Final Copy - Japanese Economy

The Japanese Economy experienced a ‘miracle’ growth phase after the end of the Second World War and up until the 1980s to become the second largest economy in the world. However, in the 1990s it experienced a ‘Lost Decade’, and some of its structural problems continue to hold it back. Japan’s economy is the second largest economy in the world and the largest in Asia, based on real GDP, market exchange rates, and nominal GDP. Japan uses planned development of science and technology, and has a strong work culture, which benefits the country as a whole. It also emphasizes good relationships between the industrial sector and national government. According to the CIA World Factbook, the estimated GDP-Purchasing power parity of Japan in 2007 was $4.29 trillion, and the GDP (PPP) per capita was $33,600. Japanese GDP grew at 2.8% in 2007. The economy is highly advanced and dominated by the services sector, accounting for 73.1% of the economy. The industrial sector, once the engine of Japan’s growth, contributed 25.3% of the GDP. The agricultural sector accounts for only 1.6% of the economy. For sustained growth rates and stability in the Japanese economy, the government has recently been considering a number of stimulus ideas to manage inflation, increase service sector productivity, look at fiscal consolidation, and reform the tax system and labor market.

Japan has been experiencing deflation – meaning an annual drop in prices - since 1999. In 2008, however, the whole world has been buffeted by rising oil, food and commodity prices. Japan’s inflation rate – excluding volatile fresh fruit, fish and vegetable prices – rose 1.5% in May 2008, its highest rate since 1998. For a decade now, Japanese consumers have grown accustomed to dropping prices. With prices suddenly going up, consumer spending is expected to drop, spelling further trouble for the economy. Indeed, in the second quarterly report of 2008

issued by the Bank of Japan, 58.7% of those surveyed said they expect to cut their spending this year. This is the highest figure on record since the survey started in 1997. The Bank of Japan will be hard-pressed to rein in inflation which has become a global phenomenon.

EXPORTS: Japan's main export goods are cars, electronic devices and computers. Most important single trade partner is the USA which imports more than one quarter of all Japanese exports. Other major export countries are Taiwan, Hong Kong, South Korea, China and Singapore. IMPORTS: Japan has a large surplus in its export/import balance. The most important import goods are raw materials such as oil, foodstuffs, and wood. Major suppliers are the USA, China, Indonesia, South Korea, and Australia. INDUSTRIES: Manufacturing, construction, distribution, real estate, services, and communication are Japan's major industries today. Agriculture makes up only about 2% of the GNP. Most important agricultural product is rice. Resources of raw materials are very limited and the mining industry rather small. CURRENCY: The Japanese currency is the Yen, literally meaning "circle". One yen corresponds to 100 sen. However, sen are not used in everyday life anymore. Coins come in 1 Yen, 5 Yen, 10 Yen, 50 Yen, 100 Yen and 500 Yen. Bills come in 1,000 Yen, 2,000 Yen (very rare), 5,000 Yen and 10,000 Yen.

COSTS OF LIVING: Living costs in Japan and especially in Tokyo are famous to be among the world's highest. However, if you live outside of central Tokyo, adjust to a Japanese lifestyle and do not depend too heavily on food and products from your home country, you may be surprised how inexpensive Japan can be. 1} HOUSING: Some of the world's most expensive land can be found in central Tokyo. Consequently, even tiny apartments in the city center are very expensive. However, housing costs are distinctly lower in Tokyo's suburbs, surrounding prefectures and in other regions and cities of Japan. Additional commuting costs are often more than compensated by the savings on the rent, especially as many Japanese companies pay part or all of their employees' commuting expenses. Utilities such as gas, water and especially electricity are expensive, and phone rates are high. For international calls, consider internet phones, callback services and other offers for the expat community. 2} FOOD: Local supermarkets are relatively inexpensive if you stick to Japanese food such as seasonal vegetables, seafood, soya bean products and rice. If you visit supermarkets shortly before closing time in the evening, you can purchase remaining perishable products at big discounts. 3}GOODS & SERVICES:

JAPAN & INDIA HISTORY: Exchange between Japan and India is said to have begun in the 6th century when Buddhism was introduced to Japan. Indian culture, filtered through Buddhism, has had a great impact on Japanese culture, and this is the source of the Japanese people's sense of closeness to India. After World War II, in 1949, Indian Prime Minister Jawaharlal Nehru donated two Indian elephants to the Ueno Zoo in Tokyo. This brought a ray of light into the lives of the Japanese people who still had not recovered from Japan's defeat in World War II. Japan and India signed a peace treaty and established diplomatic relations on 28th April, 1952. This treaty was one of the first treaties Japan signed after the World War II. Ever since the establishment of diplomatic relations, the two countries have enjoyed cordial relations. In the post World War II period, India's iron ore helped a great deal Japan's recovery from the devastation. Following Japanese Prime Minister Nobusuke Kishi's visit to India in 1957, Japan started providing yen loans to India in 1958, as the first yen loan aid extended by Japanese government. Since 1986, Japan has become India's largest aid donor, and remains so.

RECENT RELATIONS: Japan and India agreed to establish "Japan-India Global Partnership in the 21st Century" when Prime Minister Mori visited India in August, 2000. Prime Minister Vajpayee visited Japan in December, 2001, and both Prime Ministers issued "Japan-India Joint Declaration", which consist of high-level dialogue, exchange in ICT field, joint counter-action against proliferation of WMD and terrorism. In April, 2005, Prime Minister Koizumi visited India and agreed with Indian Prime Minister, Dr. Manmohan Singh, to reinforce the strategic focus of the global partnership between the two countries. They signed Joint Statement "Japan-India Partnership in the New Asian Era: Strategic Orientation of Japan-India Global Partnership" Prime Minister Singh visited Japan and had a summit talks with Prime Minister Abe in December, 2006. The two Prime Ministers decided to establish a Strategic and Global Partnership between the two countries and signed the "Joint Statement towards Japan-India Strategic and Global Partnership.

Main Elements of "Joint Statement towards Japan-India Strategic and Global Partnership" •

Holding annual Summit-level meetings in respective capitals

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Institutionalization of Strategic Dialogue at the Foreign Ministers level

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Launching negotiations for the conclusion of a bilateral EPA/CEPA

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Setting up of a Business Leaders' Forum

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Cooperation in the field of Science and Technology

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Expansion of youth exchange, promoting Japanese language education in India, etc.

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Cooperation in multilateral framework such as EAS, UN, SAARC, etc.

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Cooperation in the field of energy, environment, anti-piracy, non-proliferation, etc.

COOPERATION IN SECURITY FIELDS: Both countries have been conducting annual Foreign 0ffice Consultations at the Foreign Secretary level. The Security Dialogue between the two countries was set up in 2001 and four round of dialogue has been conducted since then. High level exchange is continuing between the defense authorities. From Japan, General Massaki, Chief of Staff (September, 2005), Admiral Saito, Chief of Maritime SDF (February, 2006), General Mori, Chief of Ground SDF (March, 2006), and General Yoshida, Chief of Air SDF (April, 2006) visited India. From India, Admiral Prakash, Chief of Naval Staff, visited Japan in October, 2005. Defense Minister of India, Mr. Mukherjee, visited Japan in May, 2006, and Joint Statement was issued to promote defense exchanges. In September, 2007, Maritime SDF joined in the "Malabar 07-2" which was hosted by India. Between the coast guards, combined exercises on anti-piracy, search & rescue etc. have been conducted every year since 2000. Heads of coast guards of both countries visit each other almost every year. The two coast guards exchanged a Memorandum on Cooperation at the occasion of commandant Ishikawa's visit to India in November, 2006.

ECONOMIC RELATIONS: Bilateral trade is expanding in the recent years. However, the speed and scope of expansion are still limited. Joint Study Group (JSG), composed of government officials and representatives of business and academia from the two countries, held four meetings after July, 2005. JSG submitted its report to both Prime Ministers when they met in July, 2006, which includes a recommendation for launching EPA negotiations. In December, 2006, the Prime Ministers of the two countries decided to launch immediate negotiations for the conclusion of a bilateral Economic Partnership Agreement/Comprehensive Economic Partnership Agreement aiming to complete in substance as soon as possible in approximately two years. Four rounds of negotiations were held in New Delhi and Tokyo respectively until October, 2007. In July, 2007 Japan-India Strategic Dialogue on Economic Issues which reviews the current status of agreed matters in the field of economy as a follow-up of Prime Minister Dr. Manmohan Singh's visit to Japan and subsequent Summit meetings, and undertake coordination as necessary was held in New Delhi. In August, 2007 the Business Leaders' Forum was held in New Delhi at the occasion of Prime Minister Abe's visit to India.

CULTURAL RELATIONS: Both governments held "Japan-India Exchange Year 2007" both in Japan and in India to commemorate the 50th anniversary of the Cultural Agreement.

ECONOMIC BUBBLE: • In 1985 the deregulation of interest rates on deposits began. • Japanese banks were also adversely affected by the decline of property values in Japan. • In 1990 Japanese banks held about 22 percent of the mortgages in Japan. • In addition, many of the loans to small businesses are backed by property. • In Japan banks are not only not required to establish reserves for bad loans, they are effectively penalized for doing so. • Consequently in 1991 Japanese banks had reserves of only 3 trillion Yen for total loans of 450 trillion Yen. • Japanese banks tend not to report that a loan is in default because it makes the accounting profits look bad. • Japanese insurance companies were at risk in the property market also. Six percent of insurance assets were property and many of their domestic loans were backed by property. • Japanese banks rely upon the guidance of the MOF and consequently. • They do not exercise sufficient independent judgment and have not learned to cope with financial difficulties. • Banks have lent heavily with land as collateral. • The aggregate property value reaching levels four to five times the aggregate property values in the U.S. yet no one, apparently, questioned the wisdom of this. • In 1990 the aggregate value of all land in Japan was fifty percent greater than the value of all land in the rest of the world. • The government tried to raise prices in the stock market by ordering public sector financial institutions to buy stocks. • The banking system suffered severe losses from loans used to buy property, but the bank tried to pretend these losses had not occurred. • Employees were paid with unsold company inventory.

• Government policy discourages Japanese companies from reducing their labor force, but this puts such companies at risk of financial collapse. • The Bubble Economy ended essentially in 1990 it wasn't until January 29, 1993 that a Japanese prime minister acknowledged that the "Bubble Economy" had collapsed. • In the first three months of 1993 the price level fell by 1.1 percent, which represents a rate of deflation of almost 4.5 percent per year. • By August 1993 wholesale prices were falling at an annual rate of 4.2 percent. • In the second quarter of 1993 Japan's GNP declined at an annual rate of 2 percent. The Japanese economy was in serious trouble.

MONETARY POLICY OF JAPAN: Monetary policy pertains to the regulation, availability, and cost of credit, while fiscal policy deals with government expenditures, taxes, and debt. Through management of these areas, the Ministry of Finance regulated the allocation of resources in the economy, affected the distribution of income and wealth among the citizenry, stabilized the level of economic activities, and promoted economic growth and welfare. The Ministry of Finance played an important role in Japan's postwar economic growth. It advocated a "growth first" approach, with a high proportion of government spending going to capital accumulation, and minimum government spending overall, which kept both taxes and deficit spending down, making more money available for private investment. Most Japanese put money into savings accounts, mostly postal savings.

FISCAL POLICY OF JAPAN: In the postwar period, the government's fiscal policy centers on the formulation of the national budget, which is the responsibility of the Ministry of Finance. The ministry's Budget Bureau prepares expenditure budgets for each fiscal year based on the requests from government ministries and affiliated agencies.

The ministry's Tax Bureau is responsible for adjusting the tax schedules and estimating revenues. The ministry also issues government bonds, controls government borrowing, and administers the Fiscal Investment and Loan Program, which is sometimes referred to as the "second budget." Three types of budgets are prepared for review by the National Diet each year. The general account budget includes most of the basic expenditures for current government operations. Special account budgets, of which there are about forty, are designed for special government programs or institutions where close accounting of revenues and expenditures is essential: for public enterprises, state pension funds, and public works projects financed from special taxes. Finally, there are the budgets for the major affiliated agencies, including public service corporations, loan and finance institutions, and the special public banks. Although these budgets are usually approved before the start of each fiscal year, they are usually revised with supplemental budgets in the fall. Local jurisdiction budgets depend heavily on transfers from the central government. Government fixed investments in infrastructure and loans to public and private enterprises are about 15 % of GNP. Loans from the Fiscal Investment and Loan Program, which are outside the general budget and funded primarily from postal savings, represent more than 20 % of the general account budget, but their total effect on economic investment is not completely accounted for in the national income statistics. Government spending, representing about 15 % of GNP in 1991, was low compared with that in other developed economies. Taxes provided 84.7 % of revenues in 1993. Income taxes are graduated and progressive. The principal structural feature of the tax system is the tremendous elasticity of the individual income tax. Because inheritance and property taxes are low, there is a slowly increasing concentration of wealth in the upper tax brackets. In 1989 the government introduced a major tax reform, including a 3 % consumer tax. This tax has been raised to 5 % by now. After the breakdown of the economic bubble in the early 1990s the country's monetary policy has become a major reform issue. US economists have called for a reduction in Japan's public spending, especially on infrastructure projects, to reduce the budget deficit. To force a reduction of the loan program, partially financed through postal savings, then-Prime Minister Junichiro Koizumi aimed to push forward postal privatization. The postal deposits, by far the largest deposits of any bank in the world, would help strengthening the private banking sector instead. BUDGET IN JAPAN:

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Three types of budgets are prepared for review by the National Diet each year.

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The general account budget includes most of the basic expenditures for current government operations.

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Special account budgets, of which there are about forty, are designed for special government programs or institutions where close accounting of revenues and expenditures is essential: for public enterprises, state pension funds, and public works projects financed from special taxes.

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Finally, there are the budgets for the major affiliated agencies, including public service corporations, loan and finance institutions, and the special public banks.

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Although these budgets are usually approved before the start of each fiscal year, they are usually revised with supplemental budgets in the fall.

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Local jurisdiction budgets depend heavily on transfers from the central government.

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Government fixed investments in infrastructure and loans to public and private enterprises are about 15 % of GNP.

TRADE BARRIERS:

INTERNATIONAL MEMBERSHIP: INFLATION: GDP: CONVERSION RATE WITH RESPECT TO $:

STATISTICS: