CONTRARY to the common assumption, the real difficulties which Japan faces are to be found not in the physical sphere so much as in the failure to comprehend economic realities. Though Japan's physical problems cannot be totally denied, it has gradually become clear that her basic and most pressing difficulties are intellectual and psychological. To understand this is one of the keys to a clearer comprehension of the Japan of the present and future.

In the opinion of her own people, Japan's material difficulties are that the country is overpopulated, land is very limited and natural resources are scarce. To maintain her living standards Japan must import large quantities of food and the raw materials with which to manufacture industrial goods for export. She has great difficulty in maintaining her balance of international payments. She is lagging far behind other nations in developing manufacturing facilities, roads and other means of transportation, and she lacks the capital accumulation necessary to improve them and bring them up to date.

Individually these points are valid, but my reason for not taking them too seriously is my belief that the problems presented can all be solved in time. In fact, they are in a large measure being solved now. If they have not yet been solved adequately it is not for physical reasons but because of what I consider to be defects in intellectual outlook. Before discussing these defects, I should like to show how some of our difficulties are being solved at present. This is well illustrated by the achievements of 1955.

II

There are several erroneous conceptions about Japan's present international balance of payments: one is that she finds great difficulty in balancing her international payments; another is that she can get along only by Special Procurements;[i] and a third is that therefore she must make desperate efforts in order to live well without Special Procurements. The records of Japan's external trade in 1955 will suffice to prove the error of these conceptions. Visible exports amounted to a little less than two billion dollars while visible imports were a little more than two billion dollars, and invisible exports were about $700,000,000 while invisible imports were about $300,000,000. Consequently, Japan's net gain was well over $300,000,000.[ii]

It is true that invisible exports included more than $500,000,000 in Special Procurements. Therefore it may be contended that if Special Procurements had been excluded the balance for the year 1955 would have been in the red. But it should be noted that Special Procurements are quite different from grants. They require that Japan provide certain goods and services. Thus if we assume that Special Procurements had not existed, Japan's national economy would have been exempted from some of the requirements to import raw materials and would have been able to direct a larger part of her economic energies to promoting additional exports. Following this logic, even if we make the rather drastic hypothesis that Japan had suddenly lost $500,000,000 of Special Procurements in 1955, we can safely infer that she would have been able to balance her international payments.

Thus a fact to be concluded from the records of 1955 is that Japan is capable of balancing her international payments without Special Procurements. But we ought also to look into the nature of exports and the rates of their increase.

Japan's exports, following the so-called Korean boom, reached about $1,300,000,000 in 1951 and showed a slight decrease both in 1952 and 1953. This trend was reversed thereafter by deflationary measures of the government and in 1954 the total was about $1,500,000,000--an increase of about 30 percent over 1953. The people tended to regard this upward trend as a temporary phenomenon. But surprisingly, an increase of about 30 percent was recorded again in 1955, making a total of nearly two billion dollars in exports. Moreover, monthly figures during the same year continued upward, leading us to expect further increases.

Special note of this two billion dollar figure should be made for another reason. The Japanese government, beginning in 1955, has been sponsoring a Six Year Economic Plan. As a result of a revision of estimates at the beginning of last year, the export goal of the Plan for 1957 was raised to $1,880,000,000. In terms of its monthly average, however, this goal was achieved as early as last April. In August the planners revised the goal once again to $2,200,000,000 to be achieved in 1957. But this re-revised objective was met between October and December of last year. Now, it generally is assumed in making economic plans for Japan that her import needs play a decisive rôle. But for this very reason the estimate of her export possibilities is the most important factor in any plan. Therefore, these facts on export increases deserve the keenest attention.

To understand the significance of these increases we must know what items were exported where. Of the three different monetary areas, exports to the dollar area showed about 50 percent increase over the previous year, to the sterling area about 35 percent increase and to the clearing accounts area--generally known as the open accounts area--about 10 percent decrease. The proportion of exports to dollar, sterling and open accounts areas became 40, 35 and 25 percent respectively. In 1954 exports to the open accounts area constituted 35 percent, while those to the dollar area accounted for 31 percent. In 1951, exports to the sterling area were foremost, constituting 43 percent while those to the dollar area were only 23 percent. This proportional increase in dollar-area exports is a most noteworthy fact, for it has been widely believed that since the dollar area is the most difficult to export to, Japan's efforts should be directed towards the open accounts and sterling areas. Now the time has come when we can resolutely deny such a point of view.

What export items showed the sharpest increase? To compare the amount of each item exported with that of the previous year and to select only those exports which showed a rapid rate of increase would not give a clear picture of the situation. Before examining each item of trade, we must understand the characteristics of Japanese export. The outstanding characteristic is that Japan exports extremely diverse items. The Foreign Exchange Statistics Monthly of the Bank of Japan classifies all export goods into 92 items. Among these, 40 items amounted to at least $10,000,000 each, yet not a single export item amounted to as much as 12 percent of the total. Cotton textiles, the largest export, constituted a little less than 12 percent, and the next item on the list accounted for less than 10 percent of the total. Steel products (except for galvanized sheets) and artificial fiber fabrics ranked next to cotton textiles, accounting for only 9 and 8 percent respectively. It is true that textiles and fabrics of all kinds together accounted for 35 percent, but it should be kept in mind that they formed an aggregate of 14 different items each of which averaged more than $30,000,000 annually. Moreover, the importance of textiles and fabrics in Japanese exports is decreasing year by year. The ratio of these items to the total exports of Japan was 44 percent in 1951 while the 1934-36 average was 52 percent.

In addition to the diversity of export items, attention is called to the equally diverse destinations of Japanese exports. Japan sent her exports to 96 countries and territories in the dollar area, 76 in the sterling area and 17 in the open accounts area. By far the largest single market was the United States which accounted for about 24 percent of Japanese exports. Areas which took more than 5 percent were Hong Kong and the United Kingdom colonies. Argentina, Indonesia, Thailand, Formosa, the Philippines and Canada constituted from 2 to 5 percent, accounting in the aggregate for about 18 percent. This means that the remaining 45 percent of the total was directed to 180 countries and territories, with less than 2 percent to each.

In short, Japan's exports of exceedingly diverse items are scattered all over the world with the single exception of the United States. This diversity of items and destinations forms the strength of the Japanese economy. Thus, although in 1955 there was a sharp increase in exports to the United States and in the export of steel products, this does not preclude the possibility of an increase in other items and to other areas in future years. Therefore the correct answer to the what and where of Japanese exports is that diverse items were exported to diverse countries and territories with a resultant increase of 30 percent in total exports.

III

As shown above, the physical problem of balancing international payments, which the people considered paramount, has been solved at least temporarily. But because there is an inadequate appreciation of the favorable circumstances of Japan's economy, popular misunderstanding may reverse this favorable trend; at least it will work against a full enjoyment of the good effects of the present rise in exports.

How have Japanese exports been able to maintain an annual rate of increase of 30 percent since the beginning of 1954? The major reason is that she did away with the inflationary tendencies which existed up to the end of 1953, tightening bank credit severely and extending special favors to export finance alone. But the people, not recognizing this, attribute the expansion of Japan's exports solely to the prosperity of the world market, with the result that they are excessively anxious about the future of the world economy. They forget that the Japanese economy depends in large measure on what is done in Japan, and how it is done. These fears indicate an acute loss of self-confidence among the people and reveal their inability to think for themselves.

Unquestionably, world-wide prosperity is a factor in the expansion of Japan's exports, but it weighs much more lightly than the effects of the deflationary measures instituted by Japan herself. Partly due to their poor execution, however, the deflationary measures applied from 1954 on were a very painful experience. Therefore, it is strange that despite the bitterness of the deflationary period, the people tend to look for the causes of the export expansion solely in the prosperity of the world market. Surprisingly, both the average Japanese and also business people and financiers interpreted the deflationary policy adopted by the government in 1954 not as a remedy for the disequilibrium in foreign exchange payments but as a sort of moral admonition.

What caused Japan to adopt these deflationary measures? It was clear to everyone during the latter half of 1953 that the Japanese economy was under the influence of an inflationary mood and that the rapid decline in Japan's foreign exchange holdings had to be rectified before it got much worse. But strangely enough, almost nobody asked how this inflation was brought about. People looked on it as a natural phenomenon, something like rain, and without clarifying its causes inaugurated a sudden retrenchment of finance. The inflation at that time was not ordinary but unusual in that the problem lay in the gap between domestic prices and international prices. Japanese prices themselves rose only slightly. They were kept level in 1952, and in the following year wholesale prices rose only 6 percent. But during this period prices on the world market kept declining. Although Japan should have been able to keep pace with the ups and downs of international prices, the government committed the fatal mistake of adopting policies which prevented Japanese prices from moving together with world prices.

What measures were taken by the government? In the field of exports the government extended export subsidies in various ways, whereas in the field of imports it followed a retrenchment policy in order to halt the loss of foreign exchange reserves. At the level of trade at that time, I estimate that about $400,000,000 in foreign exchange would have sufficed to satisfy her minimum requirements, of which one-third could be in sterling. By this estimate, the foreign exchange holdings of that time were more than enough. Consequently the government instead of restraining imports should have liberalized its imports to lower Japanese prices. Such a policy would certainly have proven to be more effective as well as less harmful than a blind retrenchment policy.

In the year ending October 1952, when foreign exchange losses began, Japan had accumulated foreign exchange reserves amounting to well over $600,000,000, thanks largely to the so-called Korean boom. Therefore, the government's failure to liberalize its foreign exchange control must be criticized.

The government's export policy was an even more serious failure. While subsidies allowed Japan to export goods below their domestic prices and avoid a decline of exports, this policy deprived Japan of the most effective means of narrowing the gap between her prices and those of the world market. By artificially removing goods from the domestic market, inflation was only encouraged. As we have seen, the price level, which was steady in 1952, rose a little in 1953 resulting in a further widening of the price gap. This developed into a vicious circle by causing a rumor of devaluation of the yen which in turn aroused stronger inflationary sentiment.

Although the ultimate catastrophe was fortunately averted, the experience of the so-called inflation in 1952 and 1953 suggests a lack of understanding of such issues on the part of the Japanese people. Still worse, now that the problem is solved, the people make no effort to learn the lesson that was taught them.

IV

What I tried to point out in the preceding section was not the errors of individual policies in the field of foreign trade, but rather the irrationality of the basic philosophy underlying those policies; and further, that the Japanese people can be surprisingly indifferent to difficulties caused by wrong policies.

The processes discussed earlier offer examples of this attitude of indifference. For instance, before launching the retrenchment policy, no thinking was done on how large foreign exchange reserves ought to be or whether losses of foreign exchange reserves are something to be really afraid of. Nor was any consideration ever given to the advisability of liberalizing import controls, while dissipating undue anxiety over the losses of foreign exchange, in order to bring about a price decline. Despite the bitterness of the deflationary experience, the people resigned themselves to the government's program with the naïve thought that any deflationary policy must be the countermeasure for any sort of inflation.

The reason I stress the attitude of indifference regarding the question of foreign exchange reserves is because this matter is closely related to the fundamentals of the Japanese-American relationship.

At the moment, the Japanese people are rejoicing without reason over increasing foreign exchange reserves. The government is pursuing a policy of piling them up limitlessly. However, this accumulation is possible only by sacrificing something which can be more important. It means that something which ought to have been possible was made impossible. Although a more liberal trade policy might have meant that we had more luxury goods than we needed, there is a definite possibility that there would have been more building of paved highways, more river control, more modernization of machinery and greater development of the island of Hokkaido. All of these are matters of urgent need for Japan. As they were disregarded and goods were squeezed out of the domestic market, our foreign exchange holdings are rushing headlong toward even greater accumulation.

Strangely enough, however, Japan has been consistently crying for investment from the United States. Supposing that we should launch a road-building program or development of Hokkaido, the trend would then be toward inflation and the reduction of exchange reserves. In this case, capital introduced from abroad would be most helpful. But the introduction of foreign capital is meaningless so long as no attempt is made to build roads or develop domestic resources. Without internal development, foreign capital will serve only to enlarge holdings that much further beyond what is necessary.

Recently the government, gradually awakening to the nonsense of mere accumulation through borrowing, has assumed a cooler attitude towards foreign capital. This change of attitude can be observed in its decision to exclude the so-called "impact loan." Government permits for dollar loans will be given only to those who actually want to import from the United States. This decision is hard to understand. If the government feels that it is so short of foreign currency as to be unable to provide foreign exchange to all those who want it, it is better for the government to accept any loan, impact or not, when offered. On the other hand, if the foreign exchange holdings are large enough, exchange permits should be given to anybody.

Consequently, a suspicion has arisen in business and government circles in the United States that the psychology of the Japanese government is not understandable. Such a suspicion is hindering the well-intentioned cooperation of those foreigners who are sympathetic with Japan.

We should courageously embark upon a variety of constructive enterprises, such as road-building and the development of Hokkaido, which will contribute to the basic strength of the Japanese economy. Any inflationary trend caused by such projects should be neutralized by calling on our foreign exchange reserves to whatever extent is necessary. It is a prerequisite that the government should liberalize the present exchange controls, which are still rigid. When the foreign exchange holdings decrease to the minimum safety level and further development programs might entail dangers, efforts should be made to invite more foreign capital if it is available. The government should thus demonstrate to the people the effectiveness of foreign capital in helping to further, without accompanying inflation, development programs that are beyond our capacity. In the face of this demonstration, the people will realize the genuine value of foreign capital and will learn to assume a sensible attitude towards it. At present, most of the people take it for granted that loans from abroad mean exploitation by foreign capitalists and they applaud the efforts of bureaucrats who want to reject foreign capital.

V

It may be interesting and profitable to speculate on how Japan might have solved her basic economic problems had her people faced the situation with fuller understanding.

Broadly speaking, Japan would first of all have avoided a zigzag course of inflation and deflation and instead would have been able to proceed on a more or less straight upward trend of economic development, just as West Germany has done. Moreover, the liberalization of import trade and the abolishment of bilateral trade would have been greatly advanced. In that case, de facto free convertibility would have been restored to a greater extent, as has been the case in West Germany. At the same time, the people would have been more open-minded about foreign capital. Foreign capital would have made possible generally low production costs and would have fortified the foreign exchange holdings, setting in motion a favorable cycle in which the greater exports resulting would have enabled greater liberalization of trade. In short, Japan would have been a much stronger country than she is today.

The arguments I have presented thus far in support of my statement that the essential difficulty is in attitude more than in material facts can be found in other economic areas, e.g. in connection with problems of finance, monetary policies, labor, etc. Moreover, the same is true in other fields of human activity-- political, social and ideological.

The origins of these shortcomings must be sought, I believe, in the nature and condition of the Japanese social sciences. An American scholar who recently visited Japan commented that he was greatly surprised to find that Japanese scholars are still seriously discussing economics in Marxist terms. Another American made the remark, quite enlightening to some Japanese, that while in America it would be difficult to find five Marxist scholars among 8,000 professors and specialists in economics, approximately 80 percent of the Japanese economists are Marxists. He also wondered why the Japanese scholars dwell in a purely theoretical world when so many challenging practical issues await their treatment. A third American pointed out that Japanese scholars seldom direct their talk to the people but limit their discussions almost completely to one another. How these characteristics of the Japanese social scientists came about has never been clearly explained, but I believe the explanation must be sought in the total process of Japan's development since the Meiji Restoration. That process was characterized by a headlong rush to catch up with Western civilization, and the failure we have noted may be but one instance of a phenomenon that occurs inevitably in the impact of one more advanced culture on another.

However this may be, the fact remains that the Japanese people are not merely unable to give full scope to their basic strength but are even unaware of it. Present-day Japan, then, cannot place herself where she should be in the contemporary world. For instance, she is incapable of dealing properly with the problem of reparations, and must still rely on aid from the United States for her own defense. Stupidly enough, moreover, there are still a great many people who, lacking a knowledge of even the basic facts of exports structure, are obsessed with the illusion that trade with China is a prerequisite of Japan's future economic development.

What, then, must be done to give the basic strength of the Japanese economy full play? The answer lies in enlarging the understanding of the Japanese by bringing about a revolutionary change in the social sciences. Yet when we think of the difficulty of this, we come face to face with another and even greater difficulty. This is that the Japanese people as a whole have lost their national ideals and still suffer from the resulting spiritual vacuum. Americans often ask us where Japanese leadership resides. But to a people who have lost their ideals, national leadership remains something hard to find.

The Japanese people lost their ideals because the path they pursued with pride and confidence from the time of the Meiji Restoration led them to war, and the catastrophic outcome of the war showed the path to have been a wrong one. During the period immediately following, the people were preoccupied with improving their material life. When this objective was in great measure achieved the more basic and difficult problems revealed themselves. There can be no denying that when people no longer have a goal to strive for, they are likely to suffer a serious degeneration of morale. The future position of Japan in the world community hinges upon how the Japanese people solve these intellectual and psychological problems.

[i] By Special Procurements I mean goods and services furnished to the Security Forces of the United States Army in Japan and to the United Nations forces in Korea.

[ii]The Foreign Exchange Statistics Monthly published by the Bank of Japan is most commonly used to examine Japan's international balance of payments. As its figures refer only to money payments and receipts, imports by credit, for example, are not included. Accordingly, this source shows a gain in foreign exchange of $494,000,000 for 1955, which is larger than the figure I quoted.

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  • NOBUTANE KIUCHI, former Chairman, Japanese Foreign Exchange Control Board; Director of the Institute of World Economy
  • More By Nobutane Kiuchi