Japanese Trade Policy and Economic
Development
--Secrets behind an Economic Miracle
Junichi Goto
Key Messages
• Japan achieved a miraculous economic
development to become one of the richest
countries in the world, although the World War
II almost killed the Japanese economy.
The Japanese economic development was
generally supported by the expansion of
international trade, especially exports of
manufacturing goods.
The secrets behind the miracle lie in very
effective economic and trade policies backed
by powerful and impartial civil service.
From fatal patient to superstar
Destruction by the devastating World War II
• The production index of Japan at the end of the war was
only one-fifth of the prewar peak, and international trade
was almost nil.
• Most major cities, e.g., Tokyo, Osaka, Kobe, Hiroshima,
etc., was almost destroyed by the carpet bombing of the
Allied (American) forces.
• People suffers from shortage in every essential goods,
such as food and energy.
• The situation facing Japan then was probably worse than
many developing countries today.
• However, the Japanese economy quickly took off, and in
1968, Japanese GDP was the third-largest in the world
year
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
1948
1946
1944
1940
1935
1930
trillion yen (1990 price)
Figure 1: Real GDP of Japan
600
500
400
300
200
100
0
The Priority Production System (PPS) in 1946
• The PPS tried to start reconstruction process by
concentrating available resources on two critical
industries, coal and steel.
• The recovery plan was called ‘inclined
production system’
• i.e., almost entire production of coal was put in
steel production, and almost entire production of
steel was put in coal production.
• The process was repeated until two vital
industries revived.
-5.0
year
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
1947
percent
Figure 2: Real GDP Growth Rate of Japan
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Table 1: National Income of Selected OECD Countries
1950
1960
1970
1980
1990
2000
1950
1960
1970
1980
1990
2000
GDP
(Value, in $billions)
Japan
USA
109
2883
440
5153
2033
10155
10632
27319
30522
58033
47661
98247
(Index, USA=100.0)
Japan
USA
3.8
100.0
8.5
100.0
20.0
100.0
38.9
100.0
52.6
100.0
48.5
100.0
(Source) IM F
UK
Germany
377
234
727
722
1249
1846
5353
8185
9946
15470
14409
18752
GDP per capita
(Value, in $)
Japan
USA
UK
Germany
131
1897
744
468
468
2852
1390
1302
1949
4952
2254
3041
9103
11996
9567
13296
24718
23209
17377
24458
37574
34796
24571
22844
(Index, USA=100.0)
UK
Germany Japan
USA
UK
Germany
13.1
8.1
6.9
100.0
39.2
24.7
14.1
14.0
16.4
100.0
48.7
45.7
12.3
18.2
39.4
100.0
45.5
61.4
19.6
30.0
75.9
100.0
79.8
110.8
17.1
26.7
106.5
100.0
74.9
105.4
14.7
19.1
108.0
100.0
70.6
65.7
Figure 3: Share of Japan in World Export
10
9
8
7
percent
6
5
4
3
2
1
0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
year
Table 2: Trade Balance of Japan
(hundred million yen)
Year
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Export
0.4
2.3
10.1
52.0
170
298
489
458
459
587
734
900
1,029
1,036
1,244
1,460
1,525
1,770
1,963
2,402
3,043
3,520
3,759
4,670
5,756
6,954
8,393
8,806
10,031
16,208
Import Balance
1.0
-0.6
4.1
-1.8
20.3
-10.2
60.3
-8.3
284
-114
348
-50
737
-248
730
-272
867
-408
864
-277
890
-156
1,163
-263
1,542
-513
1,092
-56
1,296
-52
1,617
-157
2,092
-567
2,029
-259
2,425
-462
2,858
-456
2,941
102
3,428
92
4,199
-440
4,675
-5
5,408
348
6,797
157
6,910
1,483
7,229
1,577
10,404
-373
18,076
-1,868
(Source) M inistry of Finance,Japan
Year
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Export
16,545
19,935
21,648
20,556
22,532
29,383
33,469
34,433
34,909
40,325
41,956
35,290
33,315
33,939
37,828
41,457
42,360
43,012
40,202
40,498
41,531
44,731
50,938
50,625
47,548
51,654
48,979
52,109
54,549
Import Balance
17,170
-625
19,229
706
19,132
2,516
16,728
3,828
24,245
-1,713
31,995
-2,612
31,464
2,005
32,656
1,777
30,015
4,894
32,321
8,004
31,085 10,871
21,551 13,739
21,737 11,578
24,006
9,933
28,979
8,849
3,385 38,072
31,900 10,460
29,527 13,485
26,826 13,376
28,104 12,394
31,549
9,982
37,993
6,738
40,956
9,982
36,654 13,971
35,268 12,280
40,938 10,716
42,416
6,563
42,228
9,881
44,319 10,230
Some Secrets behind the Miracle
A puzzle – export incentive under import
restrictions
• In early years, Japanese imports were heavily restricted
to protect domestic producers.
• When domestic market is protected from foreign
competition, domestic price of a good is higher than
international price.
• So, producers have incentive to sell to the domestic
market for higher price than to foreign market.
• However, Japanese producers made every effort to
export their products (e.g., textiles, TVs and cars) to the
world
• Why?
Various support programs for exports
• Export-promoting tax system
– Special deduction of export income
– Import tariff refund
• Export-promoting financing
– Pre-shipment export bill discount
– Japan Export-Import Bank
• Established in 1951 to provide medium and long-term loans
for exports, import and foreign direct investment.
Favorable foreign exchange rate
• In 1949, the yen-dollar rate was set at 360 yen to one
dollar.
• The rate was maintained until August 1971, when the
world currency system experienced major earthquake.
• At the rate, Japanese yen was generally undervalued,
which contributed to the expansion of Japanese exports.
• However, it is dangerous to maintain undervaluation of
own currency, because such a policy makes eventual
adjustment more drastic and painful one.
• Japan was just lucky.
Export contest
• In order to encourage exports, the Japanese government
set up many ‘export contests’ among firms to combine
the benefits of competition and cooperation.
• Rewards, rules, and referees
– Rewords: preferential access to credit and foreign exchange
– Rules: the one who achieved the largest values of exports is the
winner of the contest
– Referees: government officials who have designed and
supervised the contest (generally very competent and impartial)
Powerful and impartial civil service
• Powerful
– Parliament is symbolic. (Almost all laws are prepared by
bureaucrat)
– In addition to enacted laws, ‘administrative guidance’ is oftend
used and very effective.
• Impartial and effective
–
–
–
–
De fact head of the ministry is administrative vice-minister
Three classes of entrance examinations
Prestigious university is cheaper.
Smart sons of very poor family could (and often did) become top
of the bureaucracy.
Manufacturing sector – scale economies
• Japan put an emphasis on exports of manufactured
goods, such as cars.
• Production technology of manufacturing sector is often
characterized as scale economies (the more you
produce, the less is your average production cost)
• So, Japanese producers had incentive to produce more,
not only for domestic market but also for foreign market.
• Thus, for example, Toyota produces cars for both
domestic and export market.
A Caveat: weak and inefficient
agricultural sector
• The above success stories only apply to manufacturing sector, such
as cars and VCRs.
• The agricultural sector of Japan has been heavily protected from
foreign competition.
• For example, until recently, Japan had imposed almost total ban on
the import of rice, a staple food for the Japanese.
• There are no sign of hope to make Japanese agriculture sector
more competitive in the international market.
• The current situation of Japanese agriculture shows how bad
excessive protection can be (huge loss to consumers and the
continuation of very inefficient production.