JAPAN: EXPORT RELIANCE AND ECONOMIC GROWTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001001090001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: August 20, 2010
• Sequence Number: 1
• Publication Date: November 28, 1984
• Content Type: MEMO

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
28 November 1984
Japan: Export Reliance and Economic Growth
Summary
Foreign demand--in particular exports to the
United States--has provided the lion's share of
Japan's recent economic growth, in sharp contrast to
most other postwar Japanese recoveries. With
foreign demand slowing, Tokyo is now looking to
domestic demand to pick up the slack. In recent
months the domestic sector has strengthened somewhat
with increased investment spending, but consumption--
which makes up.over half of GNP--remains weak, and
some analysts in..Tokyo are concerned investment
could decline when net exports drop off. Fiscal
policy is constrained by the persistent budget
deficit, leaving Tokyo in the short run with limited
options to sustain growth.
This memorandum was prepared byl (Japan Branch,
Northeast Asia Division, Office of East Asian Analysis.
Information available as of 26 November was used in its
preparation. Comments and queries are welcome and may be
directed to the Chief, Japan Branch, Northeast Asia Division,
OEA, 25X1
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increasing again during recessions.
The strong performance of 'foreign demand in this recovery
continues a trend that has been evident since the recession began
in 1980. Net exports have accounted for half or more of GNP
growth in three of the last four years (see figure 3). In
previous postwar recoveries foreign demand never accounted for
more than one third of GNP growth in any year, with the exception
of the post-oil-shock years 1974 and 1975 (see figure 4).
Indeed, the behavior of net exports during most of the postwar
period was countercyclical--declining during expansions and
account surplus from driving the yen's rate up.
The yen's persistent weakness, especially against the
dollar, has been a major underlying reason for Japan's strong
export growth. The exchange rate has aided Japanese exporters'
competitiveness and profitability, especially in US markets.
Forecasts for a substantial appreciation this year proved
.premature as capital outflows have continued to accelerate in:
response to interest rate differentials and prevented the current
increase in Japan's trade surplus during the period.
Japanese imports from the United States rose by only $1.0
billion. Sales to Asian NICs were also up, but the rising
surplus with the United States accounted for 72 percent of the
Foreign Demand
Ioreign demand accounted for half of the increase in GNP in
1983, the first year of the current recovery2 (see figure 1),
and net exports have continued to provide a substantial
proportion of the economy's growth during the first half of
1984. The strong.US demand for imports was a major factor in
pushing export'earnings to the fore. During the first year of
the recovery Japan's trade, surplus with the United States roughly
doubled, from $3.1 billion in the first quarter of 1983 to $6.3
billion in the fourth quarter of 1983 (see figure 2). Exports to
the United States during the year were up by $4.2 billion, while
1Ca-lendar years are used in this paper.
2Recessions and recoveries are determined by dates for peaks and
troughs of business cycles published in the Economic Planning
Agency's monthly "Japanese Economic Indicators."
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 Figure 1
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Growth in the First Year of Recovery
Foreign and Domestic Components
6.4 6.4
Legend
? Domestic
? Foreign
? GNP
305
1975:2 to 76:1 1977:4 to 78:3 1983:1 to 83:4
Last quarter over last recession quarter (percent).
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5.3
 riei it 9
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Japan: Trade balance in 1983
(million dollars)
.10000
5000
Legend
? us
? OPEC LDCs
? Asian NICS
? Total
198301 1983:2 1983:3 1983:4 25X1
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 Ctn.. 2
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GNP Growth 190-83
.Foreign and Domestic Demand
Legend
? Domestic
? Foreign
EZ GNP
1980 1981 1982
Calendar year average over previous year (percent).
1983
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 Figure 4
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Foreign Demand as a Percentage of GNP Growth
1??
80 =
6O
4O
Percent of total GNP growth. 25X1
1974 NOT computed because GNP growth was ne ative.
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Domestic Demand Slowing?
In the absence of much stimulus from government fiscal
policy since 1979, the domestic component of growth has been very
low by Japanese standards--averaging 2.0 percent per year in
1980-83, compared with annual averages of 4.6 percent in 1970-79
and 10.7 percent in 1960-69 (see figure 5 and Table 1). Private
consumption demand is by far the largest potential domestic
source of growth, accounting for over half of GNP. Despite an 25X1
increase in real incomes, however, consumers have not provided
much stimulus to growth in the current recovery. Indeed, during
the first year of recovery private consumption increased more
slowly than it had during the previous recession year.
The weakness of consumption may be related to consumer
uncertainty based on the labor market's continuing weakness and
slow growth in real disposable incomes. Japanese observers
expect consumer demand to pick up as the recovery proceeds. This
expectation is based on a possible rise in disposable incomes
later this year and next if strong corporate profits are
reflected in higher year-end bonuses and larger real wage 111-- N/ ^
set e
en
s
m
t.s limb
pi III g.
Investment demand has generally been strong during this._
recovery, but this sector is smaller and typically more volatile
than the consumption sector. Corporate fixed investment has
increased rapidly, based on higher earnings and the prospect of
more rapid growth in the near term. Housing investment, however,
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since the beginning of the recovery.
companies plan to
invest more during the coming year, but a debate is going on
within the Economic Planning Agency (EPA) and elsewhere over
whether the investment. boom will continue once export growth
slows. Those who are bullish argue that business cost-cutting
and interest in continued technological improvement will fuel
strong investment demand for some time to come. They point to
surges of investment in industries such as pulp and paper as
examples. Other economic observers, supporting the EPA's
preference for fiscal stimulus, argue that most of the current
pickup in investment is based on export-fueled demand. They
insist that in the long run the changing structure of the economy
will reduce the need for expenditures on new capital, as less
capacity will be added in capital-intensive heavy industry. A
slowdown in foreign demand would therefore cut short the
investment boom, leaving the economy with no source of strong
growth.
The government's continuing efforts to reduce the persistent
deficit mean fiscal stimulus will probably provide little to
boost economic growth. Tokyo's policy could change, of course,
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Domestic Demand: Slowing Growth
Legend
* Consumption
X Investment
* Government
Todd
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Sectoral Contributions to GNP Growth
Total
Net Dom
estic Consumption
Investment
G
GNP
overnment
Exports De
mand
Spending
(To
tal)
1965
5.4
0.9
4.5
5.0
-1.3
0
8
1966
11.0
0.0 1
1.0
6.4
2.3
.
2
3
1967
10.7
-1.9 1
2.6
5.8
5.8
.
1
0
1968
12.7
0.5 1
2.2
4.9
5.3
.
1
9
1969
12.3
0.3 1
2.0
5.8
5.1
.
1
1
1970
10.0
-0.8 1
0.7
3.9
5.4
.
1
4
1971
4.7
1.1
3.6
3.2
-1.3
.
1
7
1972
8.9
-0.5
9.4
5.2
1.6
.
2
5
1973
8.9
-2.1 1
1.0
5.3
4.3
.
1
4
1974
-1.2
1.4 -
2.6
-0.4
-1.3
.
-0
9
1975
2.4
2.0
0.4
2.3
-3.1
.
1
2
1976
5.3
1.6
3.7
1.9
1.1
.
0
6
1977
5.3
1.2
4.1
2.2
0.5
.
1
4
1978
5.1
-0.8
5.9
2.5
1.3
.
2
1
1979
5.2
-1.1
6.2
3.3
2.4
.
0
5
1980
4.8
3.5
1.3
0.7
0.8
.
-0
3
1981
4.1
2.1
2.0
0.4
0.8
.
0
9
1982
3.3
0.3
3.0
2.2
0.6
.
0
2
1983
3.1
1.6
1.5
1.8
-0.5
.
0.2
Note: Components may not add to total because of rounding.
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and some LDP politicians have argued for more fiscal stimulus,
but we expect that any changes will be too small to help much.
Indeed, the LDP's supporters in the business and financial world
favor even tighter spending controls and a smaller government.
sector, as does the powerful Ministry of Finance, making a change
in government commitment to fiscal austerity unlikely in the
short term.
When Export Growth Slows
Without stimulus from the foreign sector, it is difficult to
see how Japan can sustain economic growth at the 4-percent level
called for in most long-term forecasts and in the government's
long-term economic "visions," let alone at the 5-percent rate
called for by Prime Minister Nakasone'.s commission on the
economy. If the growth rate of net exports should decline,
domestic demand would have to do better than it has recently to
maintain even the 3-percent GNP growth rates Japan achieved
during the 1980-83 recession.
Our own analysis, based in part on our econometric model,
shows a significant decline in overall growth if foreign demand
slows:
-- The baseline forecast calls for growth of 5.2 percent in
1.984 and 4 percent in 1985 based on real merchandise
export growth of 6.5 percent. If exports to the United
States stopped increasing, however, growth would drop
immediately. With exports to the United States held
constant at the level of 1984's first quarter, the growth
rates are 4.6 percent and less than 3 percent in 1984 and
1985 (see table 2).
-- If exports are slowed by an increase in the value of the
yen, the effect is delayed but eventually is as severe.
Appreciation of the yen to 180 per dollar (the baseline
case calls for 215 per dollar) would not affect growth
significantly in 1984, but GNP would increase by only 2.9
percent in 1985.
Most forecasters expect Japan's trade surpluses to remain at
high levels for the foreseeable future and to provide some
stimulus to growth for the next few years. This year's EPA white
paper on the economy sees a growing role for Japan as a capital
exporter as a result of chronic trade surpluses and the excess of
savings above domestic investment. Forecasts by the Japan
Economic Research Center, Nomura Research Institute, and others
also predict continuing trade surpluses and capital exports.
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If Export Growth Slows
(Growth Rate of GNP in Percent)
1984
1985
5.2%
4.1%
No growth in
expor.,-ts to US
4.6%
2.9%
Yen appreciation
to 180 per dollar
2.9%
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It is possible, despite these forecasts of a growing
surplus, that the foreign sector has already turned the corner.
Import growth is picking up as the modest domestic expansion
continues, and the current account surplus has not been growing
rapidly in recent months. In fact, the current account surplus
declined in 1984's third quarter. Should US growth slacken,
increases in the rate of growth of net exports will also slow.
Import demand in the past has grown rapidly in the expansion
phase of the business cycle. A combination of yen appreciation,
slower growth, protectionism in major foreign markets, and
growing imports would reduce the growth of net exports enough
keep them from contributing significantly to GNP growth.
The Politics of Growth
The slow growth of the domestic sector is already a
political issue. Prime Minister Nakasone's rivals within the
Liberal Democratic Party (LDP) have used their own proposals for
boosting economic growth to raise questions about his handling of
the econoriy.
-- Former EPA Director General Komoto has repeatedly called
for fiscal stimulus.
-- Kiichi Miyazawa, a potential prime minister, has
advocated more public works spending to "double the
nation's assets."
These traditional pump-priming measures--or others that could be
devised--would be limited by the government's commitment to
cutting the persistent budget deficit. Even so, they would
please at least some domestic constituencies and would give the
appearance of action designed to increase growth, whether or not
they proved successful
We have examined the effect of several possible measures to
stimulate specific sectors of the domestic economy--more public
investment,*,business tax cuts, sharper wage increases--under the
assumption of slower export growth. In all the simulations we
assume that slower growth is caused by appreciation of the yen to
180 yen per dollar.
Our simulations suggest that increased government spending
would have the strongest impact on growth. If government
investment were increased 10 percent beginning in the fourth
quarter of 1984, GNP growth would reach 5.4 percent, compared
with 2.9 percent if fiscal policy.were unchanged. If total
government spending (both consumption and investment) were
increased by 10 percent, GNP growth would reach 5.6 and 4.7
percent in 1984 and 1985, despite the slowdown in export
growth.
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Consumption and investment would be difficult to stimulate
directly. Rapid wage increases might boost consumption but not
by enough to offset the induced decline in net exports.
According to our simulation, even a dramatic increase in wages
and salaries would increase real GNP's growth 'rate only
slightly. Inflation would also increase. A corporate tax cut
has been proposed to boost the economy by stimulating investment,
but in our simulation even a large cut produced only a slight
effect.
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Subject: Japan: Export Reliance and Economic Growth
Distribution:
1 - Anthony C. Albrecht, Department of State
1 - John R. Malott, Department of State
1 - William Brooks, Department of State
1 - Rea Brazeal, Department of State
1 - Cora Foley, Department of State
1 - Nicholas Riegg, Department of State
1 - Richard Childress, National Security Council
1 - Cdr. James Auer, Department of Defense
1 -F ~ Defense Intelligence Agency
1 - William Hellkie, Federal Reserve Board
1 - Robery Emery, Federal Reserve Board
1 - McClellan A. DuBois, Department of Commerce
1 - Hedya Kravalis, Department of Commerce
1 - Eugene K. Lawson, Department of Commerce
1 - Joseph Massey, United States Trade Representative
1 -:Aoug Mulholland, Department of Treasury
1 C/OEA/NEA/J
1 - C/OEA/NEA/K
1 - C/OEA/NEA
1 - OEA Research Director
1 - D/OEA
1 - DDI
1 - Executive Director
1 -
1 = N EA
1 - D/OMPS
1 -
1 - OCR/ISG
1 - CPAS/ILS
5 - CPAS/IMC/CB
1 -
1 - NI'C Analytic Group (7E47)
DDI/OEA/NEA/Japan
(26 November 1984)
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