‘Market to the World’ : Imports Finally Making Major Inroads in Japan

Flexing its productive muscle after World War II, Japan became a “factory to the world.” With the capital reserves it accumulated as it built up enormous trade surpluses, it became a “banker to the world.”

And now--in the most surprising development of all--Japan is taking the first steps toward yet another transformation into a “market to the world.” From previously unaffordable Mercedes automobiles to typically made-in-Japan items such as cameras and calculators, imports are finally making major inroads here.

Exports, which have fueled Japanese economic growth for years, are still growing. But, reversing a pattern that took hold in 1970, imports are growing even faster, and Japan’s monumental trade surplus is finally shrinking.

Yet economic output has surged here anyway, because domestic consumption has erupted into the biggest economic boom since before the 1973-74 oil shock. The Japanese, their economy spurred by a combination of government policies and the release of pent-up consumer demand, have been buying everything in sight.

“The economic development of Japan has assumed a form which, a year ago, no one even dreamed of,” says Rokuro Ishikawa, chairman of the Japan Chamber of Commerce and president of Kajima Construction Co. “While reducing its black ink in international payments, the economy, supported by strong domestic demand, is enjoying a high rate of growth.”

The turnaround, if continued, matters to more than Japan. It holds out the promise of smoothing the world’s adjustment to what is widely regarded as today’s greatest threat to global economic growth--the declining U.S. trade deficit.

Japan, by opening its markets to foreign products and selling more of its own goods at home, could provide a model of how other countries can help sustain the world’s economic health even as the United States retreats from its role as the world’s consumer of first resort.

Such steps also would reduce Japan’s gigantic trade surplus with the United States, for many years an irritant in relations between the two economic superpowers. That in turn could relieve the pressure in the United States for protectionist actions that could trigger a debilitating trade war.

Local Industries Upset

For Japan, however, the new path will not be a smooth one.

Already, some local industries are howling about relatively modest penetration of competing goods from other Asian countries. Many analysts here are worried that the move of Japanese manufacturers to establish production operations overseas--as U.S. and European multinationals have been doing for decades--will lead to a “hollowing-out” of Japanese industry.

The Japanese government itself is divided between advocates of a more internationalist orientation and defenders of myriad domestic interest groups. Even Prime Minister Noboru Takeshita acknowledges that a new government commitment to easing the global adjustment process by moving away from the traditional pattern of export-led growth has not taken firm hold.

“Japan faces wrenching economic and social decisions in the next few years--decisions that will determine its economic direction for years to come,” argues Peter Drucker, a management expert at Claremont Graduate School near Los Angeles. “The choices Japan makes will determine how the world’s youngest economic great power integrates itself into the world economy. But Japan’s decisions will also profoundly affect the international economy itself.”

Manufactured Imports Spurt

Despite its long-deserved reputation as a protectionist nation, Japan’s imports of manufactured products more than doubled in just two years from 1985 to 1987. Nearly half of all imports are now manufactured goods, twice the proportion of 1982.

Even more surprising, Japan is beginning to import a wide range of manufactured goods in industries that it has long dominated. Imported textiles, black-and-white television sets, calculators, cameras, electric fans and even milling machines and lathes have recently captured almost half of the market.

“The import market will continue to grow,” says Kenichi Ohmae, head of the Tokyo office of McKinsey & Co. and one of Japan’s most provocative analysts. “We are treading the same path the United States took 10 or 15 years ago.”

Japan’s experience is turning conventional economic wisdom on its head. Rather than undermining the nation’s prosperity, the doubling in the yen’s value--the central factor behind the unprecedented spurt in manufactured imports--has actually left the Japanese economy in better shape than before.

Now, It’s ‘High-Yen Boom’

Instead of the “high-yen recession” they were complaining about only two years ago, businessmen such as Ishikawa are talking today about the unexpected “high-yen boom.”

Even before the government adopted a $48-billion supplementary budget last year to spur domestic growth, the economy began to take off on the back of a substantial tax cut, the ripple effects of an explosion of real estate prices and huge reductions in the costs of imported raw materials, particularly oil, as the yen rose in value.

Housing construction, consumer spending and business investment have added major props to the boom. The nation’s auto makers, who in January had predicted a paltry increase of 1% this year in domestic sales, instead have seen sales surge at a 15.3% rate through July.

Overall economic growth at home, adjusted for inflation, reached 6% in the fiscal year that ended last March. The decline in the trade surplus acted as a drag on economic output, but the gross national product still rose by a solid 4.9%. And in the final January-to-March quarter of the fiscal year, the GNP was rising at an annual rate of 11.3%, the highest in 14 years.

Joblessness Down Again

Meanwhile, Japan’s traditionally low unemployment rate, which reached as high as 3.2% early last year in the aftermath of the rapid appreciation of the yen that began three years ago, is back down to 2.4%.

Takeshita’s government in June announced a strategy to keep the economy on the same track for the next five years. If all goes according to plan, Japan’s economy--led by domestic growth--will power ahead in excess of a 4% annual pace. And all the while the current-account surplus--the surplus in international trade and such non-trade transactions as tourism, shipping and insurance--will continue to shrink, from a peak of 4.5% of Japan’s overall GNP in fiscal 1986 to substantially less than 2% in 1992.

Although overall growth is expected to slow from the feverish pace of the January-to-March quarter, Japan’s domestic takeoff is expected to continue, unaided by further government stimulus, at least into next year.

Also, the government is prepared to step in when necessary. Finance Minister Kiichi Miyazawa says that the government’s gradual sale of Nippon Telegraph & Telephone Corp. stock has put “in my pocket” the funds necessary to keep public works spending at a high level for the next five years.

Asian Imports to Grow

Japan’s excessive concentration on shipments to the United States will also shrink dramatically, Miyazawa said in an interview. And to help reduce the dependence of its neighbors on the U.S. market, the government made an unprecedented pledge to boost its imports from Asia’s so-called Newly Industrialized Countries, or NICs--South Korea, Taiwan, Hong Kong and Singapore--as well as other countries in the region.

Already, the results are paying off in a lessening of trade tensions with the United States. Commerce Department statistics showed a 12.6% decline in the trade surplus with the United States through June, indicating that the imbalance this year could fall to about $52 billion even if no further progress is made. From 1979 to 1987, the U.S. trade deficit with Japan ballooned from $9 billion to nearly $60 billion.

So dramatic has the transformation become that Japanese officials, long harried by “Japan bashing,” are basking in the first waves of “Japan boosting.”

During a visit here in July, for instance, Secretary of State George P. Shultz called the U.S.-Japan relationship “healthier and stronger than I have ever seen it.” He singled out Japan’s reduced dependence on exports for particular praise.

Profound Restructuring Seen

To some experts, all this adds up to nothing less than a profound restructuring of the Japanese economy. It is threatening to undermine many of the cozy arrangements that have allowed Japanese firms to maintain exorbitant domestic prices, and it is speeding the exodus of Japanese manufacturing facilities abroad.

“Basic structural change has occurred that will be very difficult to reverse,” says Tadashi Nakamae, an economic consultant to many of Japan’s largest corporations.

As Japan exposes itself more to the rest of the world, Nakamae notes, some Japanese firms will be forced to cut prices at home because the growing hordes of Japanese consumers traveling abroad can buy them for less elsewhere. Also, he says, a number of Japanese corporations, particularly in the auto and electronics industries, already “have made huge investments overseas that they will have to protect,” even if that means cutting back at home in a future slump.

Others are not so sure that Japan is ready to abandon its traditional reliance on exports as its ticket to prosperity. Major manufacturers have already adjusted to the reduced profits from exports caused by the yen’s appreciation and are once again boosting their overseas sales. Even with spectacular gains in imports, Japan’s global trade surplus, which fell by $7.7 billion in fiscal 1987 to $94.4 billion, is still expected to remain huge this year.

sh Complaints About Competition Japanese cement producers are already complaining about increased imports from South Korea. Yet domestic cement firms still have 96% of the market.

Steel makers, who last year exported 29% of their production, are grumbling about imports that took 7% of the market here.

Only one Korean car--brought in by a vice president of Mitsubishi Motors--has been sold in Japan. By contrast, South Korea is expected to export about 500,000 vehicles to the United States this year.

And when foreign manufacturers have made big strides in the Japanese market--as in some textile products--Japanese producers have often displayed the same fears about the growing economic clout of Asia’s newly industrialized countries that the United States has frequently demonstrated toward Japan.

‘Pressed in Every Market’

“The Japanese feel pressed in every market as they hear the footsteps of new Asia ‘dragons,’ ” said Kazuo Nukazawa, the top economist at Keidanren, Japan’s powerful big-business federation.

Frightened by a 90% surge in knitwear imports from South Korea this year, for instance, the Japan Knitting Industry Assn. threatened in May to sue the Koreans for dumping products below cost in Japan. A month later the Seoul government, under prodding from Japan’s Ministry of International Trade and Industry, announced that it would start a program of “voluntary export restraints.”

Naohiro Amaya, president of the Japan Economic Foundation and a former vice minister for international affairs of the trade ministry, complains that Japan has failed to come up with a “grand design” to help eliminate global trade imbalances. “Instead, it reacts to outside pressure with piecemeal concessions,” he says. “Despite being a great power, Japan retains the mentality of a minor power.”

Vittorio Volpi, president of the Italian Chamber of Commerce here and representative of the Banca della Svizzera Italiana, warns that the Japanese and U.S. economies are poles apart.

Sees No Basic Change

“The United States is a consumer-oriented economy; Japan is a manufacturer-oriented economy. . . ,” he says. “I see no fundamental change in this situation and, frankly, do not expect one. The structural problems between Japan and the United States are so big that I doubt if they can be solved peacefully over the next five years.”

But for all the obstacles, major cracks are now appearing in the Japanese jimae-shugi --or stay-at-home, produce-it-all-yourself--economic mentality.

“Reverse imports,” or purchases from Japanese factories abroad, represent one of the first signs of emerging change. The much-ballyhooed Honda car exports from Honda’s Ohio factory to Japan may be relatively trivial today, but the trade ministry estimates that the phenomenon in all industries already accounted for $2.5 billion of Japan’s imports last year. Analysts expect reverse imports to continue to swell.

And in the fiscal year that ended in March, Japanese firms poured a record $33.4 billion into direct overseas investments, $14.7 billion of it into the United States. Products that will be manufactured in the plants constructed with part of those funds will replace goods that are currently being shipped from Japan.

Plants in U.S. to Help

“Japanese investment in manufacturing in the United States will be a cause for a decrease in the Japanese surplus with the United States,” said Bunroku Yoshino, chairman of the Institute for International Economic Studies. “It will cause imports to Japan and will lead to the recovery of industrial capacity in the United States.”

James Abegglen, president of Asia Advisory Service and one of the longest-residing American analysts in Japan, predicts that an improvement in Japan’s trade imbalance with the United States “is distinctly on the way from Japanese export-substituting investments in the United States.” Within a year and a half, he says, 20% of Japan’s auto-making capacity and 15% of its electronics manufacturing capacity will be abroad, much of it in the United States.

For the first time, Japanese firms also have been abandoning some low-technology industries where it is no longer profitable to compete with the new industrial nations--or the United States.

Japan had 10% of the world’s aluminum smelting production capacity only 10 years ago. Today, because of local energy costs far in excess of those in the United States, Brazil and other aluminum producers, Japan has just one tiny smelting plant in operation.

Few Japanese can contemplate ever going as far in cutting back heavy industry or in pushing investment overseas as have American manufacturing firms, which conduct about 18% of their production abroad. Despite the recent increases in overseas investment, Japanese firms still manufacture only 3.7% of their output overseas.

Moving Abroad to Continue

As long as Japan runs a large trade surplus, however, fundamental economic forces will continue to push Japanese firms to move abroad.

“Japanese industrialists today see themselves on a treadmill running faster and faster to overcome the appreciation of the yen, but knowing all the while that success will only drive the yen up further still and force them to run faster yet,” says Nukazawa, the Keidanren economist. “The only way off the treadmill is to make . . . investments in the United States or elsewhere abroad.”

Even more difficult for the Japanese will be revamping their costly distribution system and overhauling the inefficient use of land that has pushed real estate prices out of sight. These practices, uneconomical as they may be, have the support of well-entrenched interest groups.

Makoto Kuroda, on the eve of his retirement from the trade ministry as vice minister for international affairs, defended what he called Japan’s “relatively less efficient distribution system,” even though the tens of thousands of mom-and-pop stores that dot the landscape “create more cost for us.”

“But that is not wasting money,” he said. “It is creating stability for society” because “it creates a cushion” against higher unemployment.

Reduces Purchasing Power

It also helps reduce purchasing power in Japan to only 60% of the U.S. level, even though per-capita income has risen to a level slightly higher than in the United States at today’s exchange rates. The question is whether Japanese consumers will continue to tolerate a system that exacts such a high cost.

Haruo Maekawa, former governor of the Bank of Japan, predicts that they will not.

“The main objective of all (government) ministries used to be to foster or protect the producer,” says Maekawa. “That is why our economic structure became export-oriented. It was not to improve the quality of the life of the people. . . .

“The government is now focusing on the quality of life,” he says. “That’s why the whole structure of the economy is changing.”

JAPAN’S TRADE SURPLUS:TURNING DOWN? In billions of dollars

Trade surplus with World U.S 1981 $20.8 $18.0 1982 20.5 18.9 1983 34.4 21.7 1984 45.8 36.8 1985 62.1 49.7 1986 102.1 58.6 1987 94.4 59.8

Source: Japanese Finance Ministry, U.S.

Commerce Department