Japanese Trade Policy and Economic Development --- Secrets behind an Economic Miracle

1. Japanese Trade Policy and Economic Development---Secrets behind an Economic Miracle Junichi Goto

2. 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.

3. From fatal patient to superstar

4. 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

5. Figure 1: Real GDP of Japan 600 500 400 300 trillion yen (1990 price) 200 100 0 1980 1988 1990 1992 1994 1930 1935 1950 1952 1954 1956 1958 1970 1972 1974 1976 1978 1982 1984 1986 1940 1944 1946 1948 1960 1962 1964 1966 1968 1996 1998 2000 2002 year

6. 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.

11. Some Secrets behind the Miracle

12. 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?

13. 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.

14. 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.

15. 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)

16. 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.

17. 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.

18. A Caveat: weak and inefficientagricultural 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.