THE Japanese economy today is in difficulties, and they are increasing. While there are many encouraging elements in the situation, a continuation of present trends cannot go on indefinitely without serious consequences. Thus time is a real factor in the situation.

Japan's economic structure, like that of any great nation today, is composed of many complicated and interrelated parts and hence does not lend itself to simple generalizations. Possibly the easiest way to show this is to outline a few of the difficulties which struck me in the course of a recent visit.

At the present time approximately one-half of all that Japan earns from her exports is needed to pay for indispensable food imports. In 1953 she paid out nearly $600,000,000 to foreign countries for food while her total exports were approximately 1.2 billion dollars. During 1954 imports of food are likely to be even higher because of poor harvests, due to adverse weather conditions in the 1953-54 crop year. The cost of feeding her 87,000,000 people thus imposes a very heavy priority burden on the national economy. Despite intensive agricultural practices, and yields which are among the highest in the world, Japan must still import 20 to 25 percent of the food her people consume.

The one-sided character of Japan's trade with certain important countries is another of Japan's difficulties--one that is greatly magnified by current limitations on exchange convertibility. For example, currently Japan buys about $105,000,000 worth of goods from Canada and sells only $15,000,000 worth in that country. She buys more than $700,000,000 from the United States but sells only $258,000,000 worth to us (of course, special receipts in the form of U. S. Government and troop spending more than offset this imbalance in commercial trade). In the Philippines and Australia the story is the same: Japan spends almost $50,000,000 in the former and receives $24,000,000 for her exports, while she buys $175,000,000 worth from Australia and sells $9,000,000.

Japan's foreign trade is the life-blood of her economy. Her economic viability depends upon her being able to export a sufficient volume of goods and services to provide the foreign exchange needed to buy essential imports. To accomplish this she must both increase the volume of her exports and attempt to balance her trade within each of the several currency areas. Since Japan is one of the most important buyers of the world, it is not unreasonable to suggest that if the Japanese market is to continue and grow, those who trade with Japan must buy substantially from her as well as sell heavily to her.

A result of Japan's present economic difficulties is that, beginning last year, she was obliged to draw on her reserve of foreign currency. This reserve had reached a peak of more than one billion dollars in 1952, but is now down to about $700,000,000 and faces further inroads this year. An important factor in this decline is the unfavorable trend of Japanese trade with the sterling area. Exports from Japan to this area fell from $613,000,000 in 1951 to $335,000,000 in 1953, while imports to Japan rose from $473,000,000 in 1951 to $568,000,000 in 1953. Thus a favorable balance with the area of $140,000,000 in 1951 has now been transformed to a deficit of $233,000,000. Another reason for the depletion of the exchange reserve was the 1953 boom in domestic consumption in Japan. While Japan's total exports were slightly lower than the two preceding years, imports were nearly $500,000,000 larger. A further factor is the need for increased imports of food. In 1954 the exchange fund may fall to $500,000,000--the minimum which some Japanese consider possible for sound trade operations. It will be remembered that the fund was originally built up largely through special procurement for Korea by the United States and the United Nations, and from troop spending, which taken together ran at a rate of approximately $800,000,000 annually from mid-1950.

The final indication of the seriousness of Japan's economic outlook is the increasing difficulty her manufacturers are having in meeting price competition in foreign markets. Before the Second World War, Japanese exports were largely raw silk and cotton textiles. With the development of the many other new fabrics the silk market has been all but lost; and as the underdeveloped countries become better able to meet their own textile needs, the total international cotton textile market is shrinking, and this just at a time when Japanese, American, British and Indian competition is becoming more keen.

Japan has been trying to meet this situation by making an important shift in her exports. Today the emphasis is on heavy industry and chemicals--steel, ships, machinery, cement, chemical fertilizers--to mention a few. But in the sale of these products Japan often finds it difficult to meet the prices of her foreign competitors. For example, West Germany has been a severe competitor for the South and Southeast Asian markets in steel, machinery and equipment, while Italy has been underselling Japan in chemical fertilizers. The Japanese are generally thought of as a nation of low-cost producers, and in the textile field they still are. But in heavy goods and chemicals Japan is a higher-cost producer than her major competitors.

II

These, then, are some of the problems which confront the Japanese people and which Americans must understand. It seems clear that the increase of Japan's exports is the key to the situation. Such exports must be won in competitive markets. There are a variety of factors which make it far more difficult for Japan today to maintain her position in international competition than was the case in the past.

Generally speaking, Japan's industrial plant needs to be modernized. According to data submitted to the International Bank by the Japanese Ministry of International Trade and Industry, 60 percent of the plant facilities in the caustic soda industry are more than 20 years old; and 80 percent in cement manufacture, 35 percent in machine tool manufacture, 36 percent in open hearth steel and 80 percent in power generation are likewise out of date. Moreover, as a result of the war and the occupation, Japanese businessmen have been somewhat delayed in the adoption of certain efficient modern business techniques. Cost accounting, for example, is not widely utilized. Corporate expenses, particularly for executive personnel, are often high. And though the pay per man is low throughout industry, the manpower cost per unit of production is high.

There have been other developments which, though constructive in themselves, complicate the picture. The postwar unionization of Japanese labor and the passage of protective labor legislation such as the Labor Standards Law are clearly social gains, yet they have increased the cost of labor. In principle, higher paid labor should be more productive, but productivity in Japan has not increased proportionately, since there has not been commensurate investment in modern equipment. For example, the manhour requirement in smeltering a ton of pig-iron is double that of Britain and seven times that of the United States. Then too, the postwar breaking up of large Japanese industrial units, whatever its ultimate merit, has raised production costs. This is particularly true during a period when plants have been operating at less than capacity. Some reamalgamation has occurred in the last two years but not enough to affect production costs significantly.

On top of these developments has come inflation, with all the problems which it brings. Two may be noted in particular. Domestic inflation, which tends to make the home market more profitable than foreign markets, has deterred manufacturers from making an aggressive effort to seek wider foreign outlets. The extent to which Japanese prices outrun those of competitor nations may be seen in the following table:

INDEX NUMBERS OF WHOLESALE PRICES[i]
(1948 = 100)
1950 1951 1952 1953 1954*
Japan 193 268 273 277 288
West Germany 94 112 114 111 110
Great Britain 120 146 149 150 149
Italy 90 103 97 96 97
United States 99 110 107 105 106
India 109 120 105 107 109
* January 1954

Furthermore, inflation has created a shortage of both working capital and fixed capital, and the average interest for a short-term commercial bank loan is 10 percent. As a result, short-term credits extended by banks to industry have been used for long-term capital purposes, which means that the loans must be frequently renewed. Lack of capital and high interest rates are among the most serious of Japanese economic ills. Before the war industry by and large generated its own capital for expansion.

Depletion of limited natural resources, particularly significant in the cases of coal and timber, is a further handicap. Operating conditions in coal mining have worsened considerably since World War II; more and more of the mining is done under the ocean and at uneconomic depths 300 meters or more below the surface. And linked with the lack of natural resources are the problems resulting from the loss of certain areas which had become an integral part of the prewar Japanese economy. This loss has intensified foreign trade difficulties by increasing the need for imported food, by reducing outlets for consumer goods, and by necessitating the import of essential raw materials from more distant sources at greater costs for transportation.

Finally, I should mention the discrimination that has been practised against Japanese goods in foreign markets in the postwar period. Japan is a member of no trading bloc; tariff barriers and lack of most-favored nation treatment are serious handicaps to her. In the prewar period, foreign-exchange earnings by Japan in any currency were generally convertible, and this permitted a certain flexibility and manoeuvrability in trade which is now lacking.

This cataloguing of problems is by no means complete. Some are problems with which Japan can and must deal herself, as the Japanese are becoming increasingly aware. Their Government has under way an austerity program which includes curtailing budget expenditures, cutting back imports and reducing government investments. At the same time the central bank has taken firm action to tighten credit and reduce the supply of money. In addition, shifts in taxation have been undertaken to curtail domestic buying.

This program is well conceived. The objective is to end inflationary pressures, reduce prices and restrict home consumption. A further aim is to encourage exports at lower prices, and by restricting unessential imports to bring about a better balance in the country's external payments. This is a courageous approach to Japan's economic problems. If the Government is to carry it out, much fortitude must be shown since it is bound temporarily to diminish the artificial and inflated economic wellbeing of the Japanese people in favor of a better adjustment of Japan's international economic position. In the long run, of course, the Japanese people will greatly benefit, for their Government is taking steps that will go a long way towards putting the economy on a basis which will enable it to compete effectively for world markets.

Simply stated, Japan's immediate economic problem is to increase her foreign exports to the point where withdrawal from her exchange reserve will cease. Her somewhat longer-range problem is further to build up her exports to offset the very substantial temporary assistance which she has been receiving from funds provided by procurement for the United States armed forces and by troop spending. Until both of these objectives have been accomplished, a substantial proportion of Japan's foreign exchange resources will depend upon non-commercial considerations.

To express the foregoing in terms of dollars for the year ending March 31, 1954, we must note that Japan's imports totaled $2,242,000,000 while her exports were $1,244,000,000, leaving a trade gap of $998,000,000. In short, Japan's commercial trade is out of balance by approximately one billion dollars. Largely through funds provided by United States procurement and troop spending, the over-all balance of payments deficit is brought down to $313,000,000, the amount drawn from the foreign currency reserve fund. Since the outside assistance cannot be counted on indefinitely and since the foreign currency reserve is limited in amount, the needed increase of one billion dollars in commercial exports seems a necessary goal which Japan must strive to attain during the next several years.

III

As has been already stated, the problem of Japan's economy is complex. Many factors have bearing on it: economic, political, and psychological; international as well as national. In the international field, two should be noted particularly--the question of reparations, and the problem of Indo-China.

For many months now Japan has been negotiating with the governments of the Philippines, Indonesia and Burma concerning the settlement of reparations claims. Very substantial sums have been requested. The Philippines originally asked for 8 billion dollars and Indonesia 17 billion. While Burma never officially specified a figure, the amount informally indicated was proportionately high. These sums, while understandable from the point of view of the war-damaged countries, are considered by the Japanese to be unrealistic in terms of Japan's ability to pay. From the point of view of all concerned, settlement of these negotiations is important so that normal political and economic relations can be resumed. Understandably, however, progress toward a settlement is slow.

The three countries have been pressing Japan for substantial cash payments. Japan on the other hand has placed the emphasis on meeting these obligations through the performance of services. Pending a final solution it is understood some progress is being made in the development of interim proposals. For example, negotiations are being carried on in the Philippines whereby Japan would assist that country in growing rice, aiding the Filipinos to increase the acreage given to rice and the production per acre. A very considerable contribution might be made in this way by the Japanese, since in Japan the average production of rice per acre is three times that in the Philippines. Increased food output would not only save the Philippines valuable foreign exchange but also provide Japan with another source of rice supply. Closer economic collaboration among the Asian countries is clearly to the advantage of all concerned. As a result of the Second World War and modern communications, the people of Asia recognize that it is possible for them to have a better life through their own efforts. Their leaders are working for this under great difficulties. A dynamic expanding foreign trade offers one of the most hopeful and important means of attainment.

I must at least mention a second international problem which has bearing on Japan's future, both economic and otherwise--Indo-China. That problem is in an acute phase as I write these lines, and the future is still uncertain. However, as I came away from the Far East in March, it was my strong feeling that what happens in Indo-China is of vital importance to all of Asia. Japan will not be spared from the impact of developments there. As Secretary of State John Foster Dulles stated on March 29, 1954: "Southeast Asia is . . . the so-called 'rice bowl' which helps to feed the densely populated region that extends from India to Japan. It is an area that is rich in many raw materials such as tin, rubber, oil, iron ore. It offers Japan a potentially most important market and source of raw materials. . . . Under the conditions of today the imposition on Southeast Asia of the political system of Communist Russia and its Chinese Communist ally, by whatever means, would be a grave threat to the whole free community."

IV

Three national factors affecting Japan's economy require special mention. There are four main parties struggling for political dominance in Japan today--the Liberals, the Progressives, and the Left and Right Wing Socialists. The trend of recent elections has been such that no one party has had a majority. Currently there has been talk of a merger of the Liberal and Progressive Parties. Those who advocate such a merger believe that it will strengthen the hands of government to deal with the complex problems confronting it. In this connection it must be remembered that with a worsening economic situation the opportunity for the extremists increases.

Overpopulation is, of course, an ever-present domestic problem. As has often been pointed out, the total area of Japan today is slightly less than that of the state of California, and only 16 percent is arable. If California were as densely inhabited as Japan, her population would be 93,500,000, or 60 percent of the present population of the United States. In this connection it is interesting to note that the birth rate in Japan is now lower than that in the United States (in 1953 it was 21.5 for Japan compared to 24.7 for the United States) while the death rate is about the same (8.9 for Japan compared to 9.6 for the United States). Furthermore, Japan's birth rate has been declining in recent years. However, in absolute numbers the population is increasing by more than 1,000,000 a year, which suggests that before too many years the total for the four islands will reach 100,000,000. To feed, clothe and sustain such a population Japan must obviously have an expanding foreign trade.

Finally there are the psychological factors. Recently in Tokyo I spent an interesting evening with several Japanese who emphasized the fact that Japan is still in the process of regaining the confidence and self-respect which she lost as a result of the war. There is still a feeling of sensitivity and insecurity. Sovereignty was regained two years ago, and the Japanese very naturally are keen to stand on their own feet. At the same time, they recognize that for some time they must by necessity look to the United States to a certain extent for security and economic assistance.

In this situation many Japanese see--or rather feel--elements of conflict, which cause considerable concern and unhappiness, not to mention a sense of frustration. One often hears criticism in Japan to the effect that the United States is exerting undue influence in Japanese affairs through the presence of U. S. troops, and because of the American attitude on Japanese rearmament and trade with the Communist mainland. This situation is one which it is most important for Americans to understand. It must be remembered, for one thing, that many in Japan have been relatively out of touch with the rest of the world for 15 years or more. As a result the information which they have available and on which they must rely in forming opinions does not always portray accurately current conditions in today's rapidly changing world. With the increasing exchange of peoples and publications between Japan and other countries the situation is improving, but its existence must be recognized.

Another element in Japan's present mood is the fact that all basic decisions were made for the Japanese people during the war years (and for some time before) and that this reliance on a central authority continued during the Occupation. Now, after only two years of regained sovereignty, the Japanese are faced with many very difficult problems. It is not surprising that at first there may be some hesitancy in tackling problems for which others carried the responsibility for so long.

One hears considerable talk about anti-American feeling in Japan today. To understand it one must bear these psychological factors in mind. It is not directed at the American people as individuals but rather at policies of the United States, which many Japanese feel infringe on their sovereignty. Under the circumstances, it would be much more surprising to me if there were little or no anti-American feeling than that there should be a considerable amount of it. One must remember also that every irritation or grievance that can in any way be attributed to the Americans is magnified and propagandized by an aggressive minority in Japan.

V

As has been suggested, the crux of Japan's present problem is the need to find about one billion dollars more of commercial exports, and thus to attain a viable economy. This amount will be adequate to protect her exchange reserve and gradually to replace the temporary and special aid which she has been receiving. Looking ahead, however, we must recognize that such an amount will not be nearly enough to meet the needs of Japan's rapidly growing population or to make possible the increased standard of living for which the people are so naturally striving.

The task of meeting immediate needs as well as providing a base for future growth is formidable but not insurmountable. Three of the many elements of strength upon which to draw stand out particularly.

First, Japan with her demonstrated genius for production, her capacity for hard work, her inherent thrift and her competence in world trade has in the past proved her ability to earn her own way unless barred by discriminatory restrictions. In the years since the war her businessmen and workers have made substantial and impressive progress towards increasing production and trade.

Second, the strength of free economies lies in the fact that they are based upon the concept of expansion and growth. National economies so oriented are expanding, not static. The recent spectacular growth of the Canadian economy is an outstanding example of this principle at work. As these economies grow they will be able to absorb imports on a scale which now would appear impossible of achievement. Japan can benefit greatly from such growth.

Third, more than a billion people on this side of the Iron Curtain live in the areas that are classified as "underdeveloped." If the nations that are relatively advanced economically have the wisdom to help these peoples to realize their inherent potentials, the scope for enlarging economic production and trade will be more than enough to accommodate in full measure Japan's needs and aspirations as well as those of other nations whose economies depend on foreign trade. This will, of course, take many years to accomplish.

While, as has been said, Japan alone can find the answer to some of her problems, there are others which depend for their solution on the understanding and coöperation of other countries. This applies particularly to the expansion of foreign trade. A relatively small expansion in total world trade would provide Japan with an opportunity to achieve her required additional export volume. A concerted effort on the part of all countries to achieve currency convertibility, a reduction of trade barriers, progressive elimination of trade and exchange controls, and the like, should make possible a considerable expansion of world trade over the next few years. If this is done, and if simultaneously Japan takes the necessary steps to increase efficiency and productivity, to introduce modern techniques and procedures, to restrain further inflation and generally adopts such other measures as may be necessary to make her products truly competitive in world markets--then there is no need to be pessimistic about the future of Japan.

Japan's problem is the concern of all the members of the community of nations. Their individual and joint interests will be best served by the attainment of an effective solution; favors and charity are not involved. Unless we can fashion a world economy which offers each member nation an opportunity for genuine economic progress--a dynamic upward trend that is translated into continuingly improved living standards for the masses of its population--we cannot hope to achieve either the security or the better life to which all peoples aspire. If each country does its part, the situation can be realistically met without undue burden on any one.

Among the countries of the Western World, Japan looks to the United States to take the lead in this critical period. Obviously Americans have given much thought to Japan's problems and our relationship to them over the past few years. However, I wonder if it might not be helpful to us as of today to ask ourselves a few questions. Just what is the specific responsibility of the United States toward Japan in relation to her current economic problems? What can and should be done about this responsibility and by whom? What is the rôle of government, business and non-profit institutions? Sound answers to these questions are necessary if our leadership is to be effective.

I believe in the Japanese people and in their future. The situation which they face today is a very challenging one. Given reasonable understanding and support from the outside, I have every confidence they will rise to meet it. They are an educated and industrious people who have proven their capacities in the past. Their primary concern today is, I believe, security and peace. They can, and in my judgment will, make a substantial contribution to the community of nations.

[i] Monthly Bulletin of Statistics, United Nations, April 1954, Table 50.

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  • JOHN D. ROCKEFELLER, 3rd, consultant to the Dulles mission to Japan and advisor to the U.S. Delegation to the Japanese Peace Treaty Conference, 1951; Chairman of the Board of Trustees of the Rockefeller Foundation
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