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                     Key Economic Indicators
            (Trillions of yen unless otherwise noted)

                                  1991      1992      1993
Income, Production,
 and Employment

Real GNP  /10                     418.1     424.3     424.4 /1
Real GNP Growth rate (pct.)         4.1       1.5      -0.4 /2
Real GDP Growth rate (pct.)         4.0       1.3      -0.5 /2
GDP (at current prices)           450.8     464.8     467.7 /1
Real GNP by Sector /10
  Agriculture & Fisheries           9.5       n/a       n/a
  Manufacturing                   132.8       n/a       n/a
  Construction                     36.0       n/a       n/a
  Electricity, Gas                 14.0       n/a       n/a
  Wholesale, Retail                57.4       n/a       n/a
  Finance and Insurance            24.7       n/a       n/a
  Real Estate                      40.1       n/a       n/a
  Services                         59.5       n/a       n/a
Per Capita GNP (US$ 000's) /12     26.9       n/a       n/a
Labor Force (million)              65.1      65.8      66.0 /3
Unemployment Rate (pct.)            2.1       2.2       2.4 /3

Money and Prices

Money Supply
 (M2+CD annual avg., pct.)          3.6       0.6       0.9 /4
Commercial Interest Rates
 (10-yr. govt. bonds; yr.-end)      5.38      4.52      3.73 /5
Savings Rate (pct.) /6             15.0       n/a       n/a
Investment Rate (pct.) 7/          32.1      30.8      30.1 /1
CPI (1990 equals 100)             103.3     105.0     106.3 /3
WPI (1985 equals 100)              99.4      97.8      95.4 /4
Exchange Rate (yen/$)             134.5     126.7     112.2 /4

Trade and Balance of Payments
 (billion U.S. dollars)

Total Exports, (FOB)              314.5     339.7     268.6 /8
  Total to U.S., (FOB)             91.5      97.2      78.1 /8
Total Imports, (CIF)              236.7     233.0     179.3 /8
  Total from U.S., (CIF)           48.1      47.8      35.9 /8
  Balance with U.S.                43.4      49.6      42.2 /8

Balance of Payments
Current Account                    72.9     117.6      88.3 /11
  Trade Account                   103.0     132.3      94.6 /11
  Service & Trans.                -30.1     -14.8      -6.2 /11/
Long-term Capital                  37.1     -28.5     -38.4  9/
Basic Balance                     110.0      89.1      47.9  9/
Short-term Capital                -25.8      -7.0      -6.9  9/

Gold and FOREX Reserves
 (year-end)                        69.0      68.7      86.1 5/


1/  Jan.-June, S.A.A.R.
2/  Jan.-June, year-over-year.
3/  Jan.-August, average S.A.
4/  Jan.-September, average, N.S.A.
5/  End of September.
6/  Savings as percent of personal disposable income.
7/  (Public and private domestic fixed capital formation.
    and inventory investment)/nominal GNP.
8/  Jan.-September total, N.S.A.
9/  Jan.-August total, N.S.A.
10/ Total and sectoral real GNP figures in 1985 yen.
11/ Jan.-August total, S.A.
12/ World Bank estimate.

1.  General Policy Framework

    The world's second-largest economy, with 1992 GNP of yen
465 trillion ($3.7 trillion), Japan remains mired in one of its
deepest and longest postwar downturns.  Following a period of
rapid, domestic demand-led growth in the late 1980s,
restrictive fiscal and monetary policy succeeded in bursting
the asset price "bubble" (land prices doubled, stock prices
tripled, 1985-89) -- but at a price of large-scale asset

    Asset price deflation, plus the fall-off from the late
1980s surge in private investment, have prolonged the current
slump.  Weak final demand, declining corporate profits, and low
utilization of existing capacity (reflecting the buildup of the
late 1980s) have suppressed business investment.  Similarly,
consumer spending has been dampened by fewer new hirings and by
slowed income growth due to lower wage settlements, reduction
in overtime hours, and smaller bonuses.

    Slow growth has meant a general decline in imports since
1990, while exports have continued to grow at five percent per
year.  Japan's current account surplus has consequently risen
since then to set a new record of $118 billion in 1992, or 3.2
percent of GNP.  Widespread structural rigidities remain which
either directly impede imports or impair their price
competitiveness (for instance, complex distribution channels). 
To address these problems, recent Government of Japan economic
stimulus initiatives have included among their objectives
deregulation and pass-through to consumers of import price
reductions due to yen appreciation.

    The Government of Japan has taken both fiscal and monetary
policy steps to attempt to deal with the slack in the economy. 
Increased government investment in the form of two major
spending packages in August 1992 (yen 10.7 trillion) and April
1993 (yen 13.2 trillion), has provided virtually the only boost
to the economy.  In September 1993, the Japanese Government
announced an additional yen 6.2 trillion program which it
estimated would increase nominal GNP by 1.3 percent over the
following twelve months.  Since all these programs included
elements which represented shifting of assets, as well as
government lending which may simply replace private lending --
rather than creation of new contributions to final demand -- 
the actual impact is thought to be considerably less than the
raw figures would indicate.

    Overall, however, the fiscal stance of the Japanese
Government may be said to have remained relatively tight since
1982, when it began to take steps to constrain the growth of
government debt.  The general government surplus (central and
local governments plus social insurance) has been in surplus
since 1987, even though tax receipts have recently fallen off
due to the recession.  As of November 1993, a personal income
tax cut was under discussion as both an economic stimulus and
tax reform measure (to redress the relatively high direct tax
burden on salaried workers).  However, finance authorities
remained opposed to any fiscal stimulus which involved the use
of deficit-financing bonds (government debt to finance
non-investment spending).

    Beginning in mid-1991, monetary easing has also been
applied.  Six successive decreases in the Bank of Japan's
official discount rate (ODR) brought that rate to 2.5 percent
by February 1993.  The seventh cut in the easing cycle, in
September 1993, brought the ODR to a record low of 1.75
percent.  Lending rates have also fallen, but corporate
borrowing remains weak -- partly due to lack of demand for
funds in a recession, partly due to credit tightening by banks
facing falling asset prices and a large-scale overhang of bad
debt.  Money supply growth remains very moderate, supported
largely by Government disbursements through the fiscal packages
mentioned above, but still represents improvement on the zero
or negative figures for growth in the M2 plus certificate of
deposit (CD) aggregate which were recorded from third quarter
1992 through first quarter 1993.

2.  Exchange Rate Policies

    Since 1990, the yen has been on an appreciating trend
against the U.S. dollar, reversing its movement in 1988-90. 
Yen appreciation was particularly rapid in February-August
1993, when the nominal exchange rate went from Y120:$1 to
almost Y100:$1 in six months' time.  Post-1990 yen appreciation
has had the effect of expanding Japan's exports and trade and
current account surpluses in dollar terms.

    In principle, Japan ended most foreign exchange controls in
1980, but numerous controls remain in practice.  Japan
coordinates economic policies (including exchange rate policy)
with the United States and its other Group of Seven (G7)

3.  Structural Policies

    The Japanese economy continues to undergo transition and
structural change.  This has primarily been a market-driven
response to the fundamental exchange-rate realignment of the
mid-to-late 1980s.  Another central factor has been the focus
on deregulation of the economy, particularly the privatization
of public telecommunications and railway companies and
simplification of product standards.  Despite progress in this
area, Japan's economy remains heavily regulated, effectively 
reinforcing business practices that restrict competition and
keep prices high.  Price controls remain on certain
agricultural products, and bureaucratic obstacles to the entry
of new firms into businesses like trucking, retail sales and
telecommunications also have slowed the economy's structural
adjustment.  The need for comprehensive deregulation of the
Japanese economy has been a key theme of the current Hosokawa
administration which has set up an Economic Reform Research
Council under the leadership of the Chairman of the Federation
of Japanese Economic Organizations (Keidanren).  The final
report of this Council (Hiraiwa Report) was released on
December 16, 1993.  Although it offered broad proposals for
economic reform, it was virtually devoid of specifics.

    In the past, the United States addressed structural issues
with Japan under the Structural Impediments Initiative (SII),
launched in 1989.  Progress was made in some areas.  For
example, the Government of Japan deregulated portions of its
distribution system, including reform of the Large-scale Retail
Store Law, liberalizing its foreign direct investment regime,
improving disclosure rules that should help make business
practices more transparent, and strengthening anti-monopoly
enforcement.  In the area of land use, action was taken to
eliminate tax preferences for agricultural land in major urban
areas.  In the most recent report issued in 1992, Japan made a
number of new commitments in the areas of distribution, and
exclusionary business practices.

    A Framework Agreement was announced on July 10, 1993 by
President Clinton and then-Prime Minister Miyazawa.  The
Framework provides for "an ongoing set of consultations
anchored in bi-annual meetings between the President and Prime
Minister."  In addition to a joint global cooperation effort in
such areas as the environment and technology, the two nations
have agreed to concentrate on five areas or "baskets" initially
in the Framework discussions: government procurement,
regulatory reform and competitiveness, economic harmonization,
implementation of existing agreements and other major sectors
(autos and auto parts).  Remaining issues under the SII process
are being discussed under the Framework.  These discussions
will include, but not be limited to, such issues as enhanced
competition policy, foreign direct investment, buyer/supplier
relationships, reform of the regulatory process and more
transparent administrative procedures, as well as continued
efforts to reform the distribution system, including import

    Government spending policy has given an indirect boost to
the competitiveness of a number of Japanese industries.  In the
past, the Government directed considerable public and private
resources to targeted priority areas, but has been moving away
from such industrial policy measures, partly in response to
criticism of export-oriented policies by Japan's trading
partners.  The Japanese Government continues to promote high
technology cooperation among firms and plays a direct role in
organizing these efforts, using off-budget resources and small
amounts of appropriated funds to contribute to investment
projects and government-private sector efforts.

4.  Debt Management Policies

    Japan is the world's largest net creditor.  It is an active
participant together with the United States in international
discussions of the developing country indebtedness issue in a
variety of fora.

5.  Significant Barriers to U.S. Exports

    Over the past few years, the Government of Japan has
removed most formal barriers to the import of goods and
services.  Import licenses, which are still technically
required for all goods, are granted on a pro forma basis with
limited exceptions (fish, leather goods and some agricultural
products).  Japan's average industrial tariff rate is one of
the lowest in the world, at around two percent, and Japan has
made further tariff reduction offers in the Uruguay Round
Market Access negotiations.  The successful conclusion of the
Uruguay Round negotiations will further reduce trade barriers
in a number of areas, such as agriculture (where Japan
announced that it would lift its ban on rice imports),
manufactured goods (where the United States has proposed the
mutual elimination of tariffs for major industrial sectors),
and the services sector.

    U.S. and Japanese negotiators have concluded agreements
over the past four years to improve access to Japan's market in
the areas of supercomputers, commercial satellites,
semiconductors, construction, wood products, paper, and
government computer procurement.  In addition, the Government
of Japan agreed to ease rules on value-added telecommunications
services, to strengthen copyright protection for U.S. music
recordings, and to resolve disputes involving amorphous metals
and machine tools.  Discussion of market barriers in the areas
in which there are existing bilateral arrangements continues
under the Framework process.  The Framework Agreement
identifies three priority areas (government procurement,
insurance, and autos and auto parts) for which there should be
agreements on market access in place by February, 1994.

    Tariffs and quotas are not the greatest current obstacles
to selling into the Japanese market.  Instead of tariffs and
official discrimination against imports, American exporters, in
areas ranging from glass to auto parts, face a number of less
visible, but nonetheless real, barriers that raise costs and
inhibit access.  These include government red tape, government
toleration of collusive business practices, exclusionary
private business practices, an outdated and fragmented
distribution system, and insular attitudes by both government
officials and private businessmen.

    Services:  Impediments to trade in services have become
prominent on the U.S.-Japan trade agenda in recent years.  The
United States and Japan concluded accords partially
liberalizing access to the legal services market (1987),
promoting free and open procurement of construction services
and goods (1988 and 1991), and easing restrictions on
telecommunications services (International Value-Added Networks
I, 1988; Cellular phones, 1989; International Value-Added
Networks II, 1990).  In recent years, Japan has eased some 
restrictions on financial services, though there are remaining
barriers in a wide range of these services.  These remaining
barriers are under discussion in the Framework.  Foreign
architectural design and construction firms continue to
encounter difficulties in competing for construction contracts
set by Japanese Government agencies.  The 1988 Major Projects
Arrangement established leaner and more transparent procedures
for foreign bidders.  In 1991, the arrangements were revised to
improve the procedures.  In reviews since that time, the United
States has made a number of concrete suggestions to improve the
operation of the MPA.  Finally, in April 1993, USTR designated
Japan under Title VII for discriminatory procurement practices
in the public works procurement sector.  Following the
announcement in October that the Government was committed to
fundamental reform of the bidding, the deadline for U.S.
sanctions against Japan was postponed until January 20, 1994. 
In addition, despite partial liberalization of legal services
in 1987, Japan maintains major restrictions in that area
including prohibition on employment of or partnership with
Japanese lawyers.  These difficulties are the subject of
ongoing bilateral talks.  In September 1992, the Government of
Japan established a study commission on the issue to assess the
degree to which the restrictions on foreign lawyers obstruct
free and fair trade.  This commission has issued its report,
which calls for minimal changes in the current system.  It
touches slightly on the partnership issue, but supports the
continued ban on a foreign lawyer employing a Japanese lawyer. 
The U.S. and the rest of the foreign legal community are now
studying the commission's proposal.

    Government procurement:  Government procurement in Japan
conforms to the letter of the General Agreement on Tariffs and
Trade (GATT) Procurement Code.  In November 1991, Japan agreed
to implement procedural improvements unilaterally that will
increase opportunities for foreign U.S. suppliers.  The United
States will continue to monitor Japanese government procurement
to assure that U.S. firms are given an opportunity to compete
fairly and openly.  Government procurement is a priority area
under the Framework, with the U.S. seeking specific agreements
in the telecommunications and medical technology sectors.

    Standards:  The Government of Japan has simplified,
harmonized and, in some cases, eliminated restrictive standards
in order to follow international practices in many areas.  For
example, the 1985-87 Market Oriented Sector Selective (MOSS)
Talks resolved a host of standards problems and set in motion a
continuing dialogue through MOSS follow up meetings of
experts.  In some cases, advances in technology make current
standards outdated and restrictive; in other cases, Japanese
industry supports unique safety standards which have the effect
of limiting competition.  Finally, bureaucratic inertia and
desire to maintain power inhibits further simplification of
standards.  Standards problems continue to hamper market access
in Japan.

    Foreign investment:  As a result of a Japanese Government
commitment in the SII, foreign investment into Japan in most
sectors is now subject to only ex post notification to the
Ministry of Finance (MOF).  (Previously, all foreign investors
were required to notify MOF of their intention to invest 30
days before the investment took place.)  Japan continues to 
restrict foreign investment in certain sectors, including
aircraft, space development, atomic energy, agriculture,
fisheries, forestry, oil and gas production and distribution,
leather and leather product manufacturing, and tobacco
manufacturing.  In addition, foreign investment in the banking
and securities industries is subject to a reciprocity
requirement.  Japan provides foreign investors national
treatment after entry with limited exceptions notified to the
Organization for Economic Cooperation and Development (OECD). 
The Japanese Government does not employ local equity
requirements, export performance requirements, or local content
requirements.  The Japanese Government has not forced foreign
individuals or companies to divest themselves of investments. 
Japanese law allows foreign landholding, and foreign investors
may repatriate capital and profits readily.  At the same time,
foreign direct investment in Japan is significantly lower than
in other major G-7 nations.  There are a number of factors
behind this situation, including the legacy of many years of
active Japanese government discouragement of foreign
investment.  The major problem, however, is the high cost of
doing business in Japan which makes the rate of return on
investments here far lower than other alternatives.  The
Government of Japan has taken some initial steps to provide
incentives to foreign investors.  This issue is also under
discussion in the Framework.

    The acquisition of existing Japanese companies is difficult
due in part to cross-holding of shares among allied companies,
and a low percentage of publicly traded common stock.  The
difficulty of acquisition of existing companies inhibits
foreign investment.

6.  Export Subsidies Policies

    Japan adheres to the OECD Export Credit Arrangement,
including the agreement on the use of tied aid credit.  The
Government of Japan subsidizes exports as permitted by the OECD
arrangement, which allows softer terms for export financing to
developing nations.  Of the roughly $15 billion that Japan has
committed for official development assistance in 1993, slightly
more than half has been earmarked for loan aid.  In this area,
Japan has virtually eliminated Japan-tied aid credits and now
extends about 90 percent of its loan aid officially under
untied terms.  But U.S. exporters continue to face difficulties
in competing due to (1) the use of Less Developed Country (LDC)
untied aid, where bidding is only open to Japanese and LDC
firms; (2) tied feasibility studies (provided by grant aid) for
untied (loan aid) projects which result in project
specifications more suited to Japanese than U.S. bidders; and
(3), perennial lack of transparency of ODA policies and
procedures.  These programs are the subject of continued
discussions with the OECD.  Japan exempts exports from the
three percent VAT-like consumption tax initiated in April
1989.  This provision does not appear to have any significant
impact on a manufacturer's decision to sell domestically or

7.  Protection of U.S. Intellectual Property Rights

    Japan is a party to the Bern, Paris and Universal Copyright
Conventions and the Patent Cooperation Treaty.  Japan's
Intellectual Property Rights (IPR) regime affords national
treatment to U.S. entities.  Under the bilateral Framework
Agreement's intellectual property working group, the two
governments are seeking agreement by July 1994 on a range of
patent, trademark, and trade secrets issues of concern to U.S.

    Patents:  Average patent pendency in Japan is one of the
longest among developed countries, averaging over five years
from application to grant.  The average patent examination
portion of the pendency period has been reduced from about 37
months to 30 months, with further efforts planned to reduce
this period to a 24 month-maximum.  Coupled with the practice
of laying open all applications to public inspection 18 months
after filing, the long patent pendency period results in a long
period of public access to the application without effective
legal protection.  Many Japanese firms use the patent system as
a tool of corporate strategy, filing many applications to cover
slight variations in known technology, a practice facilitated
by access to previously laid-open applications and the patent
law's compulsory licensing provisions for dependent patents. 
U.S. filers often find that their Japanese rights are closely
circumscribed by prior filing of applications for a very
similar invention or process.  The need for individual
responses to multiple patent oppositions often increases delay
and processing costs.  Moreover, patent examiners and Japanese
courts interpret patent applications narrowly and the courts
adjudicate cases slowly.  Japanese patent law lacks a doctrine
of equivalence and civil procedure lacks a discovery procedure
to seek evidence of infringement.

    Trademarks:  Trademark applications are also processed
slowly, averaging two years and three months and sometimes
taking three to four years.  Infringement carries no penalty
until an application is approved.  In April 1992, Japan amended
the trademark law to protect service marks explicitly.

    Copyrights:  The Agency for Cultural Affairs under the
Japanese Ministry of Education has convened a panel of experts
tasked with recommending how copyright protection now granted
to computer software in Japan should be weakened to allow
decompilation and reverse engineering.  A decompilation right
would damage many U.S. software companies by allowing Japanese
companies to dissect U.S. software and take some of the
creative elements that are protected under U.S. law.  U.S.
Trade Representative Kantor and Secretary of Commerce Brown
have written to Japan's Ministers of Trade and Industry and
Education expressing strong concern and urging that no
revisions be made to weaken Japan's copyright law.

    The Japanese have cited as a reason for this study two 1992
U.S. court cases and the EC Software Directive.  The two U.S.
cases allow decompilation only in very unusual circumstances
and U.S. Government representatives have explained to Japanese
officials that these cases are very limited in scope and
precedental effect.  A weakening of computer software 
protection in Japan would be likely to have an adverse effect
on U.S. software companies active in Japan and would not be

    Sales of pirated videos remains a problem although the
Japanese police have cooperated with strong efforts by the
Motion Picture Association of America to raid video pirates
under Japan's 1988 legislation which facilitates prosecution of
video pirates.  Japan has promised to enforce vigorously
national treatment rights, and a revised copyright law was
passed in 1991 which took effect in January 1992.  Under the
revised law, copyright protection was extended from 30 to 50
years.  Pre-1978 foreign recordings are now protected back to
1969, and foreign recordings are provided with exclusive rights
by cabinet order.

    While Japan's new Trade Protection Law, enacted in 1990, is
a step forward from protection by ordinary contract, it is
still very difficult to get an injunction against a third party
transferee of purloined trade secrets.

8.  Worker Rights

    a.   Right of Association

    The Right of Association as defined by the International
Labor Organization (ILO) is protected in Japan.

    b.   The right to organize, bargain and act collectively is
assured by the Japanese constitution.  Approximately 25 percent
of the active work force belongs to labor unions.  Unions are
free of government control and influence.  The right to strike
is implicitly assumed by the constitution, and it is exercised
frequently.  Public employees, however, do not have the right
to strike, although they do have recourse to mediation and
arbitration in order to resolve disputes.  In exchange for a
ban on their right to strike, government employees' pay raises
are determined by the Government, based on a recommendation by
the Independent National Personnel Authority.

    c.   Prohibition of Forced or Compulsory Labor

    The Labor Standards Law prohibits the use of forced labor
and the law is vigorously enforced.

    d.   Minimum Age of Employment of Children

    Under the Revised Labor Standards Law of 1987, minors under
15 years of age may not be employed as workers and those under
the age of 18 may not be employed in dangerous or harmful
work.  Child labor laws are rigorously enforced by the Labor
Inspection Division of the Ministry of Labor.

    e.   Acceptable Conditions of Work

    Minimum wages are set regionally, not nationally.  These
wage rates are sufficient to provide workers and their families
with a decent living.  The Ministry of Labor effectively
administers various laws and regulations governing occupational
health and safety, principal among which is the Industrial
Safety and Health law of 1972.

    f.   Rights in Sectors with U.S. Investment

    Internationally recognized worker rights standards, as
defined by the ILO, are protected under Japanese law and cover
all workers in Japan.  U.S. capital is invested in all major
sectors of the Japanese economy, including petroleum, food and
related products, primary and fabricated metals, machinery,
electric and electronic equipment, other manufacturing and
wholesale trade.

         Extent of U.S. Investment in Selected Industries

              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (Millions of U.S. dollars)

Category                                    Amount

Petroleum                                              4,768
Total Manufacturing                                   11,920
    Food & Kindred Products                    666
    Chemicals and Allied Products            2,790
    Metals, Primary & Fabricated               225
    Machinery, except Electrical             3,540
    Electric & Electronic Equipment          1,327
    Transportation Equipment                 1,573
    Other Manufacturing                      1,799
Wholesale Trade                                        5,424
Banking                                                  200
Finance and Insurance                                  2,707
Services                                                 584
Other Industries                                         609

TOTAL ALL INDUSTRIES                                  26,213

Source:  U.S. Department of Commerce, Bureau of Economic

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