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M xm tkLii (Qmœux T WEL F T H FEDERAL RESERVE DI STRI CT FEDERAL RESERVE BANK January 1956 OF SAN FRANCISCO Review of Business Conditions . . . 1955 Retail Sales at a Record Level . 2 . 4 The United States— Japan Trade Agreement and Japan’s Foreign Trade . . . 7 Review of Business Conditions the opening month of the year the economy of the Twelfth District continued to reflect the record pace of activity generated during the previous year and a half. W hile the usual season al factors operated to slow activity in some lines, a further build-up in demand in other industries pushed total output and employment up some what further. Judging from recent nonseasonal declines in average weekly insured unemploy ment, m anufacturing and commercial activity entered new high ground in December and early January. Over-all strength is still the dominant feature of the economic scene, although softness in some segments has recently become more evi dent. Notably, residential construction and auto assembly show increasing tapering-off tenden cies and furnish the m ajor sectors of concern in both the District and the nation. Despite the evidence of a slowing down in busi ness expansion, the situation and outlook con tinue to be highly favorable. It is unlikely that gains in activity in the immediate future will in any way match the exceptional advances of late 1954 and early 1955; the advance should, how ever, be reasonably well sustained. The most re cent data on nonagricultural employment reveal that the demand for aircraft, metals, and ma chinery is still rising. Employment gains in these lines have been primarily responsible for off setting seasonal job losses in food processing and construction. Recent added strength in metal and machinery demand has stemmed from the record rate of business investment expenditures, which are expected to rise to even higher levels during the first quarter of the year. Additional growth in the rate of operations at District air craft and parts production facilities reflects in part the step-up in deliveries to the military establishment and partly the initial expansion in connection with the large volume of civilian air line orders placed in recent months. Some fur ther growth in the level of employment in the aircraft industries seems likely as a result of these factors and of the distinct possibility of n I 2 some net expansion in national security outlays by the Federal Government. Residential construction shows additional weakness Construction activity in the District shows in creasing signs of softness, although employment in the industry still remains considerably ahead of a year ago. The weakening is the result of a continued downtrend in new housing activity that started in late summer of last year. Sharp declines in the volume of V A appraisal requests and F H A applications for commitments indicate a probable further decline in new housing starts. (In 1955 somewhat more than one-half of the nation’s total new housing starts were financed with government-assisted m ortgages.) In De cember, appraisal requests received by District offices of the VA were only a third of the number received in December 1954. A t District F H A offices the number of applications received was some 32 percent below the year-ago number. W ith declines of these magnitudes in govern ment-assisted housing starts and with housing accounting for substantially more than one-third of total new construction, the other forms of con struction will be hard put to fill the gap. These other forms, particularly industrial, commercial, and religious and recreational, while still grow ing, have not expanded enough to offset com pletely the declines in private residential con struction expenditures. The ending of a strike in the building materials industry in Los Angeles (the largest single housing m arket in the nation) in early January will give a temporary lift to ac tual residential construction in the next several months. Nationally, private new housing starts fell slightly below a seasonally adjusted annual rate of 1.2 million units in December. This is a 20 percent decline from the exceptional peak of nearly 1.5 million units (seasonally adjusted annual rate) reached in December 1954. To counter the steadily declining trend of new hous ing starts the Federal Housing Authority and January 1956 MONTHLY REVIEW the Veterans’ Administration simultaneously extended the maximum m aturity allowable under their mortgage insurance or guarantee programs to 30 years from the 25-year maximum term imposed last summer. In a recent survey of District home builders, difficulty in qualifying buyers for F H A or VA mortgages under the 25-year m aturity maximum was cited as a m ajor deterrent to new residential construction. (Both F H A and VA impose a minimum acceptable ratio between buyer’s income and the monthly mortgage payment.) To the degree that lenders are willing to extend funds under the longer ma turity, the new mortgage terms will have an expansionary impact upon the level of new hous ing starts. Rise in new car stocks occasions cutbacks at automotive plants The number of new passenger cars in the hands of dealers throughout the nation at the start of the year was more than double the num ber on hand a year earlier. This large unsold inventory of 1956 model cars has caused a cut back in the rate of output at automobile plants in December and January in the nation. Prelim i nary reports from state employment offices in the two m ajor auto assembly areas of California indicate that the level of operations at District assembly plants has not yet been affected by the production cutbacks. There is little doubt that should dealer stocks increase further, District assembly plants will lower the level of operations and reduce employment from the record high reached in December. Nationally, one effect of automotive cutbacks has been a reduction in the current order file of the m ajor steel producers. The automobile in dustry accounted for some 25 percent of total steel output in 1955. Only a very small propor tion of the Twelfth District’s steel production is utilized in automobile production, however, so that the direct effect of auto cutbacks on District steel output will be negligible. Despite the piling-up of new car inventories, the industry is still operating at a high level. Ac cording to some industry sources 1956 output of new cars is expected to be as low as 6.3 mil lion units nationally— a decline of about 15 per cent from the record high of 1955. Severe storms interrupt outdoor activities but reconstruction will spur the economy Extrem e winter weather struck a wide area of the District in late December and early Janu ary. Heavy rainstorms interrupted normal ac tivities, particularly in construction, lumber, log ging and agriculture. In some areas, particu larly in N orthern California, considerable loss of property and extensive damage to production and commercial facilities was experienced. The rebuilding, repairing, and restocking of these areas will add to the already strong character of demand in the District. Emergency credit exten sions by Federal and state governments will help to make effective the demands created by the disastrous floods. In the lumber industry, the storms interrupted shipments and production to such an extent that temporary shortages have resulted. The effect of these shortages has been to arrest weakening tendencies in the prices for some types and grades of lumber. Logging operations were virtually at a standstill and, for those producers whose stocks of logs were already low, this could lead to an early shutdown in mill operations. Bank loan expansion continues but intensity of rise diminishes Like the rise in general business activity, the rise in business use of bank credit goes on but with diminishing intensity. A t weekly reporting member banks in the leading cities of the District, expansion in total loans in the four-week period ended January 11 was only about one-half the gain in the comparable period one year earlier. (It will be recalled that the late months of 1954 and early 1955 showed the exceptionally large gains typical of a vigorous upswing in economic activity.) The easing in the rate of rise of demand for credit combined with seasonal forces that tend to increase bank reserve positions after the Christmas season resulted in a modest decline in some money market rates in early January. Among the principal categories, loans to busi ness and agriculture show the greatest difference between the recent period and the same period 3 FEDERAL RESERVE BANK OF SAN F R A N C IS C O a year earlier. Loans to commercial, industrial, and agricultural enterprises increased $46 mil lion in the four-week period ended January 11 compared with a rise of $73 million in the like period a year earlier. O ther loans (comprised mainly of direct loans to consumers) decreased slightly, $4 million, during the recent four-week period; an increase of $6 million had occurred in the comparable interval a year before. Bor rowing by sales finance companies, included in the total of all business loans, was at record levels in the early weeks of January, suggesting that borrowing from consumer finance organizations is still vigorous in the District. Real estate loans, contrary to the national pat tern, increased somewhat more in the four-week period ended January 11 than at this time twelve months previous. The continued rise in real estate loans at weekly reporting member banks in the District reflects mortgages drawn to finance the sale of the large volume of residential units currently being completed. However, the declining trend in housing starts in late 1955, noted earlier in this Review, will lower the rate of completions in coming months. The effect will be less need for additional financing with a re sultant slowing in the extension of new real estate credit. 1955 Retail Sales at a Record Level TO TA L RETAIL SALES ADJUSTED FOR SEASONAL VARIATION B I L L I ONS the year just ended Americans spent record amounts at retail establishments. Taking ad vantage of their record high level of personal disposable income, easy consumer credit condi tions, and an abundance of available goods, con sumers went on a buying spree that brought total retail sales in the nation for 1955 to $186 billion, according to an advance report published by the United States Departm ent of Commerce. This amount represents a $16 billion, or 9 percent, increase over both 1953 and 1954. December’s retail sales reached an all-time monthly high of $19.4 billion, exceeding the year-ago month, the previous record high, by 9 percent and December 1953 by 18 percent.1 As is shown in Chart 1, total sales for each month of 1955 were above the com parable months of the two prior years. I C hart 1 OF D O L L A R S 1954 n Automobile sales lead national expansion UNITED S TA T E S 1 9 5 3 -1 9 5 5 Source: United States D epartm ent of Commerce, Office of Business Economics, Survey of Current Business. 4 All types of retail concerns benefited from the boom in consumer spending during the year. Automotive retailers experienced the greatest increase in sales activity, with increases of 21 percent above 1954 and 15 percent over 1953. The willingness of consumers to accept the offer of easy credit terms was one factor which played 1 All percentage change figures used in this article refer to compari sons between dollar volumes unadjusted for trading days or season ality unless otherwise stated. January 1956 MONTHLY REVIEW an im portant role in supporting this large in crease. From the end of November 1954 to No vember 1955 outstanding automobile consumer credit rose by $3,876 million, a 38 percent in crease. Sales of other durable goods retailers such as furniture and appliance stores and retail lumber, building, and hardware outlets also showed marked gains over the preceding two years. Among retail stores engaged in selling non durable goods the increases generally were not so marked as for durables. This is partly ex plained by the fact that soft goods sales were maintained at fairly high levels during 1954 in contrast to sales of durables which fell off abrupt ly. Gasoline service stations had the largest in crease in dollar volume of sales, rising 8 percent above 1954 and 18 percent above 1953. Con sumers have been steadily increasing their food purchases in the last few years, reflecting both their growing income level and the rising popu lation. During 1955 they spent almost $43 bil lion at retail food stores, a 5 percent rise above their 1954 purchases and 7 percent above those made in 1953. Sales of eating and drinking estab lishments also shared in this trend of consumer buying. General merchandise stores, including department stores, mail order houses and variety stores, experienced a 7 percent increase over 1954 and a 6 percent increase over 1953. D epart ment store sales, the m ajor component of this group, followed much the same trend as the total classification, rising 6 percent above 1954 and 5 percent above the two-year-ago period. Twelfth District retail sales also reach record highs Sales data available for the Twelfth District, which are not as comprehensive as those for the nation, indicate that retail sales in this area also reached new record high levels during 1955. The United States Department of Commerce esti mates of sales by all Group I retail stores1 located in the W estern States reveal that the over-all changes during the year paralleled those in the nation, although there were variations in the patterns of change from month to month. The 1 Group I retail stores are all single retail establishments or retail chains with not more than 10 outlets. C hart 2 A N N U A L INDEXES OF DEPARTM ENT STORE SALES 1947-1949 = 100% Note: 19SS data are preliminary. sharpest increase in this area, as was true nation ally, was reported by automotive dealers. According to preliminary data submitted to this bank, apparel store sales rose 5 percent above the 1954 dollar volume. F urniture stores had an even larger increase, gaining 16 percent during the year. Sales of furniture and appliances were also im portant in explaining the increase in District department store sales. Total depart ment store sales were 7 percent larger in 1955 than in 1954 and 5 percent above 1953. On a month-to-month basis the durable goods depart ments had larger percentage gains from the yearago month than did the total store and in most cases their gains exceeded those of the other de partments. The seasonally adjusted department store sales indexes for the Twelfth District and the nation as a whole varied in their rates of change on a month-to-month basis but had the same gen eral upward trend over the year as a whole. Chart 3 illustrates the fact that the national de cline in department store sales which began in 5 FEDERAL RESERVE BANK OF SAN F R A N C IS C O m id-1953 continued into the first part of 1954 while in the D istrict the decline in sales leveled off after December 1953. A fter May 1954 an up w ard tre n d o ccu rred and continued through October 1955 for both the nation and the District, bringing the seasonally adjusted indexes to new reco rd highs. A l though in the Twelfth Dis trict the seasonally adjusted index of departm ent store sales for November and De cember remained substan tially above the previous rec ord highs for these months, it was dow n from O c to ber. Nationally, the index did not decline. C hart 3 INDEX OF DEPARTM ENT STORE SALES UNITED STATES AND THE TWELFTH DISTRICT M ost cities within the District had larger de partm ent store sales for 1955 than for the com parable periods of either 1954 or 1953. The largest percentage increases occurred in Santa Monica, Riverside-San Bernardino, San Jose, Tacoma, and Salt Lake City. The Yakima area, with a 2 percent reduction in total sales, was the only area showing a decline between 1954 and 1955. However, Phoenix, downtown Los Angeles, San Diego, downtown Oakland, Val lejo, Stockton, Everett and W alla W alla each had smaller sales volumes in 1955 than during 1953. The failure of departm ent store sales in down town Los Angeles and Oakland to keep pace with the general increase reflects in large meas ure the establishment of shopping centers in the suburban areas surrounding these cities. One of the distinctive features of the postwar period has been the movement of industries and families into the suburbs of the larger cities. Taking ad vantage of the growth of these areas, specialty shops of all types have opened and attracted cus tomers away from the downtown areas. In order to counteract this loss of business, many depart 6 ment stores also opened branches in these areas. This dispersion trend is especially noticeable in the Los Angeles area. However, the San F rancisco-Oakland area within the past few years has also participated in this movement, with many m ajor department stores opening branches or announcing future expansion in the suburbs. In the other areas of the D istrict this trend is also important, though not as prominent as in the m ajor California metropolitan areas. Christm as sales by departm ent stores give evidence of continued rise in sales for year The record level of D istrict departm ent store sales evident in the first 11 months of 1955 con tinued through December according to weekly sales data reported to this bank. Christmas buy ing, measured by activity during the four weeks ending December 25, was up 5 percent over the previous record high, year-ago period. M ost of this increase can be attributed to purchases made during the week ending on the 24th when, owing in part to an extra trading day this year, sales were 18 percent above the same week of 1954. Total sales in the four-week period preceding Christmas week were 2 percent above what they were a year ago. All metropolitan areas in the District recorded gains during the four-week January 1956 MONTHLY REVIEW pre-Christmas period ranging from 1 percent in downtown Los Angeles to 8 percent in the San Jose and Portland areas. The buying spree, which usually tapers off after Christmas, continued through the end of December. In the last week of the year depart ment store sales were 8 percent above the same week of 1954. Sizable increases were especially noticeable in N orthern California, Seattle, and Portland. The United States —Ja p a n Trade A greem ent and Ja p a n ’s Foreign Trade The United States-Japam ese Trade Agreem ent n September 10, 1955 the United States- O Japanese trade agreement went into effect, culminating several months of negotiations by Japan with the United States and sixteen other countries at Geneva under the terms of the Gen eral Agreement on Tariffs and Trade.1 Earlier in the year, in June, the document providing for the accession of Japan to full-fledged member ship in the General Agreement was opened for signature. By August 11 all 34 members of the G A T T had approved Japan’s admission, super seding her previous status as a provisional mem ber of that group. U nder the provisions of the General Agreement, the tariff schedules of the various member nations became applicable to Japan thirty days after Japan’s entrance. F our teen nations, however, who did not enter into tariff negotiations with Japan, invoked Article 35 of the General Agreement reserving their right to withhold their tariff concessions from Japan because of expressed uncertainties regarding Japan’s trading practices.2 Japan’s entry into the General Agreement had been strongly supported by the United States on both economic and political grounds. Japan’s membership would assist in the expansion of her foreign trade upon which the viability of her 1The other nations were Burma, Canada, Chile, Denmark, Domini can Republic, Finland, West Germany, Greece, Indonesia, Italy, Nicaragua, Norway, Pakistan, Peru, Sweden, and Uruguay. 2 These countries were Australia, Austria, Belgium, Brazil, Cuba, France, H aiti, India, Luxembourg, the Netherlands, New Zealand, the Rhodesian-Nyasaland Federation, the Union of South Africa, and the United Kingdom. The United Kingdom, Austria, India, the Netherlands, Belgium, and Luxembourg, however, already ex tend most-favored-nation treatm ent to Japan under other arrange ments. economy so largely depends. Principally for this reason the United States took part in the Geneva negotiations and urged other nations to follow her lead. W ithout the benefits to be derived from G A TT membership, furthermore, it was feared in some quarters that Japan would be greatly tempted to increase her trade with the communist-bloc nations. Despite the lack of unanimity in the extension of G A TT concessions to Japan, Japan was able to obtain concessions from the United States and other countries with which she negotiated on items in which she had a substantial interest. These countries in turn received concessions on their exports to Japan. The tariff negotiations The United States participated in the tariff negotiations with Japan under the authority of the Trade Agreements Extension Act of 1954, which extended for one year the President’s au thority to reduce existing tariffs by 50 percent of the 1945 levels. In accordance with the usual procedure in these negotiations, concessions were exchanged on a reciprocal basis, and the United States was governed by the “peril point” findings of the Tariff Commission determined after public hearings. The United States ad hered to the practice of granting concessions to a country only where that country was the “prin cipal supplier” of the commodity under consid eration, although the United States herself was not the “principal supplier” of all the commodi ties on which she obtained concessions. The United States delegation also paid particular at 7 FEDERAL RESERVE BANK OF SAN F R A N C IS C O tention to the problem of possible “substandard wage” exports by Japan. A new feature of the agreement was the use of triangular or third-country negotiations, a method introduced in an effort to increase the possibilities for concessions by the participating countries. The United States was empowered to offer concessions to third countries in exchange for concessions by them to Japan.1 The United States in turn was compensated by equivalent concessions granted by Japan on United States imports into Japan. This method was resorted to, however, only after all avenues of bilateral negotiation had been exhausted. Jap an ese concessions to the United States The 286 items on which Japan granted con cessions accounted for $397 million of the $760 million of goods imported by Japan from the United States in 1953.2 Seventy-eight percent of these concessions resulted in duties below 30 percent (including duty-free items) and 57 per cent below 20 percent. The concessions took two form s: duty reductions and bindings of tariff treatm ent (agreement not to change either the existing tariff level or duty-free treatm ent). T ariff reductions on United States commodi ties imported into Japan covered shipments to taling $61 million. Almost 60 percent of this total involved reductions of less than 25 percent, with medium and heavy passenger automobiles the most im portant ($24 million in imports in 1953). O ther leading commodities whose tariffs were reduced by more than 25 percent included lubricating oils and greases, certain types of sta tistical machines and parts, four-engined air planes, vitamins and vitamin preparations, meas uring and testing instruments, tetraethyl lead, tomato paste and puree used in fish exports, fresh lemons, limes, and raisins. The tariff status of certain other commodi ties, whose imports were $334 million in 1953, was bound under the agreement. Bindings of statutory rates affected commodities totaling $140 million, with imports of soybeans the prin cipal item. Beef tallow, corn for feedstuffs, cer xThe countries involved in triangular negotiations with the United States and Japan were Canada, Sweden, Norway, Denmark, Italy, and Finland. 2 Based on Japanese trade statistics. 8 tain metalworking machines, airplanes with less than four engines, raw petroleum coke, and cer tain antibiotics were among the other significant commodities in this group. Japan also granted bindings of duty-free treatm ent for imports of $195 million, including raw cotton imports of $122 million and coking and other types of coal, $66 million. Only one commodity, exposed cinemato graphic film, became subject to a somewhat higher tariff, but only because of a changeover from an ad valorem to a specific tariff to facili tate computation of the customs duty. A t the present time, not all imports from the United States into Japan are assessed the rates in the published tariff schedules. Duty-free spe cial treatment has been accorded to quite a few items to promote economic development or to encourage exports. F or these commodities, Japan agreed either to bind the special duty-free treatm ent or not to increase the tariff beyond the statutory rates. Under the new trade agreement, United States exporters may be able to increase their exports to Japan, although Japan herself is a net exporter of some of the items on which the concessions were granted. According to the Department of State’s analysis of the agreement, the two com modities which may offer the greatest potenti alities are heavy-duty motorcycles and those types of synthetic fiber fabrics included in the negotiations which are produced only in small quantities in Japan. United States concessions to Ja p an The United States granted concessions on commodities whose imports into the United States totaled $179 million in 1954; concessions granted directly to Japan covered $131 million of this total.1 The concessions were essentially similar to those granted by Ja p a n : reductions in rates ($81 m illion), bindings of existing rates ($53 m illion), and bindings of duty-free status ($45 million). As mentioned above, these con cessions were extended on items of which Japan was the principal supplier. In general, the con cessions on dutiable products were made on commodities which were either (1) not pro 1 Based on United States trade statistics. January 1956 MONTHLY REVIEW duced in the United States in large volume, (2) not strictly comparable to the United States products, (3) relatively unim portant in United States import trade or where the United States was a net exporter, or (4) on lowr valued prod ucts (e.g., certain classes of china ware and earthenw are). Nevertheless, some of the concessions may affect adversely some segments of certain indus tries in the United States. Protests have been voiced, for example, by the tuna fishing, cotton textile, and earthenware and chinaware indus tries. Various other industries, especially those producing lower-priced articles, may also ex perience new or added competition in domestic markets from reductions in the tariffs. Tariff concessions may also operate to the advantage or disadvantage of United States exporters, im porters, or users of imported materials, and of producers, importers, and exporters abroad. At the same time, there are considerations of na tional policy which must be taken into account, such as the repercussions of any particular ac tion on general economic conditions in the United States or on our international relation ships. In the case of the tariff concessions on differ ent types of tuna, diverse factors must be con sidered. There are the domestic canners who de pend on imported tuna for their supplies but who may be affected by the lower tariffs on canned tuna. There are the domestic fishing fleet oper ators who have long opposed the free list status of fresh and frozen tuna on the grounds that lower foreign labor and capital costs have made competition difficult. From still another view point, Japan, which supplies the bulk of im ported albacore, derives a significant share of her dollar earnings from exports of this whitemeat tuna. The cotton textile industry provides another instance of conflicting interests. The cotton tex tiles affected by the recent tariff negotiations are primarily the low-priced, low yarn count cot ton materials which are of greatest importance to the Japanese textile industry. In the negotia tions with Japan, the rates applicable to the higher count categories were applied to the lower valued textiles, resulting in an average re duction of 25 percent in the tariff level.1 A rgu ments have been advanced by domestic produc ers against these reductions, reinforced by the re cent sharp increases in imports of Japanese cot ton textiles. The domestic cotton textile industry is highly fearful of the inroads which are being, and may continue to be, made in their traditional markets, both in the United States and abroad. The difference in wage costs per hour is fre quently cited as one cause of complaint. Al though imports are less than 1 percent of do mestic production, these domestic manufactur ers feel that the Japanese products will be able to compete effectively and in large volume in cer tain lower priced sectors of the market. Im port ers of Japanese-made cotton cloth and articles of clothing, however, favor the tariff reductions. Furtherm ore, Japan is a m ajor market for United States raw cotton exports. And, as in the case of tuna, cotton textile exports are an im portant, although declining, earner of foreign ex change for Japan. Similar considerations are in volved in the chinaware and earthenware cases. Evaluation of Ja p a n 's entry info GA TT and the trade agreements Japan’s entry into G A TT should prove advan tageous to her in several respects. Because for eign trade is so important to the Japanese econ omy, measures to expand the volume of Japan ese trade will aid in raising her level of eco nomic activity. Many of Japan’s m ajor export industries rely upon foreign sources of supply for the raw materials needed in the process of production. Furtherm ore, with the decline in the United States special procurement and aid ex penditures in Japan, which have contributed to a significant extent in meeting Japan’s overseas dollar obligations, Japan must find other means to finance her large volume of imports. Membership in G A TT, moreover, should as sure continued favorable, or improved, treatment for Japanese commodities abroad through appli cation of most-favored-nation treatment for tariff concessions. The inclusion of Japan in G A TT will also provide opportunities to use G A TT as a 1United States Department of State, General Agreement on Tariffs and Trade, Analysis of Protocol (Including Schedules) for Acces sion of Japan, Publication 5881, Commercial Policy Series 150, p. 69. 9 FEDERAL RESERVE BANK OF SAN F R A N C IS C O forum for discussion of mutual problems and as a means of reconciling differences in trade prac tices and policies. The actual immediate benefits derived by Japan from G A T T membership and from the trade agreements recently concluded have been weakened, however, by several developments. One is the invocation of Article 35 of the Gen eral Agreement reserving the right of any of the contracting parties to withhold tariff conces sions from countries with which it has not nego tiated. U nder this article the application of mostfavored-nation treatm ent is suspended. An at tempt was made to modify the stand of some of these countries at a recent G A TT meeting, backed by Japanese assurances of adherence to the principles of fair trade, but it proved unsuc cessful. In the meantime, the Japanese Govern ment announced the introduction of a certificateof-origin requirement for imports which is now in effect. This system will enable Japan to apply most-favored-nation treatm ent only to those countries which have declared their willingness to accord similar treatm ent to Japan. The composition of the trade parley at Ge neva, furthermore, constituted a limiting factor in the scope of the trade concessions offered. A l though the participating countries accounted for approximately half of Japan’s import trade, they took only 26 percent of her exports. As a con sequence, the possible range of concessions was narrowed considerably. Many of these countries exported raw materials to Japan and imported manufactured articles. The exchange of bindings or reductions in already low Japanese import tariffs on raw materials for lower tariffs on im ports of Japanese manufactured goods was not considered adequate in many cases. Some of these countries were reluctant to grant significant con cessions to Japanese goods which competed with similar industries at home. The United States was also unable to offer her services in triangu lar negotations in this regard because her pat tern of trade with these countries was similar to that of Japan. Nevertheless, the trade conces sions extended are a starting point towards the reintegration of Japan into the community of trading nations of the free world. 10 Japan’s Foreign Trade The conclusion of the first round of tariff ne gotiations with Japan bolstered Japanese hopes for an improvement in her balance of payments position. H er admission to G A TT, although qualified, has also been considered a milestone in her program for an expanded volume of for eign trade. Two factors make the attainm ent of this objective a m atter of utmost importance to Japan. In the first place, foreign trade has al ways played a strategic role in the Japanese econ omy. In 1937, for example, Japanese exports ac counted for 17 percent of national income while imports wrere about one-fifth of national income. Comparable figures for the past several years are somewhat less than 10 percent for exports and around 14 percent for imports. Failure of Japan’s trade in the postwar period to contrib ute its prewar share to national income has an important bearing on the health of the Japanese economy at the present time. Exports, moreover, account for an appreciable share of total produc tion of many Japanese industries. Secondly, Japan has been running a substan tial deficit in her balance of trade and services with the rest of the world, with a high of $1,028 million reached in 1953.1 A large part of this de ficit was accumulated in transactions with the dollar area, especially the United States. In 1954 Japan had an unfavorable balance with the United States on merchandise trade alone of $400 million, slightly below the 1953 record fig ure. P art of the over-all current account deficit has been met by drawing down of exchange re serves or the extension of dollar and sterling usance credits. But the m ajor share of the deficit has been paid for by United States and United Nations special procurement programs, which consist mainly of purchases of goods and services for military operations and defense support activ ities in the F ar East. As a result of these pay ments, the Japanese balance of trade and services showed an over-all deficit of only $226 million in 1953 and $80 million in 1954. But expenditures for United States special procurement programs have been declining since the 1953 peak so that Japan can no longer rely almost exclusively upon *Not including the category “ Government, n.i.e.” which consists primarily of goods purchased by United Nations forces under the special procurement program. January 1956 MONTHLY REVIEW this source to fill the gap. The improvement in the balance of payments in the latter half of 1954 continued into 1955. F or the first six months of 1955, an over-all surplus of $2 million (includ ing special procurement receipts)1 was attained, compared to a deficit of $351 million for the same period in 1954. F or the year as a whole it has been estimated that Japan’s balance of payments may be even more favorable, principally because of a record level of exports. Nevertheless, the volume of Japanese m er chandise trade in the postwar period has proved disappointing although the physical volume of exports has increased almost eight times and the volume of imports almost three and a half times since 1948. Despite this spectacular increase, the volume of Japanese imports in September 1955 was still 31 percent below the 1934-36 monthly average, while exports were 41 percent below the prewar level. Imports increased sharply from 1950 to 1954, but exports lagged behind. As a consequence, merchandise imports continue to exceed exports by a substantial margin. The signing of the United States-Japanese trade agreement therefore seems to be a favor able development for Japanese trade. But the mere removal or reduction of tariffs and other restrictions to a freer flow of trade is not the only necessary, or sufficient, condition for the solution of Japan’s balance of payments prob lems. The causes of this imbalance are more deep-seated and are the consequence of post war developments that have modified the struc ture of the Japanese economy and the econo mies of other nations. The prew ar and postwar pattern of Ja p an ese foreign trade The pattern of Japan’s foreign trade has changed radically since the prewar period. Be fore W orld W ar II, a large volume of Japan’s trade was conducted with areas under her eco nomic or political control—such as Manchuria, the Kwantung Peninsula, Formosa, and Korea. These areas and the countries of southeast Asia furnished rawT materials for Japanese industry 1Or a deficit of only $235 million if special procurement receipts are excluded. and food supplies and obtained manufactured producers’ and consumers’ goods from Japan. This pattern was completely disrupted after W orld W ar II. The mainland of China is not as important as before in Japanese import trade and no longer serves as a m ajor outlet for Japanese exports or capital. The countries of southeast Asia are engaged in economic and industrial de velopment and are hesitant to become too de pendent on trade with Japan. Moreover, Japan has lost some of her overseas markets because Japanese industry has fallen behind competi tively. The requirements of a growing population have, in addition, increased the importance of food imports, although industrial raw materials still bulk large in import trade. Japan’s earnings on her service accounts (principally transporta tion and insurance services), which formerly produced a surplus, have also been adversely affected. Consequently, the customary merchan dise deficit cannot be offset by earnings from services or returns from investments. Efforts to expand Japanese exports to elim inate the deficit have been impeded by the non competitive prices of Japanese products due to high production costs and various trade restric tions. Obsolete equipment, technological prob lems, the high price of imported raw materials, and inflation at home have all contributed to the high cost of production. The cost-price situation also largely explains the failure of many Japan ese industries to undertake programs of mod ernization and rationalization upon which a lower cost schedule depends. In addition, trade barriers to Japanese exports have often been uti lized for economic or political reasons— either as a defense against alleged unfair trading prac tices or as a means of forcing a reparations settlement. Indonesia, for example, has attempted to apply outstanding trade credits due to Japan to her reparations claims. Japanese trade with Korea has also been partly obstructed by political factors. Recent developments in the Japanese econom y In the immediate postwar period, Japanese in dustrial production was less than one-third of the 1934-36 average, and economic activity was at a low ebb. By 1948, the index of industrial 11 FEDERAL RESERVE BANK OF SAN F R A N C IS C O production had risen to only slightly more than 50 percent of the 1934-36 level. By 1951 the in dex had reached 115 because of the revival of economic activity due to the war in Korea. But there were still many problems facing the Jap anese economy.1 Inflation has been one of the principal prob lems confronting the Japanese economy, distort ing the pattern of industrial production and crippling Japan’s ability both to export and to increase domestic production in the essential sectors. Inflation was partly arrested by the Dodge plan introduced in 1949, at the expense of dampening economic activity. The stimulus provided by the outbreak of the Korean war in 1950, however, set off another round of infla tionary increases. From the end of 1950 to the end of 1953, the money supply rose by 82 per cent, from 789 billion yen to 1,439 billion yen. To combat this rapid increase, the Japanese Government initiated a disinflationary program in October 1953. The Bank of Japan’s special penalty rates were raised and certain preferential rates were abandoned. Commercial banks also raised their rates on loans. The Bank tried to increase the spread between the rediscount rate and market rates of interest in order to make central bank policy more effective. Since the dis inflationary policy has gone into effect, commer cial bank credit has continued to expand, al though at a somewhat slower rate. A retrenchment program was also introduced at the Treasury in the latter half of 1953 in order to minimize the expansionary tendencies arising from fiscal operations. The restrictive fiscal pol icy was of little practical effect, however, because of the carry-over of Treasury expenditures into fiscal 1954 from 1953 and some decline in rev enue due to a lower level of economic activity. The supply of funds was further augmented by strong export demand conditions (all foreign exchange transactions pass through the T reas ury) and unusually large Government payments for the rice, wheat, and barley crops.2 The effects J For a more detailed account of the immediate postwar period, see the supplement to the M onthly Review, “ Problems of Trade Re covery in Jap an ,” October 1950. 2 Japan maintains a purchase program a t a fixed price for the domes tic rice crop, with bonus payments for early or over-quota deliv eries by producers. A similar program for wheat and barley is no longer in effect, but the Government stands ready to buy the do mestic output. 12 of the export boom and a bumper rice crop have continued to be felt in fiscal 1955 (which ends M arch 31, 1956) and will increase Treasury payments to the public. In recent months, the general credit situation has improved as commercial bank indebtedness to the Bank of Japan has been reduced and sur plus funds have been absorbed. But the repay ment of advances has not been of sufficient mag nitude to offset the effects of the cash deficit of the T reasury. The effects of inflation on Ja p a n 's export position The existence of inflationary pressures during the greater part of the postwar period reacted un favorably on Japan’s balance of trade by discour aging exports and encouraging imports. The small and medium-sized firms were particularly hard hit by this development because many of them depend heavily on export markets. F u rth er more, the costs of modernization programs for such firms were too high, so that many of them had to operate at less than optimum efficiency. Consequently the competitive export position of these companies—and of Japan—was weakened. Although the current export boom and stabiliza tion of Japan’s internal economy have improved the situation for these smaller firms, they still present a problem for Japan in the longer run. The high cost of imported raw materials, especially since 1950, has also made Japanese postwar exports less competitive than in the pre war period and has been detrimental to Japan’s foreign exchange position. This is true in the case of Japanese iron and steel products, where the recent world-wide shortage of scrap iron forced prices up, and in the shipbuilding industry which relies on Japanese steel to fill foreign and domestic ship orders. The decline of iron and steel and cotton textile prices in 1954 which accompanied the deflationary credit policies strengthened Japan’s exports in these two cat egories, however. Prospects for Japan’s Foreign Trade The future of Japan’s trade depends on inter nal and external factors. The maintenance of a January 1956 MONTHLY REVIEW high level of economic activity is her paramount concern. A t the present time, the money supply has contracted from the 1954 high and industrial production is rising. M anufacturing production has made somewhat greater progress than min ing. Employment, however, has declined, mostly in industries holding special procurement con tracts. A lower level of demand for capital goods, a reduction in mining employment because of a rationalization law, and additions to the labor force have increased unemployment. The do mestic demand for both funds and goods has stayed relatively stationary, but costs remain high. Nevertheless, economic conditions are gen erally good. On the international scene, unrestricted G A TT membership and limited sterling con vertibility (for non-residents) would help Jap anese exports. Promotion of exports through Government loans and other aid and through private organizations would also benefit foreign trade. But problems still remain to be solved in Japan’s trade with certain areas and in certain commodities. Trade with the United States Trade with the United States accounts for slightly more than one-fourth of Japan’s total trade by value. About one-third of Japanese im ports are from the United States, while some what more than one-fifth of her exports are shipped to this country. Japan’s postwar trade deficit with the United States has not been offset by earnings from merchandise trade with the rest of the world as was the case in the prewar period. Japan’s postwar merchandise deficit with the United States, moreover, has been much larger than prewar, both absolutely and relatively, with the exception of 1955. F or the first ten months of 1955, the trade deficit was less than half the total of a year earlier. Trade between Japan and the United States is important to both countries. About two-thirds of Japanese imports consist of agricultural com modities, of which the United States supplies about one-third. Japan is also one of the two most im portant markets for United States agri cultural exports, with cotton and rice the prin cipal commodities.1 Because of the anticipated decline in special procurement contracts, Japan may be com pelled e ith e r to seek nondollar sources for goods now purchased from the dollar area (mainly from the United States) or to in crease her dollar exports. The latter alternative presents some difficulties, for while United States exports to Japan are more or less essential in character, many imports from Japan may be sensitive to any recessionary tendencies that may occur in the United States. Trade with Asia Expansion of trade with other countries of Asia will help to improve Japan’s over-all balance of payments. Japan has the advantages of geo graphical proximity, and an economy which can produce goods more adapted to Asian markets— goods simpler in construction and requiring less capital. The recently-won independence of sev eral Asian nations also favors a larger volume of trade with Japan, although some of these coun tries continue to maintain traditional ties with their former mother countries. Japan has sought to promote trade with Asia through a series of economic cooperation agree ments providing for the mutual exchange of goods and technical services. These agreements will help to build up markets for Japanese prod ucts and develop nearby sources of raw mate rials. On the debit side, however, can be counted Japan’s failure to conclude reparations agree ments with certain Asian countries. Japan pre fers technical aid or service-type reparations which would make less demand on Japan’s phys ical resources, while the claimants prefer pay ment in goods. Since many of the Asiatic countries can be clas sified as “underdeveloped,” however, there is an element of uncertainty in trade with them. Like many countries in similar circumstances, they may be subject to wide, and sometimes violent, fluctuations in their balance of payments which would affect Japan’s trade adversely. Some Jap anese products will also encounter greater com petition from similar industries established in these countries, e.g., the textile industry. The 1 For the 1954-55 crop year, the United Kingdom resumed its pre war importance as the United States’ largest market for farm prod ucts, but for the previous three years, Japan was in first place. 13 FEDERAL RESERVE BANK OF SAN F R A N C IS C O difficulties which these conditions pose for Japan might be avoided to some extent were the Japa nese to concentrate on those industries using more capital per unit of labor, such as the heavy machinery and machine tool industries, which could supply a substantial overseas demand. regarding the shipping of strategic goods to pro scribed areas also limit the types of goods Japan can ship. In addition, trade with Form osa is im portant to Japan, and she risks loss of this trade if trade with mainland China increases substan tially. Trade with the sterling area Trade by commodity In 1954 Japan shipped 30 percent of her ex ports to the sterling area and obtained 19 per cent of her imports from that area. This sub stantial volume of trade was carried on prin cipally with the overseas sterling area. Since 1951, Japan’s trade with the sterling area has been highly erratic. An import balance on cur rent account in 1952 and 1953 was succeeded by a surplus of $156 million in 1954. In early 1955 Japan was still accumulating sterling. Because of failure to agree upon mutual liberalization of trade, the Anglo-Japanese payments agreement, under which sterling area trade had been con ducted, expired on June 30, 1955. Discussions were continued, however, and the pact was fi nally renewed in October 1955. A higher, bal anced level of trade around $630-$700 million each way was set for the ensuing year. Trade between Japan and the sterling area countries, especially those of the F ar East, is ad vantageous to both participants. Each is a good market for the other’s goods, although there will be increasing competition in the textile trade. Japanese goods may also compete with the ster ling area in third markets such as Latin America and the other countries of southeast Asia. Commodity-wise, Japan’s future trade picture is varied. A t the present time, Japan’s fastestgrowing export commodities are machinery, iron and steel products, spun rayon, chemical fertili zers, and sundry goods. Although cotton textiles are still Japan’s leading export, recent develop ments at home and abroad will probably prevent expansion along this line. A high level of domes tic output depressed cotton textile prices, result ing in a Government advice to curtail production in order to prop up the market. M arketing of Japan’s textiles overseas, moreover, has been meeting increasing opposition from other cotton textile manufacturers. In an attem pt to allay their fears that Japanese goods will flood their markets, the Japanese Government has ordered production cuts and export quotas for the cur rent year and is considering some sort of link system between raw cotton imports and textile exports. But whether these steps will be adequate remains to be seen. The governing factor for Japanese imports in the longer run will be the requirements of Japan’s economic development program. E x ports will have to be expanded to the necessary level to pay for industrial raw material imports. Foreign exchange budget allocations, the avail ability of import financing, and the level of im port demand will affect imports in the shorter run. Food imports will probably remain steady and fairly large in volume in the immediate fu ture because of continued population growth and limited land resources. The United States agri cultural surplus disposal program may also con tribute to the expansion of farm exports to Japan. Japan is trying, however, to reduce the drain on her foreign exchange reserves from this source. Trade with Communist China A further and more rapid expansion of trade between Japan and Communist China has some times been proposed as a partial solution to Ja pan’s trading problems, but the private trade agreements so far concluded have been unsatis factory. In many cases the commodities available are not those desired by the other trading partner. The restrictions imposed on Japan by virtue of her participation in the C H IN C O M 1 agreements 1 CHINCOM (China Committee) is a subcommittee of a larger, in formal international body known as the Consultative Group. This group, composed of the major free world trading nations, coordinates the strategic trade controls of these countries over the movement of goods to the Soviet bloc, including China. 14 January 1956 MONTHLY REVIEW B U S IN E S S IN D E X E S — TW EL FT H DISTRICT* (1947-49 a v e r a g e s 100) T o ta l nonagri- T o ta l C a r Retail D ep’t c u ltu ra l m f ’g loadings store food E le c tric e m p lo y e m p lo y (n u m sales prices 3, 4 C opper3 power m ent m ent be r)2 (v a lu e )2 In d u s tria l p ro d u c tio n (p hys ic a l v o lu m e )2 Year and m o n th Lum ber P e tro le u m 3 C ru d e R efin e d C e m e n t Lead3 1929 1933 1939 1946 1947 1948 1949 1950 1951 1952 1953 1954 95 40 71 80 97 104 100 113 113 116 118 112 87 52 67 94 100 101 99 98 106 107 109 106 78 50 63 91 98 100 103 103 112 116 123 119 54 27 56 81 96 104 100 112 128 124 130 132 165 72 93 70 94 105 101 109 89 86 74 70 105 17 80 71 106 101 93 115 115 112 111 101 29 26 40 78 90 101 108 119 136 144 161 173 1954 Novem ber D ecember 121 133 104 105 119 119 132 132 73 69 116 114 1955 Jan u a ry F ebruary M arch April M ay June Ju ly August Septem ber O ctober N ovem ber 137r 136 123 121 120r 122 119 123 118 116r 110 105 105 106 106 106 106 106 106 106 105 106 116 122 120 118 115 120 128 127 132 129 123 119 131 137 149 155 153 157 160 159 155 128 74 76 82 77 78 76 72 67 69 71 118 130 130 127 131 129 40 91 128 131 128 W a te rb o rn e foreign trade3*5 E x p o r ts Im p o rts 95 99 102 99 103 112r 118 121r 120 ’ 55 97 100 102 97 105 120r 130r 137r 134r 102 52 77 101 106 100 94 97 100 101 100 96 30 18 31 91 99 104 98 105 109 114 115 113 64 42 47 80 96 103 100 100 113 115 113 113 190 110 163 89 129 86 85 91 186 171 140 131 124 72 95 57 81 98 121 137 157 200 308 260 177 173 122r 122 136r 137r 98 106 115 118 111 111 118 113 196 313 173 179 188 191 189 200 191 196 196 197 206 123r 123r 124r 124 125r 125 125 126 126 126 128 137r 138r 139r 140r 140r 142r 141r 142r 141r 142r 144 106 99 103 105 110 111 99 106 107 104 98 125 118 118 120 118 118 123 122 126 126 125p 112 112 112 113 113 112 113 111 112 112 112 163 184 163 149 162 152 171 189 174 152 287 263 240 290 280 299 368 349 363 B A N K IN G A N D CREDIT STA T IST IC S— T W EL FT H DISTRICT (amonnts in millions of dollars) M e m b e r ba nk reserves and related iteims C o n d itio n item s of all m e m b e r banks6 Year and m o n th U .S . Loans and G o v ’t d is c o u n ts s e c u ritie s Dem and T o ta l deposits tim e a d ju ste d 7 deposits B an k rates on short-term business loans8 Factors affecting reserves: Reserve bank cre d it9 _ — 1929 1933 1939 1946 1947 1948 1949 1950 1951 1952 1953 1954 2,239 1,486 1,967 4,068 5,358 6,032 5,925 7,093 7,866 8,839 9,220 9,418 495 720 1,450 8,426 7,247 6,366 7,016 6,415 6,463 6,619 6,639 7,942 1,234 951 1,983 8,821 8,922 8,655 8,536 9,254 9,937 10,520 10,515 11,196 1,790 1,609 2,267 5,797 6,006 6,087 6,255 6,302 6,777 7,502 7,997 8,699 3.20 3.35 3.66 3.95 4.14 4.09r 1954 December 9,422 7,973 11,158 8,663 4.01 1955 Jan u ary F ebruary M arch April M ay June July August Septem ber O ctober November December 9,510 9,612 9,696 9,657 9,810 10,102 10,191 10,392 10,559 10,665 10,931 11,115 7,998 7,693 7,390 7,756 7,690 7,446 7,557 7,407 7,375 7,487 7,238 7,298 11,246 10,945 10,733 11,060 10,951 11,023 11,212 11,163 11,312 11,465 11,665 11,876 8,725 8,765 8,837 8,833 8,885 9,026 8,995 9,021 9,054 9,067 9,005 9,084 34 2 2 + 9 + 302 17 + 13 + 39 + 21 7 + — 14 2 + 0 — 3.98 + + + — 3.99 + + 4.17 + 4.25 + + — — 34 15 10 60 55 27 10 23 17 43 46 8 C o m m e r c ia l1« T reasuryw 0 - 110 - 192 -1 ,6 0 7 - 510 -b 472 - 930 -1 ,1 4 1 -1 ,5 8 2 -1 ,9 1 2 -3 ,0 7 3 -2 ,4 4 8 23 + + 150 + 245 + 1 ,329 + 698 482 + 378 + 1 ,198 + 1 ,983 + 2 ,265 + 3 ,158 + 2 ,328 - 127 + 175 — + - 150 26 401 306 51 449 193 253 148 245 81 434 + 77 57 362 261 195 429 217 200 276 174 205 417 + + + + + + + + + M o n e y in c irc u la tio n 9 _ _ Ba n k debits Index 31 cities3*m Reserves11 (1947-49= 100)2 6 18 31 + — 326 206 _ 209 _ 65 — 14 + 189 + 132 39 30 175 185 584 2,094 2,202 2,420 1,924 2,026 2,269 2,514 2,551 2,505 42 18 30 86 95 103 102 115 132 140 150 153 23 2,505 174r 79 13 1 15 50 35 9 8 18 15 18 17 2,481 2,447 2,418 2,432 2,476 2,439 2,495 2,415 2,541 2,417 2,575 2,530 161 166 177 165 170 178 166 177 173 171 181 183 - _ + + + + + + + + 1 A djusted for seasonal variation, except where indicated. E xcept for d epartm ent store statistics, all indexes are based upon d a ta from outside sources, as follows: lum ber, N ational Lum ber M anufacturers Association and U.S. B ureau of the Census; petroleum , cem ent, copper, and lead, U.S. B ureau of M ines; electric power, Federal Power Commission; nonagricultural and m anufacturing employm ent, U.S. B ureau of Labor S tatistics and cooperating state agencies; retail food prices, U.S. B ureau of L abor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. B ureau of th e Census. 2 D aily average. 3 N ot adjusted for seasonal variation. 4 Los Angeles, San Francisco, and Seattle indexes combined. 5 Commercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and W ashington cus tom s districts; startin g w ith Ju ly 1950, “ special category” exports are excluded because of security reasons. 6 Annual figures are as of end of year, m onthly figures as of last W ednesday in m onth. 7 D em and deposits, excluding interbank and U.S. G ov’t deposits, less cash item s in process of collection. M onthly d a ta p artly estim ated. 8 Average rates on loans made in five m ajor cities. 9 C hanges from end of previous m onth or year. 10 M inus sign indicates flow of funds out of the D istrict in the case of commercial operations, and excess of receipts over dis bursem ents in the case of T reasury operations. 11 E n d of year and end of m onth figures. 12 D ebits to to ta l deposits except interbank prior to 1942. D ebits to dem and deposits except U.S. G overnm ent and interbank deposits from 1942. p— Prelim inary. r— Revised.
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