No. 44 — November 11, 1996


Feature Article


Arthur J. Alexander


The manufacturing sector in Japan, long the epitome of that country's successes in economic and industrial development, is today a subject there of anxiety and concern. Worries over "hollowing out" — Japanese corporate investment in manufacturing facilities abroad instead of at home — as well as increased import penetration in manufactured goods and manufacturing's declining share in total economic output are all vivid indicators of a fall in the weight of this sector in the nation's economic life. The seemingly never-ending economic downturn of the 1990s has accelerated many of the ongoing trends. Yet these trends should not be totally surprising since they are characteristic of most mature, developed economies. Moreover, not all manufacturing industries reflect the relative decline of the sector as a whole. Worth stressing is that most of the decline, in fact, is relative; in absolute terms manufacturing continued to grow until the recession's negative effect began to be felt in 1991. The real concern for Japanese should be the relatively low average productivity of the manufacturing sector compared to the current levels demonstrated in the United States and other advanced countries. Over the long run the main route to higher real incomes is through advances in the productivity or the efficiency of production.

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Weekly Review

--- by Jon Choy

Moving quickly to flesh out his campaign promises and fulfill the public's expectations, Prime Minister Ryutaro Hashimoto announced November 11 a large-scale financial deregulation plan that he hopes to have in place by 2001. Saying that domestic financial markets had become stagnant in part because of the current regulatory framework, Mr. Hashimoto set his sights on making Japan's financial markets "free, fair and global" over the next five years. The effort mimics what British authorities did on one day in 1986 (London's so-called Big Bang) and what American officials have been doing over the past decade or more. Business leaders and financial market analysts hailed the prime minister's plan for both its detail and target date but remained skeptical that all of the changes would be implemented on time and as hoped. Powerful interests, including the Ministry of Finance, already are beginning to draw lines in the sand and to create an obstacle course for Mr. Hashimoto and other reformers.


--- by Douglas Ostrom

The bursting of the economic bubble in Japan during the early 1990s has created continuing fallout in the form of proposals to restructure the Japanese financial system. Giving the Bank of Japan more independence, a recommendation made public in a November 12 report by an advisory panel to the central bank, is one in a series of now fashionable reform proposals. Previous ideas have included suggestions from some quarters that the Ministry of Finance be dismantled and that the web of regulations entangling financial institutions substantially be reduced. The most recent such deregulation proposal goes by the moniker of the Japanese "Big Bang".


--- by Barbara Wanner

In view of heightened political uncertainties in Moscow related to Russian President Boris Yeltsin's health problems few observers expected that Foreign Minister Yevgeny Primakov's November 14-17 visit to Tokyo would yield much headway in resolving Japan's decades-old territorial dispute with Russia. Indeed, at the conclusion of Mr. Primakov's meetings with Foreign Minister Yukihiko Ikeda the two sides had refused to budge from their respective views on joint claims to four islands northeast of Hokkaido that the former Soviet Union seized during the closing days of World War II. The dialogue was not rancorous, however. Perhaps due to frustrations in both Tokyo and Moscow over the extent to which Russian nationalist pressures, among others, have stalled progress in resolving the so-called Northern Territories problem, the two top diplomats agreed to several initiatives aimed at improving the long chilly political climate of Japanese-Russian relations. Some experts are hopeful that these measures, by engendering greater trust and goodwill between onetime enemies, will sow the seeds for the eventual resolution of a dispute that since 1945 has blocked conclusion of a World War II peace treaty between Japan and Russia and generally hampered the evolution of bilateral economic and political relations.



The lead insurance negotiators for the United States and Japan conceded the obvious following unproductive talks November 15 and 16 in San Francisco. Agreement on a deregulation road map for Japan's insurance market, each official admitted directly or by inference, awaits some tough political decisions. This consensus notwithstanding, Ira Shapiro, senior counsel in the Office of the U.S. Trade Representative, and Eisuke Sakakibara, director general of the Ministry of Finance's International Finance Bureau, will meet November 25 and 26 in Tokyo. They again will try to narrow the multiple, substantive differences between the two governments before Acting USTR Charlene Barshefsky and new Finance Minister Hiroshi Mitsuzuka are brought into the negotiations sometime in early December.

The Clinton administration and the American Forest & Paper Association were disappointed if they expected an immediate payback from Tokyo for the White House's decision to drop wood products as a future Super 301 candidate after a two-year stay on the watch list of questionable foreign trade practices (see JEI Report No. 38B, October 11, 1996). During a November 7-8 series of periodically held working-level talks on transpacific trade in wood products the Japanese delegation again rejected out of hand Washington's call for accelerated implementation of Tokyo's Uruguay Round tariff cuts on value-added wood products. U.S. trade officials have been pushing such a move ever since Japan thwarted an American drive in the last stage of the Uruguay Round negotiations for a phaseout over 10 years of all duties on wood products (see JEI Report No. 46A, December 9, 1994). The Clinton administration no doubt will continue its campaign for further duty reductions since these changes are the only way to combat the trade-distorting effects of Japan's combination of duty-free entry for logs and relatively high tariffs on most value-added wood products of interest to Pacific Northwest exporters. Washington also will revisit in the future the issue of Tokyo's subsidies for the wood products industry, another big obstacle to expanded sales in Japan of American lumber and other softwood value-added products. This subject was raised during the early November meetings, but it received the same reception from Japan as the accelerated tariff reduction proposal.

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