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Esumk © IF 9 u Francis ®m june 7,1974 Japan/® Shock Tr@ateni@iffii!: Of all the thousands of English words adopted into the Japanese language, "shock" has probably received the heaviest usage during the past several years— and for good reason. Japan has been hit by a number of major political and eco nomic crises in the early 1970's, including the Sino-American detente, the several devaluations of the dollar, the imposition of restric tive measures against Japanese ex ports and imports, and most re cently, the energy crisis. Because of these shocks, the economic jugger naut that impressed the rest of the world so awesomely has begun to slow down, and Japanese statistics no longer shoot off the top of every chart. Japan today is beset by raging infla tion, characterized by a 25-percent jump over the past year in whole sale prices (following a prolonged period of near-stability in that index), as well as a 30-percent an nual increase in major wage con tracts and an oil-import bill that may triple in size despite decreased purchases this year. Foreign-ex change reserves appear to be falling as fast as they had previously risen, so that we see today a reversal of the priorities of 1973, with foreign investment now de-emphasized and foreign trade again emphasized. Moreover, Japanese observers gen erally agree that the economy is moving into recession, although they probably mean a "Japanese recession"— a mere decline in the growth rate— rather than what others usually mean by that term. 1 Digitized for FR A SE R Sudden shift The sudden shift in the nation's for tunes is reflected in its foreign-ex change reserves, which soared from $31 billion at the end of 1969 to a /2 peak of $19 billion in early 1973, before falling to less than $12 billion early this year. (The actual swing has probably been greater, since "hidden reserves" added several billion dollars to these holdings during the rise, while heavy bank borrowings abroad in 1974 have apparently cushioned the decline by a like amount.) This development has gone hand-in-hand with a sharp reversal of Japan's balance of pay ments—from a $3-billion surplus to a $131 -billion deficit over the last /2 fiscal year (ending in March)— be cause of last year's upsurge in spending for foreign travel and in vestment as well as a very sharp rise of about 50 percent in spending for imported goods. The import boom reflected the heavy demand of an economy long geared to a 10-percent annual rate of growth in real GNP— an economy which accounts for almost 30 per cent of the world's trade in natural resources. The boom also reflected the increasing liberalization of Japan's long-standing import-re striction policy, and in particular, the substantial revaluation of the yen, which before its recent troubles had risen about 36 percent against the dollar within the short span of a year and a half. Government policy, as stated by Finance Minister Fukuda, is to slow the economic pace this year through (continued on page 2) R e s e a r c h lD e jp & ir t a m f t F e d e ra l R eserve Esudk ®f Sana Fraumdisc© Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. tight monetary and fiscal measures. The goal of this policy is to reduce import demand, curb the raging inflation, and also curb the cost pressures now impeding the export drive, so as to reduce the balanceof-payments deficit to about half the level reached in the fiscal year just ended. But reaching that goal could be quite difficult, even with the help of some recent curbs on foreign travel and investment. The import bill, no matter how re duced in physical volume, will remain bloated by the sky-high prices of petroleum and other raw materials required by japan's indus trial machine. In this context, halv ing the payments deficit might require a 30-percent increase in Japan's overseas shipments follow ing several years of sharply reduced export growth. Yet boosting exports now could be somewhat difficult; for example, the income elas ticity of demand for Japanese prod ucts is rather high, so a slowdown in the world economy could mean a significant drop in demand for Japanese cars, TV sets, and other major products. The task could be doubly difficult in view of the fact that most of Japan's deficit-ridden trading partners are also trying to push exports and curb imports at this time. Rising trend Japan's high-growth economy thus is likely to fall below trend this year, partly because of restrictive govern ment policy and partly because of the severe shocks it has had to with stand during the past several years. 2 Digitized for FR A SE R But the question arises whether a high rate of growth could have been continued in any event. Some fu turologists, with their penchant for extrapolating past trends, have sug gested on the basis of the 1950-70 record that Japan would lead the GNP parade by the end of the cen tury, just as their counterparts sev eral decades back had predicted that Japan would languish forever in economic stagnation. A review of the sources of Japan's recent growth might show where the truth lies. One key element in Japan's phe nomenal performance has been a massive inflow of foreign tech nology, based on some 10,000 royalty and license agreements in the post-1950 decades. These in flows permitted the modernization of old, and the creation of new, industries under extremely favor able conditions. Advanced foreign technology was relatively cheap, even with a $1.4-billion pricetag for those 10,000 contracts. Foreign ers were willing to sell their know how for reasonable royalties and license fees, and this suited Jap anese officials and businessmen who were anxious to keep foreign enterprises out of the home market. Moreover, since the costs of tech nological pioneering were borne by others, the purchase and use of foreign processes avoided the ex pense and hazard of developing a major research-and-development effort in Japan. Other countries also obtained ad vanced technology from abroad, but Japan in addition invested heavily in new plants and equipment em bodying these new technological developments. For several decades, its fixed-capital investment has averaged over 30 percent of GNP— far above the European percentage and almost double the U.S. figure. This high-investment propensity was at least partly attributable to the high return obtainable from new private investment, which in turn reflected a high rate of growth of labor productivity, averaging over 9 percent a year and reaching 20 per cent in 1973. (Rapid productivity growth was stimulated by the con stant shift of workers from backward sectors to highly productive mod ern sectors of the economy.) The government supported this expan sion through a low tax structure and various direct-guidance measures. The Japanese public also played a role by supplying the savings needed to finance the enormous growth of investment, with con sumer savings averaging over 20 percent of disposable income. Rapid gains in labor productivity could also become less certain, partly because of this technological factor, and partly because of the drying-up of the labor pool formerly available in low-productivity sectors of the economy. Decelerating trend? To what extent are these growth factors still operative today? To begin with, the introduction of new foreign technology has become less important, partly because of the buildup of Japan's own R&D capa bility, and partly because of the growing reluctance of foreign firms to make their technology available on license. Rapid production gains henceforth may become less likely, since such increases come more easily when based on proved tech nology than when dependent on the uncertain progress of new R&D. Thus, there are certain factors in herent in Japan's increasing eco nomic maturity that make it difficult to continue with a real growth rate of 10 percent a year. One expert who has analyzed all these factors — Harvard Professor Henry Rosovsky— argues that the growth of real GNP during this decade could decelerate to about 61 percent /i annually, but in view of the shock treatment the economy has received during the past several years, even that lowered growth rate might be difficult to reach in 1974. W illiam Burke 3 Digitized for FR A SE R Cost-push pressures could develop in modern industries should pro ductivity gains lag in the face of continued labor shortages and re duced returns from new investment. If real wages should then falter, more strike action could be ex pected along the lines of this spring's labor offensive. Large em ployers are very vulnerable to such strike action; they could lose for eign-trade contracts because of interrupted shipments, and could find it difficult to carry the large overhead caused by their heavy bank indebtedness. If cost-push pressures should then expand, Japan's export prices would be pushed upward, to add to the boost already imposed by yen revaluation. o uoiSuiqse/w • qein • uoSaJO • BpBAa|s| • oqepi neMBH • BjUJopje3 ♦ eu ozu y • b> |V jsb •|i|B3 'ODspuejj ucs ZSL ON ilWH3d aivd 3DVlSOd STI HVW SSV1D JL B S IJ BANKING DATA— TW ELFTH FEDERAL RESERVE D ISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Com m ercial Banks Loans (gross) adjusted and investments* Loans gross adjusted— Securities loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other Securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD's) Weekly Averages of Daily Figures Member Bank Reserve Position Excess Reserves Borrowings Net free (+ ) / Net borrowed (—) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases (+ ) / Net sales ( - ) Transactions: U.S. securities dealers Net loans (+ ) / Net borrowings (—) Amount Outstanding 5/22/74 Change from year ago Dollar Percent + + + + + + + + + + 82,593 64,324 1,231 22,979 19,173 9,241 5,216 13,053 77,969 21,303 466 54,997 17,874 27,109 7,347 14,142 Change from 5/15/74 + 9,704 + 8,794 54 + 2,720 + 3,028 + 935 - 633 + 1,543 + 6,838 + 938 - 412 + 6,248 - 359 + 6,807 - 305 +4,737 20 44 20 84 61 10 84 108 527 564 270 347 14 190 125 318 + + + + + + + + + + + 13.31 15.84 4.20 13.43 18.76 11.26 10.82 13.41 9.61 4.61 46.92 12.82 1.97 33.53 3.99 50.37 Week ended 5/22/74 Week ended 5/15/74 34 258 224 16 109 - 93 - + 1,213 + 872 + 320 + + 300 —255 - 403 Comparable year-ago period 54 71 17 *Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120* Phone (415) 397-1137. Digitized for FR A SE R
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