Japan WT/TPR/S/32
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I. ECONOMIC ENVIRONMENT
(1) Overview
1. Following three years ofveryslowgrowth in1992-94, andasevere endogenous shock from
theKobe earthquake inthefirsthalfof1995, Japan'seconomy began arecovery from mid-1995.
Growth in1996 wasrobust, at3.5percent,increasing into1997withrealGDP growth atanannual
equivalent rateof5.7percentinthefirstquarter, ledbyconsumption inanticipation ofanincrease
intheconsumption tax;thereafter, private consumption declined markedly andtheeconomy slowed.
Official projections areforgrowth ofwellbelow 2percentin1997. (Chart I.1shows growth ofreal
GDP, comparing Japan withother industrial countries.) During theperiod, there wasprice deflation
withdecline inofficial price indices (consumer price index andGDPdeflator) in1995; in1996price
indices were stable andprojections for1997 areof1to1.5percentinflation. Theunemployment
raterosefrom justover2percentintheearly 1990s to3.3percentin1996. With theappreciation
oftheyenagainst theU.S.dollar, thecurrent account surplus fellfromover3percentofGDPin1993
to1.4percentin1996: recently thesurplus hasbegun toincrease.
WT/TPR/S/32 Trade Policy Review
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2. Theeconomiccrisisofthemid-1990srevealedstructuralproblems,includinglackofcompetition
andinefficiencyinallocationofresources,recognizedbytheauthoritiesascreatingahigh-costeconomy.1
Inthisconnection, while thedecline intariffs andquantitative restrictions hasformally opened much
ofthemanufacturing sector toexternal competition, theauthorities recognize thatstructural rigidities
persistintheinternalmarketandthatregulatoryreformtoenhancecompetitioninsectorssuchasfinance,
distribution, transport andagriculture isdesirable.2
3. Tothisend,Japan hasintroduced several reform packages containing deregulation measures
inthepastfewyears (Box I.1). Inaddition, anewForeign Exchange Law, passed bytheDietin
June1997 tocome intoforce inApril 1998, isexpected tosubstantially open theforeign exchange
market toallagents andreduce notification requirements, facilitating tradeandfinancial transactions,
andacomprehensive liberalization offinancial markets hasbeenannounced fortheyear2001.
4. Theresult ofthese reforms, however, isyettobeseen. Given theconsensus-based legislative
review process inJapan, reforms have, inthepast,often taken substantial amounts oftime. Concerns
havebeenexpressed inJapan itself about theslowpaceofreform andambiguity intheschedule of
reform processes.3
1TheEconomic Planning Agency ofJapan (EPA) studied efficiency ofbanking, retail andelectric utilities
sectors andfound thattheyallcarry excess labour compared withwhat isthought ofasan"efficient" state of
thesectors. According totheestimation byEPA, structural reform willadd0.9percentage points toannual growth
rate, compared tothecasewithout successful structural reform, overthenextfiveyears; EPA (1997).
2TheAdministrative Reform Committee expressed concern thatmarket mechanism hadsofarnotworked
inJapan asitshould have, aswritten inARC (1996): "The reformed system should beoneinwhich thegoods
andservices supplied, andthemanner inwhich theyaresupplied depend onthechoice ofthegeneral public -that
is,consumers -rather thanonsuppliers, industrial groups, orgovernment agencies. Inother words, itshould
beaconsumer-driven system."
3E.g. "Structural reform isabattle against time andJapan appears tobelagging behind thebattle"
(EPA, 1996a)); andKeidanren, 1997.Japan WT/TPR/S/32
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Box. I.1: Proposals forderegulation andstructural reform
Since the1995 Trade Policy Review ofJapan, several deregulation initiatives have been taken by
succesive Governments. These include: theDeregulation Action Program (DAP), which wasfirst
formulated inMarch 1995, with about 1,100 measures; theDAP wasrevised inMarch 1996 andin
March 1997, adding some 1,700 measures, foratotal ofabout 2,800. With thebasic objective of
"instituting radical structural reforms ofthenational economy andmaking itaninternationally open, free
andfaireconomy based onthemarket mechanism andindividuals 'self-responsibility," theDAP was
initially conceived asafive-year plan, butsubsequently modified toathree-year plan fortheperiod
FY1995-97. Revisions were conducted "onthebasis ofviews andrequirements heard from both
domestic andoverseas sources" and"fully respecting" theopinions oftheAdministrative Reform
Committee announced inDecember 1995 andDecember 1996.
TheDAP'sbasic direction ofreform is:"freedom inprinciple andregulation asexception". Itisaimed
atexpanding consumer choice availability andreducing domestic-foreign price differentials; expanding
domestic demand, facilitating imports, increasing business opportunities, and contributing tothe
realization of"international harmony"; andstreamlining administrative work. Exante regulatory-type
administration isingeneral tobereplaced byexpostfacto review-type administration. TheDAP also
calls foractive development ofcompetition policy, including strengthening oftheenforcement ofthe
Antimonopoly Act(AMA) andmeasures tovigorously pursue itsviolations, such asprice cartels and
bid-rigging. Major cross-sectoral policies include: limiting entry regulations tothe"minimum required";
review ofprice regulations suchasthose onpublic utilities; reducing regulations forconsumer protection,
safety andenvironmental protection to"theminimum required"; elimination offactors thatsubstantively
obstruct theentry offoreign operators andproducts intotheJapanese market; international harmonization
ofstandards, certification, andtesting systems andlabelling; andclarification andacceleration of
procedures forexamination andissuance oflicences, approvals andothers. Themajor sectors covered in
theDAP include housing andland, information andtelecommunications, distribution, standards,
certifications andimport procedures, financial services, securities andinsurance, energy, employment and
labour, matters related topollution, waste, environmental protection, dangerous articles, disaster
prevention andpublic safety, andeducation.
Other plans forderegulation andstructural reform include theAction Program forEconomic Structural
Reform, announced inMay 1997, which contains individual action programmes fortheProgram for
Economic Structural Reform, announced inDecember 1996, which identified 15strategically important
sectors forreform, andtheComprehensive Program ofLogistics Policies, announced inApril 1997, for
structural reform indistribution andtransportation ofgoods. Anumber ofthesame measures appear in
more thanoneofthese plans andrecommendations, indicating thecomplexity ofJapan 'sderegulation
procedures.
Proposals forderegulation areselected bytheministries incharge oftheapplicable regulation; the
Management andCoordination Agency compiles thewhole Deregulation Action Program, generally in
lines with theitems submitted bytheministries. Theproposals range from concrete measures, including
amendments tolawsandordinances aimed atelimination ofmarket entry regulations forforeign investors,
(e.g. insome sub-sectors oftelecommunications), tostatements simply proposing tolaunch reviews of
certain regulations inthefuture.
Source: Information provided bytheJapanese authorities.
(2) Major Features ofJapan'sEconomy
5. Theshare ofthemanufacturing sector inJapan'seconomy continues todecline; according
totheEconomic Planning Agency (EPA), itsshare was23.7percentin1995, down from26.8percent
in1990.4Datasince 1990alsoindicate thecontinuing increase oftheshare ofservices inGDP(rising
from 61to64percentbetween 1990 and1995) andtherelative fallintheshare ofagriculture
(1.9percentin1995) (Table I.1).
4Share inGDP lessimputed andother charges.WT/TPR/S/32 Trade Policy Review
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Table I.1
Major features ofJapan 'seconomy, 1990-96
Calendar year 1990 1991 1992 1993 1994 1995 1996
Population (million) 123.5 123.9 124.3 124.7 125.0 125.2 125.8
Growth ofpopulation (average percentage change) 0.3 0.3 0.3 0.3 0.2 0.2 0.5
Lifeexpectancy atbirth (years)
Males 75.9 76.1 76.1 76.3 76.6 76.4 ...
Females 81.9 82.1 82.2 82.5 83.0 82.8 ...
Percentofpopulation over65years old 12.0 12.5 13.0 13.5 14.0 14.5 ...
GDP (US$ billion)a2,970 3,402 3,719 4,275 4,689 5,134 4,600
GDP percapita (US$) 24,042 27,454 29,918 34,290 37,524 41,009 36,575
Share ofGDP (percent)b
Agricultureb2.4 2.3 2.2 2.0 2.1 1.9 ...
Mining 0.3 0.2 0.2 0.2 0.2 0.2 ...
Manufacturing 26.8 26.8 25.9 24.5 23.5 23.7 ...
Services 61.4 61.8 62.6 63.8 64.6 64.3 ...
Government andprivate non-profit services 9.1 9.0 9.1 9.5 9.6 9.9 ...
Share ofemployment (percent)
Agricultureb7.2 6.7 6.4 5.9 5.8 5.7 5.5
Mining 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Manufacturing 24.1 24.3 24.4 23.7 23.2 22.5 22.3
Services 65.0 65.3 65.5 66.6 67.1 67.9 68.4
Government 3.1 3.1 3.2 3.2 3.3 3.4 3.3
Merchandise exports, f.o.b. (US$ billion) 280.4 308.1 332.5 352.9 386.0 429.4 400.2
Share ofGDP (percent) 9.5 9.1 8.9 8.3 7.6 8.4 8.7
Merchandise imports, f.o.b. (US$ billion) 216.8 212.0 207.8 213.3 241.5 297.2 316.7
Share ofGDP (percent) 7.2 6.3 5.6 5.0 5.2 5.8 6.9
Services exports (US$ billion)c40.1 43.4 47.4 51.6 56.5 63.3 61.7
Share ofGDP (percent) 1.4 1.3 1.3 1.2 1.2 1.2 1.3
Services imports (US$ billion)d78.2 73.2 87.5 89.6 98.4 113.0 114.9
Share ofGDP (percent) 2.6 2.2 2.4 2.1 2.1 2.5 2.5
Memorandum item:
Exchange rate,yenperU.S. dollard144.8 134.7 126.7 111.2 102.2 94.1 108.8
... Notavailable.
a Atmarket prices.
b Share inGDP lessimputed andother changes.
c Including forestry andfishery.
d Excluding factor services.
e Period average.
Source: Information provided bytheJapanese authorities; (1997a) International Financial Statistics, October; andWTO Secretariat
calculations.
6. Therising share ofservices inJapan'seconomy underlines theimportance ofproductivity in
thesector. Withaweight ofnearby threetimes thatofmanufacturing inthemake-up ofGDP, services
have generally lower productivity; productivity growth inservices would have more impact on
economy-wide productivity growth thanthatinmanufacturing. Itisthusseenasimportant forJapan
thatitsservices markets beopen andcompetitive, toattain higher efficiency andproductivity, in
particular, for"input" services, suchastelecommunications, transport andfinancial services.
7. Theshare ofmerchandise trade(exports andimports) inGDPwaslower in1996thanin1990,
growing from alowpoint in1994. Trade inservices asashare ofGDP alsodeclined between 1990
and1994 rising again in1995 and1996, although toalower levelthanin1990.Japan WT/TPR/S/32
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(3) Recent Economic Performance
8. In1995, Japan'seconomy began aslowrecovery fromthedownturn of1993-94 (Table I.2).
GDP growth in1995 was1.4percent,slowed tosome degree bytheimpact oftheKobe earthquake.
Although housing construction increased, overall domestic private demand wasweak, withslowgrowth
inconsumption andininvestment inplantandequipment; theindex ofindustrial capacity utilization
wasover10percentlower thanits1990 level, andunemployment rosetoover3percent. Atthe
same time, exports, affected byyenappreciation intheearly partoftheyear, stagnated andimports
increased: withagrowing deficit onservices account, thecurrent account surplus fellfrom 2.8to
2.2percentofGDP. Theeconomic recovery accelerated in1996andcontinued intothefirstquarter
of1997; overall realGDP growth in1996, stimulated byrapid increase indomestic demand
(4.5percent)was3.5percent,thehighestratesince1991,andinthefirstquarterof1997wasestimated
at5.7percentonanannual basis, withconsumption inthefirstquarter of1997 increasing by
4.4percentoverthelastquarter of1996. Thisrapid growth came toanabrupt haltinmid-1997;
GDP forthesecond quarter declined byover11percentonanannual basis.
Table I.2
Japan 'seconomic performance, 1990-96
(US$ billion, percentage change andpercent)
Calendar year 1990 1991 1992 1993 1994 1995 1996
(Percentage change)
RealGDP 5.1 4.0 1.1 0.1 0.6 1.4 3.5
Industrial production 4.1 1.7 -6.1 -4.5 0.9 3.4 2.6
Private consumption 4.4 2.5 2.1 1.2 1.9 2.0 2.8
Government consumption 1.5 2.0 2.0 2.4 2.4 3.5 2.3
Gross fixed investment 8.5 3.3 -1.5 -2.0 -0.8 1.1 8.7
Exports ofgoods andservices 6.9 5.2 5.0 1.3 4.6 5.4 2.2
Imports ofgoods andservices 7.9 -3.1 -0.7 -0.3 8.9 14.3 10.3
Wholesale prices (WPI)b2.0 0.2 -1.5 -3.7 -2.1 -0.9 0.7
Consumer prices (CPI) 3.1 3.3 1.7 1.2 0.7 -0.1 0.1
GDP deflator 2.3 2.5 1.7 0.8 0.2 -0.6 0.0
Terms oftrade -6.4 10.0 7.4 8.9 7.4 -0.3 -8.4
Realeffective exchange ratec.. 6.7 3.9 22.0 7.5 5.6 -14.8
Employment 2.0 1.9 1.1 0.2 0.1 0.1 0.5
Unemployment (percent) 2.1 2.1 2.2 2.5 2.9 3.1 3.3
Labour productivity 2.7 2.3 0.1 -0.1 0.4 ... ...
Money supply (M2+CDs) 11.7 3.6 0.6 1.1 2.1 3.2 3.3
Discount rate(percent)d6.0 4.5 3.3 1.8 1.8 0.5 0.5
General Government (percentofGDP)
Revenue 34.2 33.8 33.2 32.1 32.1 32.0 31.8
Expenditure 31.3 30.9 31.7 33.7 34.4 35.7 36.2
Balance 2.9 2.9 1.5 -1.6 -2.3 -3.7 -4.4
Balance excl. social security -0.7 -0.8 -2.0 -4.8 -5.1 -6.5 -7.3
Balance ofpayments
Merchandise trade balance (US$ billion) 63.6 96.1 124.7 139.6 144.5 132.2 83.5
Current account balance (US$ billion) 35.8 68.4 112.3 132.0 130.6 111.4 65.8
Share ofGDP (percent) 1.2 2.0 3.0 3.1 2.8 2.2 1.4
International reservese78.5 72.1 71.6 98.5 125.9 183.2 216.6
Gross domestic investment/GDP 32.3 32.2 30.8 29.7 28.7 28.5 29.8
Gross national savings/GDP 33.5 34.2 33.8 32.8 31.4 30.7 31.3
... Notavailable.
a Provisional estimates.
b Period average.
c Increase indicates appreciation.
d Endofperiod.
e Excluding gold.
Source: Information provided bytheJapanese authorities; IMF(1997a) International Financial Statistics, October; IMF(1997b) World
Economic Outlook, OECD (1997b) Economic Outook, June; andWTO Secretariat calculations.WT/TPR/S/32 Trade Policy Review
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9. These patterns -particularly those ofconsumption -reflect sharp swings inJapan'sfiscal and
monetary policies. In1995, andthrough most of1996, public spending andgovernment debtrose
rapidly under twomajor fiscal stimulus packages5;gross government debtmounted tosome 80percent
ofGDPin1995, withageneral government deficit (excluding social security) of6.5percentofGDP.
Monetary policy wasalsoeased, withtheofficial discount ratelowered byonepercentage point in
April andafurther halfpercentage pointtoapostwar lowof0.5percentinSeptember. InMarch 1997,
faced withacontinuing highdeficit andincreasing indebtedness (estimated respectively at7.3and
87.1percentofGDP fortheyear), theGovernment reversed theprocess byannouncing afiscal
consolidation package aimed atreducing thedeficit to3percentorlessofGDPbyfiscal year(FY) 2003
(April-March) andpreventing anyfurther increase inthedebt/GDP ratio. Under thispackage, the
FY1998budget willbecutandacommitment wasmade nottoincrease spending through toFY2003.
Inthefirstinstance, therateofconsumption taxwasraised from3to5percenton1April 1997, and
theextraordinary income taxreduction, implemented since FY1994, waseliminated fromFY1997.
(4) Trade andCurrent Account Situation
10. Since thelastTrade Policy Review, Japan'scurrent account surplus hasdeclined steadily, both
inyenandU.S.dollar terms, against abackground ofanarrowing ofthesavings-investment gap.The
surplus, having peaked in1993atsome US$132 billion, declined steadily thereafter toUS$66 billion
in1996 or,inshare ofGDP, from 3.1to1.4percent(Tables I.3andAI.1). Historically, within
thecurrent account, surpluses onmerchandise tradeandonincome frominvestment (thelatterreflecting
theimportance ofJapanese foreign direct andportfolio investment outflows) havebeenpartly offset
byadeficit ontheservices account.
11. ThemerchandisetradesurplusdeclinedfromUS$139billiontoUS$84billioninthesameperiod.
Merchandise imports roseby13.1and23.2percentindollar terms in1994 and1995, andby
6.8percentin1996 (23.5 percentinyenterms, reflecting exchange ratedevelopments). Thedollar
value ofmerchandise exports increased by9.3percentin1994 and11.1percentin1995, declining
by6.4percentin1996(an8.2percentincrease inyenvalue). Involume terms, imports andexports
ofgoods increased by12.5and3.3percentrespectively in1995. Japan'sdeficit inservices trade
increased bysome 11.5 percentin1994, 19.5 percentin1995 and8.8percentin1996, to
US$62 billion. Thedeclining trend ofthecurrent account surplus maynowbereversing; monthly
datashow asteady increase inthesurplus (inyenvalue) forthefivemonths from April 1997.
12. Thecapitalandfinancialaccountdeficitalsoshowedacontinuousdeclinebetween1995and1996,
mirroring thefallinthecurrent account surplus. Themain element inthiswasthefinancial account
deficit, which declined by25percentin1995 toUS$64 billion, andby57percentin1996 tosome
US$28 billion. Thelargefallof1996reflected asignificant netinflow ofcapital in"other investments"
including long- andshort-term loans, trade credits andcurrency deposits. Netoutflows ofdirect
investment andportfolio investment continued togrow.
5InMay1995, the"Emergency Measures forYenAppreciation andtheEconomy", approved bytheDiet,
includedasupplementaryspendingbudgetof¥2.7trillion;asecondfiscalstimuluspackage,"EconomicMeasures
TowardSteadyRecovery"wasannouncedinSeptember1995,withafurthersupplementarybudgetof¥4.7trillion,
leading toanoverall record spending of¥14.2 trillion.Japan WT/TPR/S/32
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Table I.3
Current account summary, 1992-96
(¥billion)
1992 1993 1994 1995 1996
Current account balance 14,235 14,669 13,343 10,386 7,158
Trade balance 15,776 15,482 14,732 12,345 9,097
Exports 42,082 39,164 39,349 40,260 43,566
Imports 26,306 23,682 24,617 27,915 34,469
Services -5,571 -4,780 -4,898 -5,390 -6,779
Travel -2,942 -2,582 -2,776 -3,160 -3,588
Receipts 455 394 355 305 445
Payments 3,396 2,976 3,132 3,464 4,033
Transportation -1,100 -1,103 -1,159 -1,256 1,307
Receipts 2,338 2,103 2,074 2,123 2,350
Payments 3,438 3,205 3,233 3,379 3,656
Other -1,529 -1,095 -962 -973 -1,884
Receipts 3,416 3,420 3,529 3,730 4,571
Payments 4,945 4,515 4,491 4,703 6,456
Income 4,513 4,533 4,131 4,157 5,818
Investment 4,613 4,622 4,202 4,220 5,818
Labour -100 -89 -72 -63 0
Nettransfers -483 -565 -623 -725 -978
Public -261 -266 -288 -314 -214
Private -222 -300 -334 -411 -763
Memorandum items:
Current account balance (US$ bn) 112.3 132.0 130.6 111.4 65.8
Current account/GDP (%) 3.0 3.1 2.8 2.2 1.4
Average exchange rate(¥/$) 126.7 111.2 102.2 94.1 108.8
Source: Information provided bytheJapanese authorities.
13. Therealeffective exchange rate(REER) oftheyengenerally appreciated untilthesecond quarter
of1995, falling thereafter untilApril 1997, toalevelabout 30percentlower thanthepeakin1995
(Chart I.2).Some signs ofappreciation havebeenobserved recently. Thepattern ismirrored inthe
nominal bilateral rateoftheyenagainst theU.S.dollar.
14. Changes inthesavings-investment balance mirror thedecline inthecurrent account surplus.
According totheEconomic Planning Agency, thehousehold savings ratehaslongbeeninadeclining
trend, butincreased inFY1995; investment hasincreased, reflecting theriseinthebudget deficit
since FY1993. Netinvestment inthenon-financial private sector rosetoaround 1.7percentofGDP
inFY1995, afteracontinuous decline since FY1991, reflecting thestagnation ofcapital equipment
investment afterthecollapse ofthe"bubble" economy inthelate1980s, andaweak landmarket since
FY1990. Netgovernment investment declined toaround 4.0percentofGDP inFY1995.Japan WT/TPR/S/32
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(i) Composition oftrade
15. Thecomposition ofJapan'smerchandise imports haschanged markedly inthe1990s. Theshare
ofmanufactures, including textiles andmachinery, grew(from 47.5percentin1993to55.3percent
in1996); in1996, those ofagriculture andofmining products andfuelsdeclined, to20.4percent
and23.0percent, respectively (Chart I.3andTable AI.2).
16. Reflecting changing patterns oftrade andofforeign direct investment, theshare ofconsumer
durable andnon-durable goods, including automobiles, inJapan'smerchandise exports hasfallen, while
theshare ofcapital goods increased from57.6percentin1993toover61percentin1995and1996.6
Manufactures were overall responsible for95percentofexports (Table AI.3).
17. Intra-industry trade (theimport andexport ofgoods classified inthesame product category)
accounted in1996forsome 37percentoftotalJapan'smerchandise trade, upfromaround 27percent
in1993 (Chart I.4). ThelevelofJapan'sintra-industry trade withtheworld hasbeenlower thanin
mostOECD countries. Japan'sintra-industry tradewithCanada andtheUnited States comprised about
41percentofthetradebetween thesecountries in1996. Bilateral intra-industry tradewiththeEuropean
Union andEastAsiawaslower, accounting forabout 25percentand33percentrespectively.
18. Theshare ofservices inJapan'stradeoverall hasbeenincreasing; inaddition, Japan'sservices
trade hasbeeninlarge andgrowing deficit, withthevalue ofservices imports being nearly double
thatofexports. Thedeficit increased in1996 mainly duetoalarge increase intravel expenditure;
travel andtransportation arethepredominant elements ofservices imports inJapan, withshares of
about 29and26percentrespectively in1996. Theshare ofmiscellaneous business, professional and
technical services declined fromsome 26percentin1992to17percentin1996. Ontheexport side,
transportation andmiscellaneous business, professional andtechnical services havebeenthelargest
elements, withshares ofabout 32and22percentrespectively in1996. Receipts fromroyalties and
licence feeshavebeengrowing steadily since 1992 atanaverage annual rateofabout 17percent.
In1996, trade infinancial services increased rapidly; exports andimports increased byten-and
seven-fold respectively, partly reflecting botharevision ofthebalance-of-payments categories and
statistical discrepancies.
6MITI (1997).WT/TPR/S/32 Trade Policy Review
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Japan WT/TPR/S/32
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(ii) Geographic pattern oftrade
19. Theshare ofEastAsian sources inJapan'smerchandise imports hasgrown rapidly, from
33percentin1993to36percentin1996. Inthesame period, theshare oftheUnited States declined
slightly to23percentwhile thatoftheEuropean Union increased to14percent. Inmerchandise
exports, theshare ofEastAsian countries increased to42.8 percentin1996, compared with
36.4percentin1993; those ofboththeUnited States andtheEuropean Union fellto27.5percent
and15.4percentrespectively (Chart I.5).
20. Thechanges inJapan'stradestructure anddirection reflect tosome extent thepattern ofJapan's
foreign direct investment (FDI) flows andthechanges initsdomestic manufacturing base. Therapid
increase offoreign direct investment inEastAsiabyJapanese firms since thesecond halfofthe1980s
hasresulted inadecline inJapan'sconsumer goods exports to,andrawmaterial imports from, the
region andanincrease inJapan'sexports ofpartsto,anditsimports offinalproducts from, EastAsia.WT/TPR/S/32 Trade Policy Review
Page 12
Japan WT/TPR/S/32
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(5) Foreign Direct Investment
21. Thestock ofFDIfrom other countries inJapan equalled ¥3,473 billion attheendof1996,
considerably lower thanJapan'sFDIposition inforeign countries, amounting to¥29,999 billion.
22. Historically, FDIoutflows havelargely exceeded inflows, peaking atsome US$67.5 billion
in1989, orapproximately 2.5percentofGDP. Most inward investment intoJapan hasbeenfrom
North America andEurope: in1995, shares oftheUnited States andEurope were48and34percent
(Table I.4). Following adecline between 1989 and1993, thevalue ofoutward investment andits
share inGDPbegan togrow again through 1994and1995, according tostatistics byJapan'sMinistry
ofFinance.7Against abackground oftheappreciating yen,outward FDIflows inFY1995increased
by23percent. Thistrend wasagain interrupted inFY1996, when outward FDIdeclined invalue
by5.3percent. FDItrends havebeenassociated witharising share ofmanufacturing production
abroad byJapanese affiliates, particularly intheEastAsian region, giving risetosome concerns about
the"hollowing-out" oftheJapanese economy, butalsoassociated withtheprocess ofglobalization.8
23. Anincreasing share outward investment since1993hasgonetoneighbouring Asian economies,
including China; theshare ofJapan'soutward FDItoNorth America declined from about 48to
45percentintheperiod FY1990-95, while overthesame period theshare ofAsiarosefromaround
12to24percent.
24. Sectorally, alarge increase wasobserved ininvestment inelectrical machinery, reflecting a
largeincrease ofFDIinelectric appliances andelectronic machinery intoChina andASEAN countries.9
Innon-manufacturing FDIflows, anaverage annual decline ofabout 5percentwasobserved inthe
period FY1993 toFY1995; while FDIinrealestate, commerce andfinancial services (including
insurance) alldeclined, thatinother non-manufacturing increased about 45percentduring thesame
period.
25. Justover55percentofthestock ofinward FDIisinmanufacturing, particularly inmachinery
andchemicals. Recent FDIflows intoJapan, however, havebeencharacterized byanincrease inthe
share ofthenon-manufacturing sector, which wasabout 62percentinFY1995; inFY1990, itwas
some43percent. Notable increases inrecent inward FDIflows include financial services andinsurance,
whose share inJapan'sinward FDIrosetosome 27percentin1995 (Table I.5).
7Thestatistics arebased onnotification ofFDItotheMinistry ofFinance; notallthenotified FDImay
beactually implemented.
8According toMITI, theratioofmanufacturing production abroad byJapanese affiliates toJapan 'sdomestic
production increased from 3.0percentinFY1985 to9.1percentinFY1995.
9MITI (1996a).WT/TPR/S/32 Trade Policy Review
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Table I.4
Foreign direct investment (FDI) bysource anddestination, selected years
(US$ billion)
StockaAnnual flows
Fiscal year 1990 1994 1990 1993 1994 1995 1996b
FDIintoJapan (US$ billion) 18.4 34.9 2.8 3.1 4.2 3.8 7.1
Shares ofselected partners
North America 48.3 45.2 29.0 35.1 46.1 48.4 31.7
United States 46.5 40.4 23.9 30.2 38.4 48.0 31.0
Canada 1.8 4.8 5.1 4.9 7.7 0.4 0.7
Europe 27.1 30.3 49.0 33.3 36.4 34.3 28.6
United Kingdom 3.5 5.5 1.9 2.2 12.1 3.0 5.3
Germany 5.2 4.5 9.3 3.6 3.0 4.4 6.2
France 1.6 1.9 2.7 2.6 1.6 3.0 1.4
Switzerland 6.3 6.3 5.1 4.8 3.7 2.6 3.2
Netherlands 7.9 8.2 26.4 9.2 12.6 14.6 10.4
Others 2.6 3.9 3.5 11.0 3.5 6.7 ...
Hong Kong 2.8 2.1 2.2 1.0 1.9 0.7 2.3
Foreign companies inJapan 11.3 10.9 8.3 11.2 7.5 6.3 13.0
Others 10.5 11.5 11.4 19.4 8.2 10.2 ...
Japan 'sFDIabroad (US$ billion) 310.8 463.6 56.9 36.0 41.1 50.7 49.7
North America 43.8 43.7 47.8 42.4 43.4 44.9 47.9
United States ... ... . ... 40.9 42.2 43.8 45.8
Canada ... ... ... 1.6 1.2 1.1 2.1
Latin America 13.0 11.9 6.4 9.4 12.7 7.6 9.3
Asia 15.3 16.4 12.4 18.4 23.6 24.2 24.2
Indonesia ... ... . ... 2.3 4.3 3.1 5.0
Hong Kong ... ... ... 3.4 2.8 2.2 3.1
Singapore ... ... ... 1.8 2.6 2.3 2.3
China ... ... ... 4.7 6.2 8.8 5.2
Thailand ... ... ... 1.6 1.8 2.4 2.9
Malaysia ... ... ... 2.2 1.8 1.1 1.2
Korea ... ... ... 0.7 1.0 0.9 0.9
Chinese Taipei ... ... ... 0.8 0.7 0.9 1.1
Philippines ... ... ... 0.6 1.6 1.4 1.2
Middle East 1.1 1.0 0.0 0.6 0.7 0.3 0.5
Europe 19.1 19.4 25.1 22.0 15.2 16.7 15.4
United Kingdom ... ... ... 7.0 5.3 6.8 7.2
Germany ... ... ... 2.1 1.8 1.1 1.2
France ... ... ... 1.5 1.0 3.0 1.0
Switzerland ... ... ... 1.2 0.1 0.2 0.1
Netherlands ... ... ... 6.0 2.6 3.0 2.3
Africa 1.9 1.7 2.0 1.5 0.8 0.7 0.9
Oceania 5.8 5.9 7.3 5.6 3.5 5.5 1.9
... Notavailable.
a Onahistorical costbasis.
b Preliminary estimates.
Source: Ministry ofFinance; andWTO Secretariat calculations.Japan WT/TPR/S/32
Page 15
Table I.5
Foreign direct investment (FDI) byactivity, selected years
StockaAnnual flows
Fiscal year 1990 1994 1990 1993 1994 1995 1996b
FDIintoJapan (US$ billion) 18.4 34.9 2.8 3.1 4.2 3.8 7.1
Shares ofselected sectors
Manufacturing 63.9 55.2 56.5 50.8 47.3 38.2 40.4
Chemicals 17.1 16.0 15.8 14.9 5.3 29.5 9.0
Machinery 33.5 27.0 29.0 21.8 30.8 5.0 20.2
Non-manufacturing 36.1 44.8 43.5 49.2 52.7 61.8 59.6
Realestate 3.5 3.6 0.9 2.9 0.7 0.4 3.4
Commerce andtrading 16.0 20.2 26.3 28.6 26.2 18.4 21.6
Financial services andinsurance 3.7 7.1 3.9 1.1 16.1 27.2 3.5
Other non-manufacturingc12.1 13.8 12.4 16.6 9.6 15.8 ...
Japan 'sFDIabroad (US$ billion) 310.8 463.6 56.9 36.0 41.1 50.7 49.7
Manufacturing ... ... 27.2 30.9 33.6 36.7 42.2
Chemicals ... ... 4.0 4.8 6.3 4.2 4.3
Ferrous andnon-ferrous metals ... ... 1.8 2.1 2.5 3.1 5.1
Machinery ... ... 2.6 3.3 4.0 3.7 3.0
Electrical machinery ... ... 10.0 7.7 6.4 10.4 13.6
Transport equipment ... ... 3.3 2.6 4.9 3.9 8.1
Non-manufacturing ... ... 71.4 68.4 65.5 61.4 55.7
Realestate ... ... 19.5 16.9 12.5 11.7 12.9
Commerce ... ... 10.8 14.1 10.7 10.5 10.0
Financial services andinsurance ... ... 14.1 17.8 15.8 10.8 16.2
Other non-manufacturing ... ... 26.9 19.6 26.5 28.4 ...
Establishment ofbranches ... ... 1.4 0.7 1.0 1.9 2.1
... Notavailable.
a Onahistorical costbasis.
b Preliminary estimates.
c Including construction, transportation andcommunications.
Source: Ministry ofFinance; andWTO Secretariat calculations.
26. Asurvey conducted byMITI in1995 suggested thatmajor factors likely tobeacting against
greater inward FDIintoJapan included highbusiness costssuchaslandprices andwages, lowexpected
profitability andahightaxburden.10MITI alsorecognized thatcomplex regulatory systems, lackof
transparency inregulatory procedures, complex distribution systems andexclusionary business practices
mayhavemade potential foreign investors hesitant toinvest inJapan.11
10MITI (1997).
11MITI (1997).WT/TPR/S/32 Trade Policy Review
Page 16
(6) Outlook
27. Following thestrong growth of1996, allprojections for1997 byJapanese andinternational
agencies showaconsiderable slowdown.12Asnoted, recent economic indicators showamarked slowing
(orevendecline) inpersonal consumption andafallinhousing investment. While investment inplant
andequipment hasgrown, industrial production hasstagnated andunemployment remains high. The
principal factor restraining growth isfiscal retrenchment, undertaken asacorrective totheexpansion
of1995/96; theApril 1997 increase inconsumption taxhadaparticularly marked effect, distorted
byanticipated purchasing. However, structural elements, including thecontinued effects ofslow
deregulation,alsoplayamajorrole.Exports,stimulatedbytheweakeryen,havebeengrowingstrongly,
withsome redirection towards Europe andtheUnited States asAsian markets haveweakened during
theyear; imports remain largely unchanged.
12TheEconomic Outlook published inJanuary 1997 bytheGovernment projected 1.9percentgrowth for
FY1997; growth ofaround 2.3percentwasestimated bytheOECD inJune; however, more recent projections
bytheIMFfortheWorld Economic Outlook postulate growth ofonly1.1percentforthecalendar year, and
theJapan Center forEconomic Research estimates only0.9percentrealGDP growth forFY1997.