NO. 4 -- January 31, 1997


Feature Article


Investment has been the most important means of promoting economic welfare for most people in most countries, most of the time. Japan is no exception. Investment increased economic capacity, it stimulated growth by contributing to aggregate demand, and it advanced productivity through the introduction of the newest production technologies and methods.

An economy also can grow if the quantity of other productive inputs, such as labor, is expanded as well as if the efficiency of using inputs is increased across-the-board. Nonetheless, for economies far from the technological frontier of the most advanced nations, as Japan has been for most of its modern history, investment has been the primary source of per capita income growth.

Investing in industrial plant and equipment, social infrastructure, research and development, and in human potential through education, training and improved health requires that current output be diverted from current consumption. A portion of national income must be saved and devoted to expenditures that will have a payoff only in the future. The Japanese economy channeled more than one-third of its output into gross capital investment in the peak years of the postwar economic miracle. Its growth reflected those investments.

However, as capital accumulates, the returns from such investment tend to decline. Mature economies must look more toward increased productivity as the source of improved economic welfare. Unfortunately for Japan, productivity has not kept up with the pace of investment. By many measures it lags the United States by two-thirds or more. The admirable qualities of discipline and patience undergirding a nation of savers and investors are less valuable to an economy when productivity improvements are the main source of growth. When productive levels are high and the frontier is near, risk-taking and impatience seem to be the necessary qualities for an economy to prosper.

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Weekly Review

Japan's Trade Surplus Declined Again In 1996 by Douglas Ostrom

First, the good news for policymakers on both sides of the Pacific who would like to see Japan tote up a smaller trade surplus. At ¥6.7 trillion last year, that country's customs-clearance trade surplus was at its lowest level since 1983. In 1996 alone it dropped 32.4 percent, continuing a contraction that started in 1992. The bad news is that last year marked the return of the infamous J-curve, which has a way of reversing the interpretation of apparently favorable numbers.


Hashimoto, Kim Agree To Disagree by Barbara Wanner

Postwar relations between Tokyo and Seoul often have been thorny due in part to South Koreans' long memories of the harsh treatment to which they were subjected by Japanese colonial authorities during the pre-1945 period. Judging by the substance and the tenor of the January 25 meeting in Beppu, Oita prefecture between Prime Minister Ryutaro Hashimoto and South Korean President Kim Young Sam, it does not appear that the two countries will be headed out of their current brier patch very soon.


Scandals, Appointments Suggest Diminished Commerce Department Role by Christopher B. Johnstone

Under the leadership of the late Ron Brown, the Department of Commerce emerged as a major force in the foreign economic policymaking of the first Clinton administration. An artful and articulate advocate for U.S. business interests, Mr. Brown -- who died in a plane crash while on a trade mission to Bosnia last April -- placed Commerce at the center of a new "national export strategy" that sought to bolster America's global competitive position through aggressive government support for overseas sales.



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