structuring of their pension schemes and, as a result, several of them willprobably make significant cuts in retirement allowances.

New accounting rules

New standard Timetablea

Mandatory disclosure of debt liabilities on a consolidated basis 1998/99

Mandatory use of consolidated financial statements 1999/2000

Introduction of tax-effect accounting 1999/2000

Mandatory assessing of all financial assets except cross-shareholdings at market value rather than historical cost 2001/02

Mandatory reporting of status of corporate pension plans 2001/02 (voluntary from 2000/01)

Mandatory assessing of cross-shareholdings at market rather than historical cost 2002/03

a Fiscal years (April-March).

Source: EIU, derived from press reports.

Disbursement of the“consumption vouchers”

begins—

In order to garner the support of New Komeito in passing the 1999/2000 budgetthrough the Diet, the government had to endorse its proposal of issuing“consumption vouchers” to the elderly and people with young children toencourage them to buy more retail goods and so boost private consumption.Local authorities have distributed some ¥700bn ($5.8bn at an exchange rate of¥121:$1) worth of vouchers to 35m people since the end of January—eachvoucher is worth ¥20,000 ($165) per person and must be spent in local storeswithin six months of issue. The voucher scheme has, however, not produced thehoped-for increase in commercial activity (see Trends in demand) as consumershave been using them to make purchases they would have otherwise madeusing cash.

—but the scheme makespolitical rather than

economic sense

Whatever the ensure has been on retail sales, the scheme was from the startmore about politics than about economics. Both the ruling Liberal DemocraticParty (LDP) and New Komeito are eager to please the small business sector inurban areas so that these constituencies will reward the parties with their votes.

22 Japan


This intention is clearly manifested in the prohibition, in many parts of Japan,forbidding large retailers and department stores from accepting the coupons aspayment. The bigger companies are furious that state funds should be used insuch an inequitable fashion, but they do not represent a large enough votingbloc to alter the government’s calculations.

Public-sector finances(% of GDP; annualised rate)

1997 1998 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Public-sector budget balance –29.1 3.0 –18.8 –37.4 –32.5 –5.4 n/a Central government budget balance –18.4 12.0 –8.2 –31.2 –24.2 7.0 n/a Local authority & public corporations balance –10.6 –9.0 –10.6 –6.2 –8.3 –12.5 n/a

National government debt 71.6 71.4 73.2 78.6 80.4 81.5 87.4 of which: domestic bonds 49.4 49.6 51.0 54.5 55.8 58.0 61.1Source: Bank of Japan.

Trends in demand

The recession persiststhrough the fourth

quarter of 1998

Real GDP contracted in the fourth quarter of 1998 by 3% in year-on-year termsand by 0.8% in quarter-on-quarter terms. This was the fifth consecutive quarterin which Japan’s economy contracted, in both year-on-year and quarter-on-quarter terms. For 1998 as a whole, real output contracted by 2.9%, the worstoutturn of any large industrialised economy since the end of the second worldwar, and Japan’s worst performance since 1955.

Government investmentexpands—

Government investment was the only component of domestic demand thatexpanded in the fourth quarter in both year-on-year and quarter-on-quarterterms. This improvement derived directly from the economic stimulus pack-ages adopted in April and November 1998 (1st quarter 1998, page 17;2nd quarter 1998, pages 19-20).

Expenditure on gross domestic product, year on year(seasonally adjusted; % change unless otherwise indicated; constant 1990 prices)


Private consumption –0.4 1.0 –1.1 –4.2 0.8 –0.9 0.0

Private plant & equipment investment 8.9 5.7 2.0 –6.2 –9.1 –12.6 –17.2

Private residential investment –13.0 –22.7 –27.6 –21.7 –12.3 –9.5 –10.8

Government consumption 2.8 4.2 –1.0 2.2 –0.2 –0.6 1.1

Government fixed investment –17.6 –6.0 –4.5 –3.0 –6.3 –4.1 8.6

Stockbuilding (all sectors, contribution to growth) 0.0 0.0 0.0 0.2 –0.1 –0.3 –0.3

Exports of goods & services 16.5 10.9 7.6 2.2 –3.5 –1.4 –6.3

Imports of goods & services 0.7 –0.2 –3.3 –5.1 –8.9 –8.5 –8.4

GDP 0.9 1.7 –0.8 –3.6 –1.8 –3.1 –3.0

Implicit GDP deflator 0.2 0.3 0.9 1.3 0.2 0.0 0.0Source: Economic Planning Agency.

Japan 23


Expenditure on gross domestic product, quarter on quarter(seasonally adjusted; % change unless otherwise indicated; constant 1990 prices)


Private consumption –5.0 1.6 –1.0 0.3 –0.1 –0.1 0.0

Private plant & equipment investment –1.9 1.3 –0.4 –5.2 –4.8 –2.7 –5.7

Private residential investment –9.0 –9.0 –5.7 0.1 2.1 –6.1 –7.0

Government consumption 2.6 1.2 –2.2 0.7 0.2 0.8 –0.6

Government fixed investment 0.5 1.3 –2.3 –2.4 –3.0 3.7 10.6

Stockbuilding (all sectors, contribution to growth) 0.3 0.0 0.0 0.0 0.0 –0.1 0.0

Exports of goods & services 3.9 –0.3 1.5 –2.8 –2.0 1.8 –3.4

Imports of goods & services –2.0 –0.6 –1.6 –1.1 –5.8 –0.1 –1.5

GDP –2.5 1.0 –0.9 –1.2 –0.7 –0.3 –0.8

Implicit GDP deflator 0.9 –0.6 0.0 0.9 –0.2 –0.9 0.2Source: Economic Planning Agency.

Thanks to the generous allocations for public works in the recent initial budgetfor 1999/2000 and to projects carried over from the last year’s two stimuluspackages, this trend should continue into the first quarter of 1999. Govern-ment investment was also the only component of domestic demand to make apositive contribution to overall growth.

—but fails to offset thefall-off in private-sector

demand

Increased government investment spending was not, however, enough to offsetthe ongoing contraction in private-sector demand. As might be expected giventhe poor outlook for profits, significant overcapacity in key industries and therestrictive lending attitude of most private-sector banks (see table), the contrac-tion in private plant and equipment investment continued in the fourthquarter. Private consumption, by far the largest component of demand, was flatin the fourth quarter in both year-on-year and quarter-on-quarter terms, sug-gesting that the government’s policy of cutting taxes to make consumers spendmore had yet to bear fruit. Indeed, the 8.1% year-on-year rise in average house-hold savings during 1998 suggests that most of the windfall gains from the taxcuts were saved rather than spent. Reflecting poor consumer sentiment and thesteady decline in land prices, private residential investment also contracted inthe fourth quarter both year on year and quarter on quarter.

-5

0

5

10

15

1988 89 90 91 92 93 94 95 96 97 98

Average household savings, ¥ m % changeAverage nominal wages, % change

Household savings

Source: Management and Co-ordination Agency.

24 Japan


Bank lending(% change, year on year)

1998 1999Sep Oct Nov Dec Jan Feb Mar

City banks –2.5 –3.3 –5.0 –6.6 –6.7 –6.5 –6.0

Long-term credit banks –7.3 –7.1 –8.2 –9.0 –9.0 –8.1 –6.6

Trust banks –7.0 –8.9 –9.7 –9.4 –9.1 –8.4 –7.6

Regional banks, Tier I 0.0 0.0 0.2 –0.1 0.1 0.1 0.2

Regional banks, Tier II –2.3 –2.9 –1.2 0.6 1.1 2.0 1.6

Foreign banks’ yen lending –12.0 –21.2 –14.9 –11.3 –2.4 –1.4 –6.0

Total –2.7 –3.4 –4.0 –4.7 –4.6 –4.3 –3.8Source: Bank of Japan.

Net trade fails tocontribute to growth

During the first three quarters of 1998 net trade made a consistently positivecontribution to year-on-year real output. This was reversed in the fourthquarter, however, with net trade failing to contribute to overall growth at all.This was largely owing to the acceleration in the year-on-year contraction inexports of goods and services from 1.4% in the third quarter to 6.3% in thefourth, as a result of increased competition from South Korea and the apprec-iation of the yen against the dollar in the latter part of the year.

Contribution to real GDP growtha

(year on year; quarter on quarter in brackets; seasonally adjusted)


Private consumption –0.2 0.6 –0.6 –2.4 0.5 –0.5 0.0 (–3.0) (0.9) (–0.6) (0.2) (0.0) (0.0) (0.0)

Private plant & equipment investment 1.5 1.0 0.4 –1.1 –1.6 –2.3 –3.1 (–0.3) (0.2) (0.0) (–0.9) (–0.8) (–0.4) (–0.9)

Private residential investment –0.7 –1.2 –1.5 –1.1 –0.6 –0.4 –0.4 (–0.4) (–0.4) (–0.2) (0.0) (0.0) (–0.3) (–0.3)

Government consumption 0.3 0.4 0.0 0.2 0.0 0.0 0.0 (0.2) (0.1) (–0.2) (0.0) (0.0) (0.0) (0.0)

Government fixed investment –1.8 –0.5 –0.4 –0.2 –0.5 –0.3 0.7 (0.0) (0.1) (–0.2) (–0.2) (–0.2) (0.3) (0.9)

Final domestic demand –0.9 0.2 –2.2 –4.7 –2.3 –3.6 –2.8 (–3.5) (0.9) (–1.3) (–0.9) (–1.1) (–0.4) (–0.4)

Stockbuilding (all sectors) 0.0 0.0 0.0 0.2 –0.1 –0.3 –0.3 (0.3) (0.0) (0.0) (0.0) (0.0) (–0.1) (0.0)

Total domestic demand –1.0 0.3 –2.2 –4.5 –2.4 –3.9 –3.1 (–3.2) (1.0) (–1.3) (–1.0) (–1.1) (–0.6) (–0.5)

Net trade 1.9 1.4 1.4 0.9 0.6 0.8 0.0 (0.7) (0.0) (0.4) (–0.3) (0.4) (0.3) (–0.3)

GDP 0.9 1.7 –0.8 –3.6 –1.8 –3.1 –3.0 (–2.5) (1.0) (–0.9) (–1.2) (–0.7) (–0.3) (–0.8)

Exports of goods & services 2.0 1.4 1.0 0.3 –0.5 –0.2 –0.9 (0.5) (0.0) (0.2) (–0.4) (–0.3) (0.2) (–0.5)

Imports of goods & services 0.0 0.0 –0.4 –0.6 –1.1 –1.0 –1.0 (–0.2) (0.0) (–0.2) (–0.1) (–0.7) (0.0) (–0.2)

a Individual contributions sum to percentage change in GDP, subject to rounding. Measured by value in Period 2 minus value in Period 1 as apercentage of GDP in Period 1.

Source: Economic Planning Agency.

Japan 25


Political pressure from the US and the EU for Japan to curtail merchandiseexport volumes may also have been a factor. Imports of goods and services,meanwhile, declined by 8.4% year on year in the fourth quarter. This reflectedboth weak private-sector demand and soft commodity prices—according toMinistry of Finance data, for example, the average price of crude and partlyrefined oil fell to $13.80/barrel in the fourth quarter of 1998 from $19.90/b inthe same period of 1997.

Retail sales continueto slump

At the end of 1998 the director-general of the Economic Planning Agency(EPA), Taichi Sakaiya, said improvements in the leading indicators for house-hold consumption indicated that a recovery was under way. Such thinkingnow seems premature, as falling wages and rising unemployment continue toundermine consumer sentiment. This is confirmed by retail sector data forMarch, which show, for example, that the value of sales at department storesand supermarkets fell by 7.6% and 8.2% year on year respectively; for bothstore categories, the March data represented the 11th consecutive month ofyear-on-year contractions.

Retail sector indicators(% change in value, year on year)


Retail sales –4.1 –6.0 –2.6 –4.4 –5.3 –3.7 –4.3

Underlying retail salesa –5.2 –4.8 –1.6 –4.2 –4.6 –2.9 –7.9 of which: department storesa –5.4 –4.9 –2.4 –5.8 –1.9 –2.6 –7.6 supermarket salesa –5.1 –5.0 –0.8 –2.6 –6.8 –3.1 –8.2

Wholesale sales –7.8 –6.8 –3.7 –5.4 –9.5 –8.3 –7.9

Real household expenditure –1.4 –1.0 1.2 –0.4 1.3 –3.9 n/a of which: wage-earning households –1.1 –0.2 2.0 0.1 2.5 –4.3 n/a

a Adjusted for changes in the number of stores.

Sources: Japan Department Stores Association; Japan Chain Stores Association; Management and Co-ordination Agency.

The improvement in carsales is misleading

The data most frequently cited to support the contention that a recovery isimminent in the household sector are those on car sales, which seemed tostabilise by the end of 1998. In November, for example, unit purchases of newcars rose by 2.7% year on year. This figure was, however, misleading. In Octoberthe government changed the regulations governing car design and construc-tion, giving a fillip to the market for mini-vehicles (vehicles with engines of660 cc or less). Unfortunately for the car market as a whole, however, the strongperformance of mini-vehicles seems to have come at the expense of largerpassenger cars, which are more expensive to run. This is shown in the new carsales data for March, which indicate that, excluding the 25.4% year-on-yearincrease in the volume of mini-vehicle sales, the volume of overall sales fell by2.1% over the period.

26 Japan


The latest Tankan surveyshows a modestimprovement—

The Bank of Japan’s most recent quarterly Tankan survey of 10,000 corpor-ations, released on April 5th, reveals that the malaise in the corporate sector islikely to persist into the first, and perhaps the second, quarter of 1999. Themethodology used is to ask companies questions about their situation andprospects, and then to aggregate the answers both generally and for four sub-categories: large manufacturers, small and medium-sized manufacturers, largenon-manufacturers, and small and medium-sized non-manufacturers.

The results of this survey have been consistently gloomy for a very long time.Indeed, the primary activity of those who analyse the Tankan is no longer tolook for positive signs, but rather to discern lesser degrees of pessimism. Atentative diminution of the recent pessimism was evident in the April survey,in which the diffusion index—obtained by subtracting the number of com-panies that believe their circumstances will improve from those that foreseeworsening conditions—for non-manufacturers improved to –34 from –41 inthe fourth quarter of 1998. The diffusion index for manufacturers remainedunchanged from the fourth quarter at –56. Much of the improvement in thenon-manufacturing sector—which includes construction, transportation andretailing—derives from increased public works spending as part of the govern-ment’s recent economic stimulus packages. As such, this improvement maynot be maintained once the effects of the packages wear off.

—but business conditionsremain severe

A closer examination of the Tankan data shows that business conditions re-main generally severe for many of Japan’s companies. On the positive side,there has been a mild improvement in companies’ perceptions of bank lendingattitudes, presumably because of the new loan guarantees that the governmentis issuing, and inventories of finished goods have also diminished marginally.Against these modest improvements, however, must be set a deterioration insupply and demand conditions, and an increase in the number of companiesthat believe they have too many workers on their payrolls and that productivecapacity is too high. Confirming the fragility of the improvement in overallbusiness sentiment, large and small manufacturers and non-manufacturersalike expect to reduce fixed investment in fiscal year 1999/2000 by an averageof 13%, after an expected 12.2% cut in 1998/99.

0

100

200

300

400

500

600

700

800

-40

-30

-20

-10

0

10

20

30

40

Jan . . Apr . . Jul . . Oct . . Jan . . Apr . . Jul . . Oct . . Jan .

'000 units; left scale

% change, year on year; right scale

New car sales

Sources: Japan Automobile Association; Japan Mini-Vehicles Association.

19971997199719971997199719971997199719971997199719971997199719971997199719971997199719971997199719971997199719971997 98989898 99991997 981997 981997 981997 981997 981997 981997 981997 981997 981997 98 9999991997 98 991997 98 991997 981997 98 99

Japan 27


Tankan survey resultsa

(all industry unless otherwise indicated)


Business conditions, all industry –6 –15 –30 –34 –44 –50 –46 Manufacturing 3 –11 –31 –38 –51 –56 –56 Non-manufacturing –15 –20 –30 –28 –36 –41 –34

Bank lending attitudes 19 3 –41 –32 –33 –36 –29

Demand/supply conditions –27 –31 –41 –45 –49 –50 –51

Employment decisions 12 13 15 21 25 29 33

Company financial positions 13 7 –5 –1 –5 –7 –7

Stocks of finished goods 16 19 29 32 35 33 28

Input prices 1 2 –11 –8 –8 –14 –15

Interest rate on loans –13 8 42 0 8 9 –5

Output prices –9 –14 –24 –22 –28 –30 –29

Production capacity 4 5 9 12 15 16 18

Wholesale stock level 19 23 36 39 41 42 40

a Percentage of firms giving a positive response less percentage of firms giving negative response.

Source: Bank of Japan.

Machinery orders arestill falling

Machinery orders are a useful indicator of companies’ capital investment plans,typically leading actual investment by six to nine months. The current state ofoverall machinery orders supports a pessimistic view of how private invest-ment in plant and equipment will fare in 1999. The 30.3% year-on-year rise inpublic-sector machinery orders in February was almost entirely due to theimpact of the 1998 economic stimulus packages and is therefore unlikely to besustained. Foreign demand also remains very weak, mainly reflecting poor salesby Japan’s machinery makers in key markets, such as South Korea.

Machinery orders(% change, year on year)

1998 1999 Aug Sep Oct Nov Dec Jan Feb

Total –28.5 –18.2 –21.0 –15.8 –15.2 –15.8 –9.8 Private-sector domestic demand –23.5 –17.9 –25.7 –13.9 –11.9 –22.3 –9.2 Public-sector demand –12.0 –5.9 11.9 28.4 –2.5 –1.0 30.3 Foreign demand –47.4 –25.9 –26.3 –36.9 –23.8 –11.3 –24.5

Private domestic demand excl ships and electricity –25.0 –14.5 –26.1 –12.2 –14.3 –22.9 –8.9Source: Economic Planning Agency.

Industry and construction

Industrial production falls As might be expected, given the weakness of demand at home and in keymarkets abroad, output at Japan’s mining and manufacturing establishmentscontinued to fall in year-on-year terms in the first quarter of 1999. More en-couraging, however—since it suggests that companies are restructuring—is theyear-on-year fall in inventories, which since November 1998 has begun tooutpace cuts in production. Thanks mainly to the effects of the economicstimulus packages introduced in 1998, industrial production registered modest

28 Japan


month-on-month increases of 1.3% and 2.2% respectively in February andMarch 1999. Increased production levels for electrical machinery, transportequipment and general machinery were the main contributors to the rise.

Industrial production and shipmentsa

(% change year on year unless otherwise indicated)


Industrial production –8.2 –8.6 –5.0 –6.9 –8.5 –4.2 –1.3

Producers’ shipments –6.9 –7.4 –4.4 –5.4 –6.5 –3.5 –0.3

Producers’ inventories –2.3 –2.9 –5.2 –7.3 –8.7 –9.2 –9.6

Inventories to shipments ratiob 96.4 103.2 102.4 99.3 110.8 102.2 82.3

a Mining and manufacturing. b 1995=100.

Source: Ministry of International Trade and Industry.

The steel industry shiftsfrom exports—

In 1998 Japan’s steel producers attempted to compensate for lacklustre dom-estic demand by exporting more of their output to the stronger economies inthe West. Strenuous objections from the US and the EU, however, have causedthe manufacturers to place less emphasis on this strategy and focus instead oncutting output and restructuring. As a consequence, Japan’s steel productionfell from 102.8m tonnes in February 1998 to only 98.5m tonnes in Februarythis year. Since the manufacture of steel involves massive fixed investments,such a slowdown is very costly and is putting immense pressure on some of theindustry’s less competitive firms.

—to restructuring Japan’s second largest steel manufacturer, NKK, recently declared that it wouldlose ¥109bn ($900m at the forecast average 1999 exchange rate of ¥121:$1)in fiscal year 1998/99. To prevent further losses of a similar magnitude, thecompany plans to shed 3,300 of its 15,300 workers and reorganise its Keihin,Shimizu, and Toyama factors as independent companies by the end of1999/2000. NKK’s situation may be unusually dire relative to its peers, but onlythe largest steelmaker, Nippon Steel, is expected to report a profit for 1998/99.In April, furthermore, the Japan Iron and Steel Federation formally asked thegovernment to revise the country’s laws in order to facilitate industrial restruc-turing and, in the meantime, to provide emergency funding to troubled steelcompanies.

Vehicle manufacturerssuffer further losses—

Japan’s vehicle manufacturers had one of their worst years ever in 1998 in termsof production and sales, which fell by 8.4% and 8.9% year on year respectively.The most important factor contributing to this poor performance was the reces-sion at home, which caused domestic sales to fall every single month in year-on-year terms. The damage was also quite widespread. In 1998 Nissan Motor, argu-ably the industry’s least efficient firm, registered a 12.8% decline in sales relativeto 1997, while sales at Toyota Motor, one of Japan’s most profitable vehiclemakers, suffered a 14.6% decrease in sales. Mazda Motor, which lies somewherebetween these two extremes, saw its domestic sales contract by 5.6%.

—particularly specialisttruck-makers

The situation for those companies that specialise in making trucks was evenworse, since they depend heavily both on the domestic construction marketand on orders from Japanese companies operating in South-east Asia, an area

Japan 29


that has been hit particularly hard by the general Asian economic slowdown.Hino Motor and Nissan Diesel Motor, two of Japan’s most important truck-makers, for example, saw sales fall by 33.1% and 36.6% respectively in 1998.These two companies also made the sharpest cuts in production during theyear of any of Japan’s vehicle makers, at 46.5% and 40.7% respectively.

Nissan Motor seeks apartnership with

DaimlerChrysler—

Nissan Motors has been haemorrhaging money for several years; in 1998/99alone its losses are expected to total some ¥30bn. Even worse, the corporation’s¥4.3trn in debt has prevented it from raising new capital and is constraining itsability to invest in promising new technologies and models. This has left thecompany with no alternative but to seek merger partners from abroad. The firstof these suitors was a German-US vehicle maker, DaimlerChrysler, which in-vestigated its books, but in March declared that Nissan’s debts were unreason-ably high and walked away from the deal.

—and then with Renault Shortly afterwards, a French vehicle maker, Renault, declared an interest in theembattled Japanese firm, arguing that an injection of $5.4bn would enable thegroup to survive long enough to restructure. On this basis Renault took a 36.8%stake in Nissan Motor and obtained warrants to increase its position to 44.4%in the future. Whether this bold move into the Japanese market will enableRenault to establish the global prominence it seeks is by no means clear, butthe merger is already benefiting Nissan Motor. Not only will the companyavoid bankruptcy, but its negotiating power relative to its suppliers has beenstrengthened immeasurably: in April Nissan Motor’s president, YoshikazuHanawa, accordingly ordered its suppliers to cut their prices or be replaced bycheaper business partners.

Land prices are stillfalling—

The fall in land prices that began in 1990 has continued into the first quarterof 1999. In January-March prices of all categories of land were down 62.4% onthe mid-1990 peak and 7.3% on the first quarter of 1998. The contraction hasconsistently been most severe in commercial land prices; during the firstquarter of this year, for example, prices for this category of land were down78.3% on their mid-1990 peak and down 11.3% year on year.

Land prices(6 biggest cities)


% change, year on yearTotal –5.8 –5.5 –5.1 –5.2 –5.3 –6.3 –7.3 Commercial areas –10.9 –10.5 –10.2 –9.9 –9.6 –10.5 –11.3 Residential areas –2.8 –2.6 –2.3 –2.5 –2.7 –3.6 –4.5 Industrial areas –3.6 –3.6 –3.6 –3.9 –4.2 –5.2 –6.2

% change on mid-1990 peakTotal –58.4 –58.9 –59.5 –60.0 –60.6 –61.5 –62.4 Commercial areas –74.2 –74.8 –75.5 –76.1 –76.7 –77.5 –78.3 Residential areas –51.5 –51.7 –52.0 –52.4 –52.8 –53.5 –54.2 Industrial areas –43.3 –43.9 –44.4 –45.1 –45.7 –46.8 –47.9Source: Japan Real Estate Institute.

30 Japan


—as banks sell offcollateral

The source of this weakness is twofold. First, the recession is predictably put-ting downward pressure on prices. Second, the government’s banking sectorreforms are compelling lenders to sell off the collateral backing their non-performing loans. Since this reform process is still in its early stages, the likeli-hood is that much more commercial real estate will enter the market in thecoming months and hence that prices will settle lower still. Some members ofthe ruling Liberal Democratic Party (LDP) are, however, calling for a ¥20trn($165bn at an exchange rate of ¥121:$1) injection of public funds into theproperty sector to prevent the deflation from getting much worse.

Public-sector constructionorders rose in March

The key indicators of construction activity have followed the same downwardpattern as land prices and industrial production, although they have recentlyreceived some support from the government’s expanded public works pro-grammes. Reflecting the impact of last year’s ¥24trn economic stimulus pack-age, total construction orders to the 50 largest construction companies grew inyear-on-year terms in March 1999 for the first time in 14 months. As might beexpected, growth in orders from the public sector was most robust duringthis period.

Central governmentorders rose sharply

in February

Possibly reflecting the reluctance of local governments to implement new pub-lic works programmes owing to their deteriorating finances (1st quarter 1999,pages 23-24) the share of new construction orders from the central governmentrose to nearly 70% in February (latest available data); for most of 1998 localgovernments shouldered by far the largest share of new construction orders.

Demand for new housingremains weak

Housing starts were flat in March in year-on-year terms; this was the firstmonth since December 1996 that housing starts had not contracted year onyear. This marginal improvement presumably reflects the recent extension onmortgage tax credits (1st quarter 1999, pages 18-19) and the decision by thestate-run Housing Loan Corporation to cap its mortgage lending rates. A strongrebound in housing starts is, however, unlikely in the short term, owing toboth the weakness of consumer sentiment and the high level of inventories.Falling land prices will also deter many from investing in new housing.

Construction industry(% change, year on year)


Housing starts –14.0 –12.9 –16.0 –10.8 –11.2 –9.4 0.0

Construction orders –8.9 –14.7 –21.4 –3.7 –12.5 –2.3 5.0 Private –16.8 –22.7 –19.7 –12.5 –21.8 –10.2 2.3 Public 5.3 –2.3 –23.8 11.1 8.0 11.1 9.6Source: Ministry of Construction.

Japan 31


Transport, communications and infrastructure

NTT seeks to build aninternational presence—

Japan has experienced a wave of mergers and acquisitions since regulatorybarriers between local, long-distance and international telecommunicationscompanies were removed in 1997. By far the strongest company in the industryis Nippon Telegraph and Telephone (NTT), which controls almost all of Japan’sdomestic network and accounts for more than half of all domestic long-distance carriage. Since these markets are now open to competition fromvarious other providers, however, NTT believes it is necessary to establish aninternational presence so that it can offer its customers a range of telecom-munications services in a seamless fashion.

—by bidding for IDC— The easiest way to fill this gap in the company’s strategy would be to acquiremanaging control over International Digital Communications (IDC), a leadinginternational carrier. Indeed the two corporations’ businesses are so clearlycompatible—NTT has, for example, been extending technical co-operation toIDC since the latter was founded in 1987—that most Japanese observers, andindeed many regulators, have long assumed that a merger between the two isonly a matter of time.

—but is thwarted byCable & Wireless—

In mid-March, however, before NTT could announce a bid, the UK’s secondlargest telecommunications company, Cable & Wireless (C&W), declared itsintention to increase its minority stake in IDC to a majority. C&W already owns17.7% of IDC, and its offer was to purchase the equal stakes held by ToyotaMotor and Itochu Corporation at a price of ¥100,000 (about $840 at an ex-change rate of ¥121:$1) per share—at the beginning of May, this was increasedto ¥107,352 per share—or twice the par value. This was a generous bid, and itwas common knowledge that both Toyota Motor and Itochu Corporation werereconsidering their involvement in the telecommunications industry.

—which makes acontroversial bid

C&W’s plan has become controversial, however, both because it challengesNTT’s apparent interests directly and because it represents such a bold attackon an industry everyone believed would remain almost entirely Japanese. Inaddition, C&W has put the government in an awkward position. Ostensiblycommitted to encouraging foreign direct investment in general, and to theinternationalisation of the telecommunications business in particular, it isnonetheless reluctant to see NTT taken over.

NTT counters by playingthe national

interest card—

At the end of March NTT made its own bid for a controlling stake in IDC. Theterms of the offer remain secret, but it contained such non-monetary provi-sions as a promise that IDC’s employees would either be retained on thatcompany’s payroll or be given new jobs in other NTT operations. This ap-proach seems to have pleased IDC’s directors, who began hinting that NTT wasa better “fit” than C&W, and should therefore be given preferential considera-tion. As a result, on in mid-April IDC accepted NTT’s bid.

—but the UK governmentreacts angrily

Confronted by this decision, C&W complained that it had a contractual rightto match any other bids for IDC and that the board of directors could thereforenot legally accept NTT’s offer. If IDC did not reconsider its position, C&W

32 Japan


threatened, it would appeal for redress to the World Trade Organisation(WTO). This possibility gained further credence in late April, when the UKgovernment sent a strongly worded letter to Tokyo. Japan’s response was thatmerger and acquisition decisions are the business of individual companies andnot within the government’s purview—a strange answer, given that theMinistry of Posts and Telecommunications owns 65% of NTT.

BT and AT&T express aninterest in Japan

Telecom—

The UK’s largest telecommunications company, British Telecommunications(BT) and the US’s largest long-distance and international carrier, AmericanTelephone and Telegraph (AT&T), fear that if C&W is successful in obtaining amajority stake in IDC, they will be left at a distinct disadvantage in their effortsto enter the Japanese market. For this reason, they have decided to expandtheir global alliance—first publicised in March this year—by seeking to obtaina controlling interest in Japan Telecom, a company with a significant presencein the domestic long-distance and cellular markets, and a budding interest ininternational transmission.

—but it is reluctant tosurrender its independence

Although no formal bids have yet been made, the Anglo-American alliancecould invest as much as ¥150bn ($1.2bn at an exchange rate of ¥121:$1) inexchange for 30% of Japan Telecom. The latter, however, reacted to this newswith dissatisfaction: it is willing to accept outside money and greater inter-national access, but it hopes to garner those benefits without surrendering itsown independence.

The main airlines lowerticket prices—

Following its entrance into the airline business at the end of 1998 (4th quarter1998, page 33), Skymark Airlines has seen its prospects change dramatically. Atfirst, consumers used the company frequently because its ticket prices were50% lower than those available from the three main carriers, Japan Airlines(JAL), All Nippon Airways (ANA) and Japan Air Systems (JAS). Since then,however, the big three have matched Skymark Airline’s discount prices, andbookings on the tiny airline, which flies between Fukuoka on Kyushu in thesouth and Tokyo, have fallen from over 80% of available seats in February tojust over 60% in March.

—damaging theirprofitability

This has hurt Skymark Airlines significantly. Nor are the larger companiesescaping this enhanced competition unscathed: ANA, for example, lost ¥680m($5.6m at an exchange rate of ¥121:$1) in revenue and some 37,000 passengersin February alone. Looking forward, the large airlines will find it difficult tomake money with ticket prices falling across the board, while Skymark Airlineswill have trouble maintaining its margins as it expands its flights to cover themore expensive routes from Osaka to Fukuoka and Sapporo on Japan’s north-ernmost main island of Hokkaido. The only obvious winners in this brutalbusiness—assuming Skymark Airlines survives—are going to be consumers,who will benefit from an increase in the number of flights offered on primeroutes, as well as significantly cheaper rates.

ANA fares the worst— While all three of the largest carriers are being squeezed uncomfortably be-tween cost-cutting newcomers and the Ministry of Transport, which wantsthem to increase their flights to outlying (and less profitable) regions of Japan,

Japan 33


ANA appears to be suffering the most. Thus the airline decided in 1998 tosuspend its dividend for the first time in 30 years. More recently, the companyannounced that it expects to post net losses of some ¥8bn in 1998/99, up froma net loss of ¥2.7bn in 1997/98 and a net profit of ¥3.9bn the year before.

—and launches arestructuring programme

In order to stem the losses ANA has inaugurated a modest retrenchment pro-gramme. The number of seats on the board of directors, for instance, will be cutfrom 31 to 19, directors’ salaries will be reduced, and some unprofitable hotelswill be sold. Whether these measures will suffice to stave off bankruptcy in thelong term is open to question, both because of the modest scale of the reformsand because JAL is restructuring much more aggressively.

Aircraft producers look toEurope for new business

opportunities—

For many years Japan’s aircraft industry served largely as subcontractors for UScorporations, such as Boeing. Their best avenue of advance, therefore, was thedevelopment of the 767 and 777 as well as other new US aircraft. Now, how-ever, the combination of recession at home and the termination of Boeing’sMD-80 and MD-90 projects has caused demand for Japanese engines and partsto dry up. In response, some Japanese corporations have turned their attentionto Europe, where the Airbus consortium is expanding its operations.

—but are worried that USmakers may take offence

Mitsubishi Heavy Industries, for example, will participate directly in the devel-opment of the A3XX jet, which is expected to carry 555 passengers and will berolled out in 2004. This decision is being watched closely by other Japanesecompanies, since Boeing may take offence and find some way to retaliate. Thechances of this happening are not too high, however, as Boeing wants Japanesecompanies to provide capital to help moderate the investment risk inherent indesigning next-generation aircraft.

Employment, wages and prices

The unemployment ratereaches new heights—

In March the jobless rate reached a new post-war high of 4.8%. As always,however, this official figure may understate the true level of unemployment. Aleading private-sector research organisation, Nomura Research Institute, esti-mates that the real level of Japan’s unemployment may be as high as 15% ofthe workforce, if those who have given up looking for work and those who arekept on company payrolls but have nothing to do are included.

Employment(m unless otherwise indicated)


Labour force 68.21 68.16 67.72 67.17 66.77 66.48 67.24

Employed 65.26 65.26 64.81 64.43 63.80 63.34 63.84 of which: manufacturing 13.67 13.73 13.83 13.84 13.62 13.36 13.08

Unemployed 2.95 2.90 2.91 2.73 2.98 3.13 3.39

Unemployment ratea (%) 4.3 4.3 4.4 4.4 4.4 4.6 4.8

a Seasonally adjusted.

Source: Ministry of Labour.

34 Japan


—owing to the recessionand restructuring—

The main reason for the rise in unemployment is the recession, but the corpor-ate restructuring that has now begun in earnest is also important on the mar-gin. Whereas between 1993 and 1995 the average retrenchment programmeenvisioned a payroll contraction of 5% within three to five years, such pro-grammes now typically aim at eliminating 10% of a corporation’s employeeswithin one to three years (see table).

Retrenchment plans of selected companies listed on the Tokyo StockExchange(approximate figures)

Company Timetablea No. of employees % of workforce

Toshiba End-1999/2000 6,500 9.8

NEC End-2001/02 15,000 10.0

Sony End-2001/02 17,000 10.0

Mitsubishi Chemical End-2000/01 2,000 17.3

Mitsubishi Motors End-1999/2000 1,400 5.0

Nissan Motor End-2000/01 2,000 4.9

Nissan Diesel Motor End-2000/01 3,000 27.0

Nissho Iwai End-2001/02 1,000 25.0

Daiei End-2001/02 3,000 17.6

Ube Industries End-2001/02 1,000 17.3

a Fiscal years (April-March).

Source: EIU, derived from press reports.

—and the characteristicsof the jobless change

As companies have become more serious about cutting costs, they have shiftedtheir attention from new job applicants and “office ladies” to the most expen-sive elements of their workforces. Thus the greatest increase in joblessness in1998 and the first quarter of 1999 was among men aged between 45 and 64;they accounted for 40% of the total redundancies. Furthermore, since thesemen are do not fit easily into other companies, they spend longer periods oftime unemployed. This fact has skewed the overall figures for men, causing thecategory’s average time out of work to rise to 5.4 months, while statistics showthat women find new jobs within a comparatively short 3.1 months.

Wages, productivity and costs(% change, year on year)


WagesIndustry –0.5 0.2 0.3 –4.0 –8.0 –3.6 –3.7Manufacturing 0.0 0.4 1.8 –4.2 –3.3 –0.7 –0.7

ProductivityIndustry –3.9 –4.9 –3.0 –2.3 n/a n/a n/aManufacturing –4.5 –5.2 –2.9 –2.3 n/a n/a n/a

Unit labour costsManufacturing 6.6 6.8 3.3 4.7 7.0 3.5 n/aSources: Ministry of Labour; Japan Productivity Centre.

Annual wage negotiationsoffer workers little

comfort

Despite hard lobbying by the unions for larger wage increases on the groundsthat this would boost consumer spending, this year’s annual wage negotiationsoffer workers little comfort. Illustrating the depressed state of those industries

Japan 35


that are most dependent on domestic demand—for example construction andretailing—for the first time since data on the wage negotiations were firstcollected in 1977 the average wage increase in the manufacturing sector, at2.11%, was higher than that in the non-manufacturing sector (2.05%).

Results of annual wage negotiations in selected industries

1998 1999 ¥ % changea ¥ % changea

IndustryPulp & paper 8,024 2.66 5,587 1.84 Pharmaceuticals 2,400 0.67 0 0.00 Chemicals 8,278 2.74 6,829 2.23 Automotive products 8,149 2.76 6,476 2.16 Non-electric machinery 7,730 2.68 6,105 2.10 Electric machinery 8,283 2.79 7,232 2.38

Manufacturing 7,540 2.56 6,314 2.11 Construction 7,687 2.61 6,350 2.13 Real estate 8,306 2.86 0 0.00 Large retailers 8,167 2.81 6,888 2.38 Small retailers 8,322 3.15 7,023 2.61 Hotel & travel 2,800 1.13 655 0.24 Communications 9,087 0.59 7,769 2.18

Non-manufacturing 7,847 2.57 6,296 2.05

Overall average 7,646 2.56 6,308 2.09

a Year on year.

Sources: Nihon Keizai Shimbun, April 6th 1999, as cited in the Japan Economic Institute’s JEI Report, No. 15, April 16th 1999.

The government considersmeasures to boost the

job market—

The steady increase in the unemployment rate presents the government with amajor problem: owing to the sparse nature of the country’s welfare system, adeterioration in the job market causes consumers to reduce their purchasesmore dramatically than in other OECD countries that have more generousbenefit systems. Hence both the Ministry of Labour and the Ministry of Inter-national Trade and Industry consider it necessary to inaugurate publicly sup-ported jobs programmes. The ruling Liberal Democratic Party has come to thesame conclusion.

—including job creationand deregulation schemes

As a result, a plan was published in March this year to create 770,000 newemployment opportunities within the next two years. Of these, 400,000 are tobe in the housing industry; 180,000 in information technology; 100,000 inhealth and welfare; and 90,000 in tourism. In a related attempt to stimulate thejob market, the government plans to deregulate the temporary job marketfurther by expanding the categories of work for which temporary job place-ment agencies can dispatch workers. At present, such agencies can only dis-patch workers for 26 job categories.

Wholesale prices fall totheir lowest level

since 1979—

If the effects of the April 1997 consumption tax increase are stripped out of thedata, overall wholesale prices have been stagnant or falling since 1992. InJanuary this year the overall wholesale index (1995=100) dipped below 97 forthe first time since March 1979. This trend has recently been underscored bythe financial crises in South-east Asia, which sapped global demand for com-modities and pushed the prices of Japanese merchandise imports down even

36 Japan


further, and by the strengthening of the yen relative to the dollar at the end of1998 in both nominal and real effective terms. That this pattern has continuedin 1999 is evident in the year-on-year contractions in excess of 3% in January,February and March (latest available data).

—dragging downconsumer prices as well

The only inflationary factors at work in Japan over the past few years have beenthe government’s occasional stimulus packages and the consumption tax in-crease of April 1997. The limited effects of these factors, however, have left thegeneral path of consumer prices to be determined by wholesale developments.Thus consumer price rises in Tokyo were on a broadly decreasing trend inyear-on-year terms from the beginning of 1998 until September, when inclem-ent weather damaged harvests, making fresh food more expensive. In February1999, however, this trend was reversed, and as a result consumer prices inTokyo began declining again in year-on-year terms. Unless the Bank of Japan(the central bank) decides that more aggressive monetary policy is appropriate,thereby initiating some inflation and perhaps a sharp depreciation of the yen,this mild deflation will continue for some time.

Inflation indicators(% change, year on year)

1998 1999 Oct Nov Dec Jan Feb Mar Apr

Consumer prices, national 0.2 0.8 0.6 0.2 0.0 –0.4 n/a

Consumer prices, Tokyo 0.4 1.0 0.8 0.0 –0.2 –0.4 –0.2

Overall wholesale prices –2.8 –3.5 –4.4 –4.9 –3.8 –3.4 n/a

Corporate service prices –0.8 –0.8 –0.9 –0.9 –1.0 –1.1 n/aSources: Bank of Japan; Management and Co-ordination Agency.

Money and finance

The BOJ sends conflictingsignals on monetary policy

The Bank of Japan (BOJ, the central bank) is in two minds about monetarypolicy. On the one hand, it wants to preserve its credentials as a guardianagainst inflation, but on the other it is under considerable pressure to expandthe money supply to complement the government’s fiscal stimulus. To date,the BOJ has tried to balance the evident need for an aggressive easing ofmonetary policy with its own instincts to maintain the stability of Japan’soverall macroeconomic environment. These conflicting impulses explain thebank’s decision to guide the overnight call rate to 0.25% in September 1998and 0.15% (effectively 0% once commission is paid) in February 1999, and itsadamant refusal to help lower long-term interest rates by buying governmentbonds directly from the government.

M1 and M2 growthcontinue to diverge

Growth in the broad measure of money supply, M2, continues to lag behindgrowth in the narrow measure, M2, in year-on-year terms, continuing what isnow a well-established pattern. This mainly reflects the continuing preferenceof many Japanese for cash, owing to the perceived weakness of the bankingsystem and the very poor nominal and real rates of return on deposits, as wellas the restrictive lending stance of most private-sector banks (see Trends indemand). Although the government’s banking sector reforms have largelymitigated fears of a systemic collapse of the private-sector banking system (see

Japan 37


below and 4th quarter 1998, pages 22-23), the state-run postal savings systemcontinues to attract funds that would probably otherwise have been depositedwith private-sector banks. At the end of February 1999 the balance of postalsavings stood at some ¥253trn ($2.1trn at an exchange rate of ¥121:$1), anincrease of 5.4% year on year.

Money supply growth(% change, year on year; end-month)


M1 7.5 10.6 3.3 4.6 5.2 6.1 n/a

M2 plus CDs 3.7 5.0 3.1 3.6 3.6 3.4 n/a

Broad liquidity 3.3 3.0 3.1 3.1 3.1 3.3 3.7Source: Bank of Japan.

Progress is made onbanking reform—

The Financial Supervisory Agency (FSA) shocked the world by declaring Long-Term Credit Bank (LTCB) and Nippon Credit Bank (NCB) insolvent and hencedeserving of nationalisation at the end of 1998, and the Financial Reconstruc-tion Commission (FRC)—which controls the FSA—is proving unexpectedlyassertive in overseeing the process of financial reform. In March, for example,

200

300

400

500

600

-2

0

2

4

6

8

Jan . . Apr . . Jul . . Oct . . Jan . . Apr . . Jul . . Oct . . Jan (a) .

Balance of postal savings, ¥ trn % change, year on yearReal deposits outstanding at domestically licensed banks, ¥ trn % change year on year

Postal savings and bank deposits outstanding

(a) Outstanding deposits figures not available.Sources: Ministry of Posts and Telecommunications; Bank of Japan.

19971997199719971997199719971997199719971997199719971997199719971997199719971997199719971997199719971997199719971997 98989898 99991997 981997 981997 981997 981997 981997 981997 981997 981997 981997 98 9999991997 98 991997 98 991997 981997 98 99

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Oct . . . . Nov . . . Dec . . . . Jan . . . . Feb . . . Mar . . . . Apr . . . .May. .

Japan premium over 3-month libor%

Source: Bloomberg.

19981998199819981998199819981998199819981998199819981998199819981998199819981998199819981998199819981998199819981998 99999999

Government nationalises Long Term Credit BankGovernment nationalises Long Term Credit Bank

1998 991998 991998 991998 991998 991998 991998 991998 991998 991998 99

Government nationalises Long Term Credit BankGovernment nationalises Long Term Credit BankGovernment nationalises Long Term Credit Bank

1998 99

Government nationalises Long Term Credit Bank

Government announces ¥24trn stimulus packageGovernment announces ¥24trn stimulus package

1998 99

Government nationalises Long Term Credit Bank

Government announces ¥24trn stimulus package

1998 991998 99

Government nationalises Long Term Credit BankGovernment nationalises Long Term Credit BankGovernment nationalises Long Term Credit BankGovernment nationalises Long Term Credit Bank

Government announces ¥24trn stimulus packageGovernment announces ¥24trn stimulus package

Government nationalises Nippon Credit Bank

15 large banks submit restructuring plans to the FRC

FRC formally approves transfer of ¥7.5trn in public funds to these 15 banksFRC formally approves transfer of ¥7.5trn in public funds to these 15 banks

Government nationalises Kokumin bank

38 Japan


the FRC injected ¥7.5trn ($62bn at an exchange rate of ¥121:$1) into 15 ofJapan’s largest banks in exchange for promises from the banks to cut 20,000jobs and foreclose on a large proportion of their non-performing loan port-folios. This action—which also helped boost the banks’ Bank for InternationalSettlements (BIS) capital-adequacy ratios—was immediately rewarded in thecapital markets, where the “Japan premium” that banks had to pay to borrowinternationally disappeared almost overnight. In addition, in recent monthsthe FSA and the FRC have used their influence to encourage two mergers oflarge commercial banks.

Public fund injections for Japan’s 15 largest banks and changes in bankcapital-adequacy ratios

Total public BIS capital-adequacy ratio (%) Bank funds (¥ bn) End-1997/98a End-1998/99a

Daiwa Bank 408 10.3 13.3

Tokai Bank 600 10.3 12.2

Sakura Bank 800 9.1 12.0

Asahi Bank 500 9.4 11.1

Fuji Bank 1,000 9.4 11.0

Sanwa Bank 700 9.6 11.0

Dai-Ichi Kangyo Bank 900 9.1 10.9

Sumitomo Bank 501 9.2 10.5

Bank of Tokyo-Mitsubishi n/a 8.5 10.0

Industrial Bank of Japan 600 10.1 11.1

Mitsui Trust & Banking 400 10.4 15.1

Toyo Trust & Banking 200 10.7 14.0

Chuo Trust & Banking 150 12.7 13.0

Sumitomo Trust & Banking 200 9.9 12.0

Yasuda Trust & Banking n/a 13.6 12.0

Mitsubishi Trust & Banking 300 10.4 10.9

Bank of Yokohama 200 n/a 9.5

Total 7,459 – –

a Fiscal year (April-March).

Sources: Nikkei Weekly, March 8th 1999; Nihon Keizai Shimbun, April 1st 1999, as cited in the Japan Economic Institute’s JEI Report,

No. 11, May 7th 1999.

—as banks sell off some oftheir cross-shareholdings

One way in which lending institutions can improve their financial condition isto dispose of the shares they hold in affiliated industrial enterprises. This isclearly controversial, as such cross-shareholdings are the cornerstone of thekeiretsu system of business alliances that dominates much of Japan’s economy.Nevertheless, necessity is forcing one of Japan’s largest city banks, Fuji Bank, tounwind one-third of its ¥3.2trn worth of stakes in affiliated companies over thenext six years; another large city bank, Sumitomo Bank, is also taking this step,although only at the pace of ¥100bn a year. Neither of these developments willtransform the structure of Japanese business, since both banks will maintaintheir holdings in their closest affiliates and none of the other commerciallenders are yet committed to this sort of large-scale disintegration. Moreover,the total volume of banks’ cross-shareholdings is huge, accounting for an esti-mated 30-60% of all shares listed on the Tokyo Stock Exchange.

Japan 39


But much remains tobe done—

According to the chairman of the FRC, Hukuo Yanagisawa, the necessary bank-ing reforms have only just begun. After all, Japan can ultimately sustain onlyseven or eight of its 15 large commercial banks; and the number of smallerregional banks should likewise shrink from today’s total of over 120 to less than50. Closing down so many institutions will naturally take years and will requirevery careful administration, since restructuring the industry too fast would pushhundreds of borrowers into bankruptcy. That the long process of consolidationis proceeding, however, is clear from the fact that insolvencies of financialinstitutions continue to mount. In April, for example, the FRC declared that asecond-tier Tokyo-based bank, Kokumin Bank, was insolvent; and in the samemonth one of Kokumin Bank’s peers, the Osaka-based Kofuku Bank, wasordered by the FSA to supplement its capital as its capital-adequacy ratio hadfallen below the 4% minimum need for a bank to operate domestically.

—as industrialbankruptcies keep up the

pressure on banks

By raising demand for corporate output, the government’s latest stimulus pack-age has brought the number of bankruptcies down in recent months relative tothe corresponding period of 1998. The total number of insolvencies is still veryhigh, though, with 1,235 business failures leaving a total of ¥3.1trn ($26bn atan exchange rate of ¥121:$1) in debt in March this year alone; this compareswith 1,811 cases and ¥1.6trn in March 1998. Since most of those debts wereowed to banks, the constant stream of insolvencies is increasing the volume ofnon-performing loans burdening the financial sector. At the same time, banksare finding it more difficult to collect their questionable loans. As mentionedabove, in exchange for the government’s ¥7.5trn in financial injections, the15 largest banks promised to accelerate the disposal of their bad debts. Themost promising of these assets have, however, already been written off, and asa result the rate of collection fell to 22.5% in April-September 1998, the lastperiod for which such data have been published. The government is thus likelyto have to offer further capital infusions to the banks later in 1999.

Western financialcompanies suffer some

setbacks—

Nationalisation of LTCB and NCB was the first step in reforming those institu-tions. Next the government needed to separate those banks’ non-performingloans and then to sell the remaining assets and business relationships to privatereceiver banks. To do so efficiently, the government turned to Goldman Sachs,a US investment bank which has handled privatisations for other govern-ments. Recently, however, the president of Industrial Bank of Japan and otherleading figures have expressed concern that Goldman Sachs may be offeringLTCB’s assets to foreign institutions on preferential terms. This criticism mayhave contributed to the delay in privatising LTCB, although insiders claim thatthe segregation of the bank’s bad loans is simply taking more time than origi-nally expected. In any case Goldman Sachs’s reputation will suffer if theprocess does not proceed smoothly.

—and are implicated inJapan’s “rites of spring”

In the months before the end of the financial year at the close of March manyof Japan’s financial institutions try to dress up their books for the govern-mental inspectors by shifting their liabilities to other companies and exchang-ing assets at artificially elevated prices. Some of this sleight of hand is legalunder Japanese regulations, but practices such as tobashi, whereby losses aretemporarily placed in the accounts of a bank’s clients, are clearly illegal. These

40 Japan


manoeuvres, incidentally, partly explain the increase in the benchmark Nikkeiaverage price of 225 stocks listed on the first section of the Tokyo StockExchange that usually occurs in the first quarter of each year. Recently, how-ever, the annual rites have undergone a slight change: foreign banks are nowbeing asked to participate. After struggling for so long to become part of theJapanese establishment, some Western institutions appear to have found thisinvitation too appealing to ignore. This, at least, is the opinion of the FSA,which in early April launched a surprise inspection of a large foreign invest-ment bank, Credit Suisse, sending tremors of fear throughout the foreign bank-ing community, which worries that the distinction between legal and illegalprocedures is dangerously vague.

Foreign fund managersenlarge their positions

in Japan

One reason for the strong recent performance of the Nikkei average has beenthe renewed interest in Japanese stocks shown by Western money managers. Inthe second week of March, for example, foreign acquisitions of Japanese equi-ties reached a record ¥776bn ($6.4bn at an exchange rate of ¥121:$1), and sincethen they have continued at a very rapid pace. When asked about their mo-tives, these managers answered rather sheepishly that they have long beenunderweight in Japanese securities and would like to rectify that situation inorder to improve their diversification. Yet some foreign institutions believethat the current banking reform and the recent acceleration of corporate re-structuring efforts may be sufficient to cause a lasting recovery in the stock-market. In particular, Western investors have been pouring money into theover-the-counter market for small company stocks, the index of which doubledbetween September 1998 and April 1999.

Financial market indicators(end-month)


Nikkei 225 stock average (¥) 13,565 14,884 13,842 14,499 14,368 15,837 16,702 % change, year on year –17.6 –10.5 –9.3 –12.8 –14.6 –4.2 6.8 % change on end-1989 high –65.1 –61.8 –64.4 –62.7 –63.1 –59.3 –57.1

Uncollateralised overnight call rate (%) 0.4 0.3 0.4 0.3 0.1 0.2 0.1

3-month government bill rate (%) 0.8 0.7 0.2 0.3 0.2 0.2 0.9

10-year government bond yield (%) 0.9 1.0 1.9 2.0 2.1 1.6 1.4Source: Datastream.

The yen remainsrelatively strong

The financial crisis in Russia in September 1998 prompted a global liquidityshortage as international investors rushed to meet their margin calls. For Japanthis led to a massive appreciation of the yen, since many non-Japanese finan-cial institutions had borrowed at very low rates from Japan’s banks to buyassets abroad and were now compelled to buy yen to repay their loans. Japan’sgovernment was not unhappy with the yen’s appreciation against the dollar,since it suggested economic strength rather than weakness, and simultaneouslyimproved the balance sheets of Japan’s international banks by reducing theyen value of their dollar assets. The yen came under further upward pressuretowards the end of the financial year as institutional investors—particularly life

Japan 41


insurance companies—repatriated funds to improve their balance sheets. Theend of large-scale repatriation flows once the new financial year had startedhelped weaken the yen slightly against the dollar in April.

Exchange rates(end-month)


¥:$ 116.2 123.1 113.5 116.4 119.1 118.9 119.3

¥:€a 137.6 141.7 132.8 132.1 130.2 127.9 126.3

¥:DM 70.5 72.2 69.1 67.8 67.4 66.1 64.8

a Ecu prior to 1999.

Source: Datastream.

Foreign trade, payments and aid

The merchandise tradesurplus rises slightly

Data from the Ministry of Finance (MOF) show that Japan’s merchandise tradesurplus, measured on a customs cleared basis, rose to ¥3trn ($25bn at an ex-change rate of ¥121:$1) in the first quarter of 1999, a year-on-year rise of 2.8%.MOF data also show that over the same period Japan’s politically sensitivemerchandise trade surplus with the US stood at ¥1.5trn, a level almost un-changed from the same period of 1998; to a large extent this reflected volun-tary export curbs by Japan’s exporters, anxious about rising trade frictionbetween the two countries.

Bilateral trade flows(¥ bn)


AsiaExports to Asia 1,531.2 1,446.3 1,254.6 1,506.0 1,141.3 1,198.5 1,549.9Imports from Asia –1,183.4 –1,130.1 –1,069.2 –1,051.1 –1,021.5 –988.3 –1,130.4Trade balance 347.8 316.2 185.4 454.9 119.8 210.1 419.5

EUExports to EU 846.6 839.5 691.7 806.6 669.7 720.4 789.3Imports from EU –428.7 –415.9 –422.3 –387.4 –394.6 –369.9 –458.3Trade balance 417.9 423.6 269.5 419.2 275.1 350.5 331.0

USExports to US 1,423.9 1,412.0 1,107.3 1,175.6 1,107.2 1,131.2 1,279.1Imports from US –693.7 –693.8 –627.6 –579.4 –619.9 –716.7 –731.7Trade balance 730.2 718.2 479.7 596.2 487.3 414.6 547.4Source: Ministry of Finance.

Exports fall sharply invalue terms—

Notwithstanding the slight rise in the merchandise trade surplus, merchandiseexports fell year on year during the first quarter in yen terms, by 9.5%. Al-though this was partly the result of the continuing weakness in key Asianmarkets, the decline was mainly driven by the strengthening of the yen againstthe dollar from the latter part of 1998 in nominal and real effective terms. Withthe exception of exports of food and video recorders, all the major exportcategories fell in dollar terms during the first quarter relative to the same periodof 1998.

42 Japan


Exports of selected commodities, Jan-Mar(¥ bn)

1998 1999 % change

Food, beverages & tobacco 57 60 5.4

Textiles 216 198 –8.5

Chemicals 873 803 –8.0

Metals 778 620 –20.4 of which: iron & steel 471 347 –26.4

Non-electric machinery 2,836 2,486 –12.3 of which: office machinery 887 760 –14.4 of which: automatic data-processing machines 489 437 –10.4 pumps 167 158 –5.2 metalworking machinery 215 201 –6.4

Electrical machinery 2,914 2,578 –11.5 of which: VCRs 111 139 25.5 televisions 76 68 –10.4 television cameras 99 45 –54.4 telecommunications apparatus 209 182 –12.8 semiconductors etc 948 825 –13.0 of which: electronic circuits 571 499 –12.6

Transport equipment 3,015 2,892 –4.1 of which: passenger cars 1,643 1,624 –1.2 motor vehicle parts 415 379 –8.8 ships 386 357 –7.5

Precision instruments 606 541 –10.8

Total incl others 12,545 11,351 –9.5 Source: Ministry of Finance.

—particularly ironand steel—

Significantly one of the sharpest falls in value terms during the period was inexports of iron and steel. This was almost certainly a result of pressure from theUS, which feared that “dumping” in the US market by Japanese steelmakerswould further weaken the US’s own iron and steel industry and cost more USjobs. The fall in value terms of iron and steel exports was accompanied by a 5%year-on-year drop in export volumes.

—and products thatcompete with South

Korean makers

The impact of fierce competition from the South Korean exporters, Japan’smain competitors in many products on third markets, was also evident in thefirst-quarter data. Enjoying a slight increase in competitiveness as the yen hasappreciated, South Korean producers have stepped up their efforts to exportsemiconductors and ships, in particular. This contributed to a 13% and a 7.5%year-on-year contraction respectively in Japan’s exports of these products. Ex-ports of passenger cars held up relatively well against competition from SouthKorean makers, falling by just 1.2% year on year. This may not last, however,as South Korean makers appear to be intensifying efforts to boost exports, forexample by cutting prices further, in order to offset weak demand at home.South Korean makers are, in particular, targeting markets in the US and the EU,where demand for Japanese cars has traditionally been strong.

Japan 43


Imports of selected commodities, Jan-Mar(¥ bn)

1998 1999 % change

Food, beverages & tobacco 1,241 1,172 –5.6

Raw materials 771 632 –18.1 of which: wood 172 159 –7.7 ore & concentrates of non-ferrous base metals 107 90 –15.4

Mineral fuels 1,638 1,151 –29.7 of which: coal 216 159 –26.3 crude petroleum 850 537 –36.8 liquefied natural gas 311 230 –25.9

Chemicals 708 644 –9.1

Textiles 618 526 –14.8

Metals 526 360 –31.5 of which: iron & steel 131 83 –37.2 aluminium 172 95 –44.8

Machinery & equipment 2,964 2,800 –5.5 of which: office machines 558 587 5.2 audio & visual equipment 170 165 –2.9 telecommunications equipment 115 103 –10.8 semiconductors etc 366 334 –8.8

Motor vehicles 212 176 –16.8

Aircraft 217 276 27.3

Total incl others 9,621 8,344 –13.3 Source: Ministry of Finance.

The fall in exports isoutpaced by the fall

in imports

The decline in merchandise imports in value terms outpaced that in merchan-dise exports in the first quarter. This reflected weak domestic demand and softcommodity prices on world markets, as well as the strengthening yen. Thusimports of machinery and equipment, which is used for capital investment, fellby 5.5% year on year, and imports of mineral fuels and raw materials fell by29.7% and 18.1% respectively. The problems in the construction industry werereflected in the 7.7% year-on-year decline in the yen value of imports of wood,which is used extensively to make the frames for Japanese houses.

Trade values, volumes and prices, 1999(goods; % change, year on year; values and prices in yen terms)

Mar Apr

ExportsTotal cash value 1.1 –1.8Prices –0.8 –0.8Volume 3.6 0.9

ImportsTotal cash value –10.4 –13.7Prices –8.2 –8.0Volume –1.4 –5.5Source: Ministry of Finance.

44 Japan


The current-accountsurplus contracts

Japan’s current-account surplus stood at ¥1.9trn ($16bn at an exchange rate of¥121:$1) in January-February 1999 (latest available data), a year-on-year contrac-tion of 9%. As usual, this movement was determined largely by developmentson the merchandise trade account (fob-fob), which contracted by 0.5% year onyear over the period. The services deficit widened by 2.7% year on year, mainlyowing to a sharp increase in “other services”. As might be expected, given thecontraction in import volumes, the transportation deficit narrowed sharplyduring the period. The travel deficit, meanwhile, narrowed slightly, reflectingsluggish outward tourism. The income surplus contracted by 12.6% year on yearin January-February, as net inflows of direct investment income fell sharply,presumably reflecting the continued weakness in other parts of Asia, whereJapan has extensive facility investments. The fall-off in net portfolio incomeinflows was less severe, however, owing to buoyant returns from both US andEuropean investments, which partly offset poor returns from Asian markets.

Balance of payments, IMF basis(¥ bn unless otherwise indicated)

1997 1998 19993 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Jan-Feb

Merchandise trade balance 3,223.9 3,924.5 3,458.0 4,123.2 4,256.1 4,155.9 2,024.9

Services balance –1,747.4 –1,541.5 –1,430.9 –1,677.8 –1,693.1 –1,601.9 –978.6

Income balance 1,521.1 1,546.6 1,871.7 1,647.0 2,145.4 1,750.8 1,026.8

Current transfers balance –175.3 –269.8 –348.7 –233.9 –256.5 –304.6 –153.8

Current-account balance 2,822.3 3,659.8 3,550.1 3,858.5 4,451.8 4,000.2 1,919.4

Capital & financial account balance –3,662.6 –5,252.8 –4,052.0 –7,842.8 –3,021.9 –2,218.7 –458.5

Reservesa ($ bn) 225.6 220.8 233.6 205.9 212.1 216.0 221.5

a End-period; total of gold, foreign exchange, SDRs and IMF reserve position.

Source: Ministry of Finance.

Japan 45


Quarterly indicators and trade data

Quarterly indicators of economic activity

1996 1997 1998 1999

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Real GDPab Qtrly figures

At annual rate ¥ ’000 bn 492.2 500.3 487.8 492.9 488.3 482.4 478.9 477.5 473.7 n/a

Industrial productiona Monthly av

Mining & manufacturing 1995=100 104.8 106.9 106.5 106.7 104.0 102.7 97.5 97.5 97.1 98.0

Final demand goods “ 107.0 108.6 108.5 107.9 104.3 103.0 97.5 97.8 96.4 95.3c

Investment goods ” 110.4 112.1 109.7 111.7 106.1 104.7 94.8 95.3 90.7 88.2c

Consumer goods “ 103.8 105.3 106.7 104.4 102.4 101.6 99.4 100.3 101.8 102.6c

Producer goods ” 102.4 104.5 104.5 105.4 103.8 102.1 97.6 97.3 98.0 99.7c

Machinery orders, net: new,

incl shipsd ¥ bn 2,519 2,440 2,550 2,544 2,275 2,188 2,047 1,952 1,887 1,876e

Constructiona

Starts:

total m sq metres 22.28 20.42 19.41 18.47 17.94 17.55 16.80 15.87 15.28 15.18c

for mining & mnfrg “ 1.80 1.81 1.77 1.82 1.78 1.66 1.31 1.13 0.97 1.07c

Employment

Employed m 64.99 64.42 66.28 66.12 65.45 64.45 65.79 65.50 64.83 63.57e

Unemployed ’000 2,157 2,287 2,347 2,303 2,273 2,537 2,890 2,873 2,847 3,055e

Retail trade

Retail sales 1990=100 113 108 101 102 110 100 99 98 105 91e

Wages & prices

Monthly earningsf 1990=100 140.3 90.8 113.0 119.2 142.5 90.8 112.7 116.9 139.8 90.8e

Consumer pricesg: 1995=100 99.9 99.8 101.7 101.7 102.0 101.8 102.3 101.6 102.7 101.7 change year on year % 0.0 0.0 1.5 1.8 2.1 2.0 0.6 –0.1 0.7 –0.1

Wholesale prices: general 1995=100 100.1 101.3 102.2 101.4 101.6 100.8 100.6 100.8 97.9 96.8

Share prices 1990=100 71 63 67 68 58 57 55 54 50 50e

Money & banking End-Qtr

M1a: ¥ trn 175.4 177.2 182.1 184.7 190.6 189.6 195.2 198.9 199.4 207.3h

change year on year % 9.9 5.9 5.4 6.3 8.7 7.0 7.2 2.7 4.6 n/a

Discount rate % per year 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

Call money rate “ 0.49 0.51 0.50 0.50 0.39 0.43 0.44 0.32 0.25 0.18i

Three month CDSj ” 0.52 0.55 0.58 0.61 0.66 0.95 0.62 0.67 0.62 0.64e

Foreign trade &

payments Qtrly totals

Exports fob ¥ bn 12,100 12,072 12,649 12,641 13,576 12,545 12,735 13,172 12,193 11,351

Imports cif “ 10,089 10,616 10,151 10,019 10,171 9,621 9,081 9,429 8,523 8,344

Current-account balance “ 1,829 2,037 2,917 2,822 3,660 3,550 3,859 4,452 4,000 1,919k

Exchange holdings End-Qtr

Goldl $ bn 6.84 6.38 6.23 5.88 5.57 5.35 5.45 5.24 5.34 5.21

Foreign exchange “ 207.34 209.36 212.57 214.99 207.87 210.40 192.86 198.55 203.22 211.40

Exchange rate

Market rate ¥:$ 116.0 124.1 114.4 121.0 130.0 132.1 140.9 135.3 115.6 120.4

Note. Annual figures of most of the series shown above will be found in the Country Profile.a Seasonally adjusted. b At 1990 prices. c January only. d 280 firms. e Average for January-February. f Manufacturing; figures for June, July andDecember include bonus payments. g Tokyo. h End-January. i End-February. j Monthly averages. k Total for January-February. l End-quarterholdings at quarter’s average of London daily price less 25%.

Sources: OECD, Main Economic Indicators; Statistics Bureau, Government of Japan, Monthly Statistics of Japan; IMF, International Financial Statistics.

46 Japan


Foreign trade(¥ bn)

Total US EU China Australia

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1997 1998 1997 1998 1997 1998 1997 1998 1997 1998

Food, beverages & tobacco 5,578.9 5,411.2 1,724.1 1,632.3 510.3 536.2 609.5 599.1 367.2 346.2

of which:

meat & preparations 915.9 882.0 371.2 374.7 123.7 91.4 71.0 75.3 130.5 129.3

fish & preparations 1,835.8 1,642.5 197.8 159.2 48.3 36.3 267.2 229.9 50.1 43.1

wheat 164.7 143.2 84.5 72.2 0.0 0.0 0.0 0.0 34.2 27.8

maize for feeding 206.0 190.5 197.4 162.6 0.0 0.0 2.3 3.3 0.0 0.0

fruit & vegetables 715.6 758.3 217.0 224.9 30.1 33.2 206.0 228.3 12.0 11.8

alcoholic beverages 208.5 295.9 23.7 29.1 156.0 213.5 3.6 3.6 2.0 3.4

Soya beans 211.8 187.9 160.9 145.5 0.0 0.0 9.4 8.0 0.3 0.2

Wood 1,068.3 626.0 278.4 170.6 74.4 42.3 44.2 29.0 2.7 2.1

Pulp 214.8 203.9 68.5 62.9 8.6 8.9 0.2 0.1 0.0 0.0

Iron ore 395.4 398.4 0.0 0.0 0.0 0.0 0.0 0.0 180.9 189.8

Non-ferrous ores 492.8 413.5 19.7 10.7 2.4 1.5 5.2 3.4 96.5 78.4

Coal 823.3 801.0 53.4 52.7 0.0 0.0 70.4 70.5 426.1 421.1

Petroleum, crude 4,217.4 2,930.4 6.8 4.8 0.0 0.0 195.1 101.4 35.8 29.5

Petroleum products 837.7 533.8 70.7 45.0 6.1 6.4 12.1 9.4 13.5 11.1

Gas 1,643.5 1,341.6 33.8 29.7 0.3 0.3 0.5 0.4 197.6 182.5

Chemicals 2,840.9 2,726.2 865.3 804.8 1,000.7 1,013.4 177.9 171.6 23.8 24.5

of which:

organic 816.7 751.3 176.2 135.0 283.5 310.9 39.0 37.0 2.1 1.7

medicinal products 512.9 489.9 110.4 114.5 307.6 275.3 14.2 16.2 3.0 3.0

Wood manufactures 751.9 568.1 122.4 103.7 27.1 19.3 54.1 54.9 70.8 70.1

Textile manufactures

incl clothing 2,708.4 2,476.6 139.1 106.8 371.4 335.5 1,497.1 1,444.0 1.9 1.6

Non-metallic mineral mnfrs 623.4 522.9 88.3 73.3 131.2 113.8 112.2 107.9 23.6 15.4

Metals & manufactures 2,161.3 1,866.8 223.8 202.1 184.8 186.2 230.5 194.6 116.5 133.8

of which:

iron & steel 534.4 417.6 21.2 20.5 25.7 24.6 80.3 55.7 7.2 5.6

aluminium 640.3 542.7 48.8 40.7 20.1 17.6 24.7 21.0 98.9 115.9

Machinery & transport eqpta 11,476.3 11,171.9 4,285.4 4,377.5 2,262.2 2,026.2 1,058.7 1,136.1 46.6 43.0

of which:

office 2,264.1 2,135.6 736.5 679.5 232.4 188.0 167.4 164.7 11.5 7.6

audio & visual 733.3 695.9 114.1 82.6 36.7 26.6 165.5 196.5 0.5 0.3

electronic circuits etc 1,555.7 1,407.1 723.9 621.2 66.8 94.5 24.9 29.8 0.1 0.6

motor vehicles 974.0 746.5 205.5 154.8 750.1 579.2 0.2 0.1 2.7 2.9

aircraft 448.7 677.9 398.6 628.4 45.1 45.2 0.0 0.1 0.3 0.2

scientific, medical & optical 851.4 841.4 350.7 368.2 160.0 160.3 108.2 111.8 2.1 1.5

Furniture 391.8 348.0 49.0 52.9 65.2 55.3 73.0 69.4 0.8 0.7

Gold, non-monetary 152.6 104.5 5.3 5.2 15.0 11.9 0.0 0.0 35.8 35.2

Total incl others 40,956.2 36,653.6 9,149.3 8,778.1 5,434.1 5,098.9 5,061.7 4,844.1 1,763.3 1,699.8

continued

Japan 47


Total US EU Taiwan Hong Kong

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1997 1998 1997 1998 1997 1998 1997 1998 1997 1998

Food, beverages & tobacco 267.4 260.6 42.6 45.2 11.0 11.0 47.4 51.0 56.8 49.1

Textile fibres, manufactures

& clothing 1,002.8 956.7 81.3 86.5 97.0 117.5 62.5 62.9 124.6 113.6

of which:

synthetic fabrics 239.5 216.8 14.5 14.6 22.8 26.6 6.9 5.2 19.2 18.9

Chemicals 3,623.2 3,556.2 673.9 719.1 568.9 642.1 469.1 453.1 265.0 252.7

of which:

organic 1,224.9 1,235.8 228.7 245.9 215.7 267.0 168.2 152.6 34.5 36.2

plastics 1,011.2 975.1 141.1 155.4 109.1 121.6 110.8 113.3 159.6 145.1

Rubber tyres 404.7 451.5 95.3 125.9 69.8 97.1 10.5 10.0 22.8 17.5

Paper & manufactures 263.8 260.3 44.8 54.9 19.2 21.4 27.9 25.8 51.5 46.2

Non-metallic mineral mnfrs 628.7 580.9 148.0 151.7 59.5 71.2 65.4 63.1 49.6 48.9

Iron & steel 1,929.4 1,940.5 218.7 418.1 56.2 81.4 190.1 185.5 154.1 137.5

Non-ferrous metals 521.5 545.3 69.8 81.2 36.7 44.9 103.8 107.5 56.0 64.6

Metal manufactures 795.5 723.6 231.1 227.5 100.8 105.1 41.2 44.4 39.1 34.0

Machinery & transport eqpta 37,566.8 37,256.8 11,414.5 12,259.7 6,267.2 7,311.7 2,073.8 2,072.2 2,142.1 1,889.6

of which:

power generating 1,565.3 1,668.4 558.5 629.9 222.1 287.4 57.5 61.5 31.5 22.8

office 3,825.6 3,651.8 1,695.6 1,568.4 1,053.6 1,110.3 198.1 177.4 117.4 111.2

metal working 973.4 931.7 310.1 369.8 124.1 189.0 76.6 70.0 17.8 14.3

pumps 723.2 699.4 139.5 148.0 141.6 173.8 54.3 61.4 27.5 20.9

electric power 676.6 646.2 122.6 126.7 68.2 75.5 52.8 55.5 57.8 53.4

television & radio receivers 429.5 484.6 129.5 179.4 104.6 141.3 8.6 9.8 70.5 58.3

electronic circuits etc 4,065.6 3,702.8 837.9 706.0 404.6 427.5 453.5 383.6 442.7 386.5

telecommunication eqpt 778.8 806.3 247.6 306.6 122.4 138.0 10.4 9.9 54.6 54.3

VTR 361.4 662.1 160.0 307.6 76.6 189.3 2.9 4.7 46.9 44.2

TV cameras 464.5 270.8 188.3 128.8 134.5 72.0 4.1 2.5 33.2 20.9

motor vehicles 7,112.3 7,795.2 2,769.8 3,259.7 1,265.5 1,524.2 50.8 53.2 228.9 159.8

motor vehicle parts 1,789.5 1,637.4 746.1 765.5 231.1 256.4 89.5 92.4 18.2 17.6

motorcycles 481.5 586.8 87.8 113.0 212.3 277.5 0.0 0.0 42.4 39.0

ships 1,126.6 1,288.9 0.1 0.2 8.5 74.7 8.6 14.0 42.2 52.7

precision instruments etca 2,426.9 2,346.4 797.2 805.2 556.0 590.6 175.8 167.2 248.2 239.9

Total incl others 50,938.0 50,645.0 14,168.9 15,470.0 7,933.6 9,319.7 3,335.2 3,340.4 3,297.8 2,949.2

a Including watches and clocks.

Source: Japan Tariff Association, Summary Report on Trade of Japan.

Trade with main partners(¥ bn)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-DecImports cif 1996 1997 1998 Exports fob 1996 1997 1998

US 8,631 9,149 8,778 US 12,177 14,169 15,470China 4,400 5,062 4,844 Taiwan 2,825 3,335 3,340Australia 1,548 1,763 1,700 Hong Kong 2,760 3,298 2,949South Korea 1,735 1,763 1,577 China 2,382 2,631 2,621Indonesia 1,653 1,769 1,416 Germany 1,981 2,178 2,489Germany 1,541 1,501 1,397 South Korea 3,192 3,153 2,005Taiwan 1,628 1,511 1,336 Singapore 2,260 2,450 1,930Malaysia 1,279 1,375 1,133 UK 1,358 1,659 1,905UAE 1,253 1,491 1,089 Netherlands 1,007 1,186 1,417Thailand 1,111 1,157 1,068 Thailand 1,988 1,764 1,222Canada 1,101 1,185 1,003 Malaysia 1,668 1,756 1,216Total incl others 37,993 40,956 36,654 Total incl others 44,731 50,938 50,645Source: Japan Tariff Association, Summary Report on Trade of Japan.

48 Japan


country report · contents 3 summary 4 political structure 5 economic structure 6 outlook for...

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