Economic relations of Japan
Encyclopedia
In its economic relations, Japan
is both a major trading nation and one of the largest international investors in the world. In many respects, international trade
is the lifeblood of Japan's economy
. Imports and exports totaling the equivalent of nearly US$522 billion in 1990 meant that Japan was the world's third largest trading nation after the United States
and the Federal Republic of Germany
(West Germany). Trade was once the primary form of Japan's international economic relationships, but in the 1980s its rapidly rising foreign investments added a new and increasingly important dimension, broadening the horizons of Japanese businesses and giving Japan new world prominence.
policies to limit foreign competition for domestic industries.
After the end of the World War II, Japan's economy was in a shambles, with production in 1945 at 10% of prewar levels. Its international economic relations were almost completely disrupted. Initially, imports were limited to essential food and raw materials, mostly financed by economic assistance from the United States
. Because of extreme domestic shortages, exports did not begin to recover until the Korean War
(1950–53), when special procurement by United States armed forces created boom conditions in indigenous industries. By 1954 economic recovery and rehabilitation were essentially complete. For much of the 1950s, however, Japan had difficulty exporting as much as it imported, leading to chronic trade and current account deficits. Keeping these deficits under control, so that Japan would not be forced to devalue its currency under the Bretton Woods system
of fixed exchange rates that prevailed at the time, was a primary concern of government officials. Stiff quotas and tariffs on imports were part of the policy response. By 1960 Japan accounted for 3.6 percent of all exports of noncommunist countries.
and other material prices rose during the 1973 oil crisis
and supply was uncertain. Japan faced sharply higher bills for imports of energy and other raw materials. The new exchange rates and the rise in raw material prices meant that the surpluses of the decade's beginning were lost, and large trade deficits followed in the wake of the second oil price shock in 1979
. Expanding the country's exports remained a priority in the face of these raw material supply shocks, and during the decade exports continued to expand at a high annual average rate of 21 percent.
. The large surpluses, combined with foreign perceptions that Japan's import markets were still relatively closed, exacerbated tension between Japan and a number of its principal trading partners, especially the United States. A rapid increase in imports of manufactured goods after 1987 eased some of these tensions, but as the decade ended, friction still continued.
The processes through which Japan is becoming a key member of the international economic community continued into the 1990s. Productivity continued to grow at a healthy pace, the country's international leadership in a number of industries remained unquestioned, and investments abroad continued to expand. Pressures were likely to lead to further openness to imports, increased aid to foreign countries, and involvement in the running of major international institutions, such as the International Monetary Fund
(IMF). As Japan achieved a more prominent international position during the 1980s, it also generated considerable tension with its trade partners, especially with the United States, although these have dissipated more recently as the growth of Japan's economy has slowed.
, and lending. Controls were motivated by the desire to prevent foreigners (mainly Americans) from gaining ownership of the economy when Japan was in a weak position after World War II, and by concerns over the balance of payments
deficits. Beginning in the late 1960s, these controls were gradually loosened, and the process of deregulation accelerated and continued throughout the 1980s. The result was a dramatic increase in capital movements, with the biggest change occurring in outflows—investments by Japanese in other countries. By the end of the 1980s, Japan had become a major international investor. Because the country was a newcomer to the world of overseas investment, this development led to new forms of tension with other countries, including criticism of highly visible Japanese acquisitions in the United States and elsewhere.
, Taiwan
, Hong Kong
, Singapore
, Indonesia
, and other countries in Southeast Asia
) accounted for 28.8 percent of Japan's exports, a share well below the 34 percent value of 1960 but one that had been roughly constant since 1970. In 1990 developing Asian countries provided 23 percent of Japan's imports, a share that had risen slowly from 16 percent in 1970.
As a whole, Japan had run a surplus with noncommunist Asia, and this surplus rose quickly in the 1980s. From a minor deficit in 1980 of US$841 million (mostly caused by a peak in the value of oil imports from Indonesia), Japan showed a surplus of nearly US$3 billion with these countries in 1985 and of over US$228 billion in 1990. The shift was caused by the fall in the prices of oil and other raw materials that Japan imported from the region and by the rapid growth in Japanese exports as the region's economic growth continued at a high rate.
Indonesia and Malaysia both continued to show a trade surplus because of their heavy raw material exports to Japan. However, falling oil prices caused trade in both directions between Japan and Indonesia to decline in the 1980s. Trade similarly declined with the Philippines, owing to the political turmoil and economic contraction there in the 1980s.
South Korea, Taiwan, Hong Kong, and Singapore constituted the newly industrialized economies (NIEs) in Asia, and all four exhibited high economic growth during the 1970s and 1980s. Like Japan, they lacked many raw materials and mainly exported manufactured goods. Their deficits with Japan increased from 1980 to 1988, when the deficits of all four were sizeable. Over the 1970s and 1980s, they evolved a pattern of importing components from Japan and exporting assembled products to the United States.
Japan's direct investment in Asia also expanded with the total cumulative value reaching over US$32 billion by 1988. Indonesia, at US$9.8 billion in 1988, was the largest single location for these investments. As rapid as the growth of investment was, however, it did not keep pace with Japan's global investment, so Asia 's share in total cumulative investment slipped, from 26.5 percent in 1975 to 17.3 percent in 1988.
China is now Japan's largest export market, surpassing the U.S. despite a drop in overall trade, according to recent figures from the Japan External Trade Organization. Japan's exports to China fell 25.3% during the first half of 2009 to $46.5 billion, but due to a steeper drop in shipments to the U.S., China became Japan's largest trade destination for the first time. China is also Japan's largest source of imports.
expanded dramatically in the 1970s with the jumps in crude oil
prices. The 1973 oil crisis
put a break to the high rates of economic growth Japan enjoyed in the 1960s, and Japan was deeply concerned with maintaining good relations with these oil-producing nations to avoid a debilitating cut in oil supplies. During the 1980s, however, oil prices fell
and Japan's concerns over the security of its oil supply diminished greatly. Still, measures were taken to reduce Japanese dependency on oil as energy source. After the end of the Cold War
, Japan tried to win Russia
as another source of oil, but so far Japanese-Russian relations
remain tense because of territorial disputes. Other oil sources include Indonesia and Venezuela
.
The Middle East represented only 7.5 percent of total Japanese imports in 1960 and 12.4 percent in 1970, with the small rise resulting from the rapid increase in the volume of oil consumed by the growing Japanese economy. By 1980, however, this share had climbed to a peak of 31.7 percent because of the two rounds of price hikes in the 1970s. Falling oil prices after 1980
brought this share back down to 10.5 percent by 1988—actually a lower percentage than in 1970, before the price hikes had started. The major oil suppliers to Japan in 1988 were Saudi Arabia
and the United Arab Emirates
. Iran
, Iraq
, and Kuwait
were also significant, but smaller, sources. These three countries became less important oil suppliers after 1980 because of the Iran-Iraq war
(1980–88), Iraq's invasion of Kuwait in 1990, UN sanctions and the 2003 US invasion of Iraq
.
As imports from the Middle East surged in the 1970s, so did Japan's exports to the region. Paralleling the pattern for imports, however, this share fell in the 1980s. Amounting to 1.8 percent in 1960, exports to this region rose to 11.1 percent of total Japanese exports in 1980 but then declined to 3.6 percent by 1988.
Part of Japan's strategy to ensure oil supplies is to encourage investment in oil-supplying countries. However, such investment have never kept pace with Japan's investments in other regions. The country's expanding need for oil helped push direct investment in the Middle East to 9.3 percent of total direct investments abroad by Japanese companies in 1970, but this share had fallen to 6.2 percent by 1980 and to only 1.8 percent by 1988. The Iran-Iraq War (1980–88) was a major factor in the declining interest of Japanese investors, exemplified by the fate of a large US$3 billion petrochemical complex in Iran, which was almost complete when the Islamic revolution
took place in Iran in 1979. Completion was delayed first by political concerns (when United States embassy personnel were held hostage) and then by repeated Iraqi bombing raids. The project was finally canceled in 1989, with losses for both Japanese companies and the Japanese government, which had provided insurance for the project.
In the 1990s, urbanization
in several Gulf states, especially Dubai
, led to a number of profitable contracts for Japanese construction companies
.
grew steadily but had been relatively small well into the 1980s considering the size of this market. In 1980 Western Europe supplied only 7.4 percent of Japan's imports and took 16.6 percent of its exports. However, the relationship began to change very rapidly after 1985. West European exports to Japan increased two and one-half times in just the three years from 1985 to 1988 and rose as a share of all Japanese imports to 16 percent. (Much of this increase came from growing Japanese interest in West European consumer items, including luxury automobiles.) Likewise, Japan's exports to Western Europe rose rapidly after 1985, more than doubling by 1988 and accounting for 21 percent of all Japan's exports. By 1990 Western Europe's share of Japan's imports had risen to 18 percent and the share of Japan's exports that it received had risen to 22 percent.
In 1990 the major European buyers of Japanese exports were West Germany
(US$17.7 billion) and Britain
(US$10.7 billion). The largest European suppliers to Japan were West Germany (US$11.5 billion), France
(US$7.6 billion), and Britain (US$5.2 billion). Traditionally, West European countries had trade deficits with Japan, and this continued to be the case in 1988, despite the surge in Japan's imports from them after 1985. From 1980 to 1988, the deficit of the West European countries as a whole expanded from US$11 billion to US$25 billion, with much of the increase coming after 1985. That diminished somewhat to US$20.7 billion in 1990, before rising sharply to US$34 billion in 1992.
Trade relations with Western Europe were strained during the 1980s. Policies varied among the individual countries, but many imposed restrictions on Japanese imports. Late in the decade, as discussions proceeded on the trade and investment policies that were expected to prevail with European economic integration in 1992, many Japanese officials and business people became concerned that protectionism directed against Japan would increase. Domestic content requirements (specifying the share of local products and value added in a product) and requirements on the location of research and development facilities and manufacturing investments appeared likely.
Fear of a protectionist Western Europe accelerated Japanese direct investment in the second half of the 1980s. Total accumulated Japanese direct investments in the region grew from US$4.5 billion in 1980 to over US$30 billion in 1988, from 12.2 percent to more than 16 percent of such Japanese investments. Rather than being discouraged by protectionist signals from Europe, Japanese businesses appeared to be determined to play a significant role in what promises to be a large, vigorous, and integrated market. Investment offered the surest means of circumventing protectionism, and Japanese business appeared to be willing to comply with whatever domestic content or other performance requirements the European Union might impose.
ian prospects. A vast territory richly endowed with raw materials and with a sizable Japanese-Brazilian minority in the population, Brazil appeared to Japanese business to offer great opportunities for trade and investment. However, none of those expectations have been realized, and Japanese financial institutions became caught up in the international debt problems of Brazil and other Latin America
n countries.
In 1990 Japan received US$9.8 billion of imports from Latin America as a whole and exported US$10.2 billion to the region, for a surplus of US$429 million. Although the absolute value of both exports and imports had grown over time, Latin America had declined in importance as a Japanese trading partner. The share of Japan's total imports coming from this region dropped from 7.3 percent in 1970 to 4.1 percent in 1980, remaining at 4.2 percent in 1990. Japan's exports to Latin America also declined, from 6.9 percent in 1980 to 3.6 percent in 1990.
Despite this relative decline in trade, Japan's direct investment in the region continued to grow quickly, reaching US$31.6 billion in 1988, or 16.9 percent of Japan's total foreign direct investment. This share was only slightly below that of 1975 (18.1 percent) and was almost equal to the share in Asian countries. However, over US$11 billion of this investment was in Panama
—mainly for Panamanian-flag shipping, which does not represent true investment in the country. The Bahamas also attracted US$1.9 billion in investment, mainly from Japanese financial institutions but also in arrangements to secure favorable tax treatment rather than real investments. Brazil absorbed US$5 billion in Japanese direct investment, Mexico
absorbed US$1.6 billion, and other Latin American countries absorbed amounts below US$1 billion in the late 1980s.
Latin American countries lie at the heart of the Third World
debt problems that plagued international financial relations in the 1980s. Japanese financial institutions became involved as lenders to these nations, although they were far less exposed than United States banks. Because of this financial involvement, the Japanese government was actively involved in international discussions of how to resolve the crisis. In 1987 Minister of Finance Miyazawa Kiichi put forth a proposal on resolving the debt issue. Although that initiative did not go through, the Brady Plan that emerged in 1989 contained some elements of the Miyazawa Plan. The Japanese government supported the Brady Plan by pledging US$10 billion in cofinancing with the World Bank and the IMF.
Japan has signed a Free Trade Agreement with Mexico
.
(UN), the International Monetary Fund
(IMF), the Organization for Economic Co-operation and Development (OECD), and the General Agreement on Tariffs and Trade
(GATT). It also participates in the international organizations focusing on economic development, including the World Bank
and the Asian Development Bank
.
As a member of the IMF and World Bank, for example, Japan played a role in the effort during the 1980s to address the international debt crisis brought on by the inability of certain developing countries to service their foreign debts as raw material prices fell and their economies stagnated. As a member of the IMF, Japan also cooperates with other countries in moderating the shortrun volatility of the yen and participates in discussions on strengthening the international monetary system.
Japan's membership in the OECD has constrained its foreign economic policy to some extent. When Japan joined the OECD in 1966, it was obliged to agree to OECD principles on capital liberalization, an obligation that led Japan to begin the process of liberalizing its many tight controls on investment flows into and out of Japan. Japan is also a participant in the OECD's "gentlemen's agreement" on guidelines for government-supported export credits, which places a floor on interest rates and other terms for loans to developing countries from government-sponsored export-import banks.
GATT has provided the basic structure through which Japan has negotiated detailed international agreements on import and export policies. Although Japan had been a member of GATT since 1955, it retained reservations to some GATT articles, permitting it to keep in place stiff quota restrictions until the early 1960s. Japan took its GATT obligations seriously, however, and a number of American disputes with Japan over its import barriers were successfully resolved by obtaining GATT rulings, with which Japan complied. Japan also negotiated bilaterally with countries on economic matters of mutual interest.
The international organization with the strongest Japanese presence has been the Asian Development Bank, the multilateral lending agency established in 1966 that made soft loans to developing Asian countries. Japan and the United States have had the largest voting rights in the Asian Development Bank, and Japan has traditionally filled the presidency.
As Japan became a greater international financial power in the 1980s, its role in financing these trade and development institutions grew. Previously, the government had been a quiet participant in these organizations, but as its financial role increased, pressure to expand voting rights and play a more active policy role mounted.
By the early 1990s, Japan's influence and voting rights in the World Bank and IMF and other multilateral development banks increased. Japan's financial and policy positions become more prominent. Tokyo had assumed a leading role at the Asian Development Bank for a number of years. At the World Bank, Japan's voting share represented about 9.4 percent, compared with 16.3 percent for the United States. Japan also made several "special" contributions to particular World Bank programs that raised its financial status but did not alter its voting position. Japan planned to participate in the East European Development Bank, making a contribution of 8.5 percent, the same as the United States and major West European donors. Japan also displayed a growing prominence in IMF deliberations, helping ease the massive debt burdens of developing countries, and generally supported efforts in the early 1990s at the GATT Uruguay Round
of trade negotiations to liberalize world trade and investment.
This list does not include the European Union
which is a single economy and trading bloc (including Germany from the above list). The EU as a whole would be Japan's 3rd largest trading partner (11.1% of inports, 13.3% of exports) in 2010.
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
is both a major trading nation and one of the largest international investors in the world. In many respects, international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
is the lifeblood of Japan's economy
Economy of Japan
The economy of Japan, a free market economy, is the third largest in the world after the United States and the People's Republic of China, and ahead of Germany at 4th...
. Imports and exports totaling the equivalent of nearly US$522 billion in 1990 meant that Japan was the world's third largest trading nation after the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and the Federal Republic of Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
(West Germany). Trade was once the primary form of Japan's international economic relationships, but in the 1980s its rapidly rising foreign investments added a new and increasingly important dimension, broadening the horizons of Japanese businesses and giving Japan new world prominence.
Postwar development
Japan's international economic relations in the first three decades after World War II were shaped largely by two factors: a relative lack of domestic raw materials and a determination to catch up with the industrial nations of the West. Its exports have consisted exclusively of manufactured goods, and raw materials have represented a large share of its imports. The country's sense of dependency and vulnerability has also been strong because of its lack of raw materials. Japan's determination to catch up with the West encouraged policies to move away from simple labor-intensive exports toward more sophisticated export products (from textiles in the 1950s to automobiles and consumer electronics in the 1980s) and to pursue protectionistProtectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
policies to limit foreign competition for domestic industries.
After the end of the World War II, Japan's economy was in a shambles, with production in 1945 at 10% of prewar levels. Its international economic relations were almost completely disrupted. Initially, imports were limited to essential food and raw materials, mostly financed by economic assistance from the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. Because of extreme domestic shortages, exports did not begin to recover until the Korean War
Korean War
The Korean War was a conventional war between South Korea, supported by the United Nations, and North Korea, supported by the People's Republic of China , with military material aid from the Soviet Union...
(1950–53), when special procurement by United States armed forces created boom conditions in indigenous industries. By 1954 economic recovery and rehabilitation were essentially complete. For much of the 1950s, however, Japan had difficulty exporting as much as it imported, leading to chronic trade and current account deficits. Keeping these deficits under control, so that Japan would not be forced to devalue its currency under the Bretton Woods system
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
of fixed exchange rates that prevailed at the time, was a primary concern of government officials. Stiff quotas and tariffs on imports were part of the policy response. By 1960 Japan accounted for 3.6 percent of all exports of noncommunist countries.
1960s
During the 1960s, the U.S. dollar value of exports grew at an average annual rate of 16.9 percent, more than 75 percent faster than the average rate of all noncommunist countries. By 1970 exports had risen to nearly 6.9 percent of all noncommunist-world exports. The rapid productivity growth in manufacturing industries made Japanese products more competitive in world markets at the fixed exchange rate for the yen during the decade, and the chronic deficits that the nation faced in the 1950s had disappeared by the middle of the 1970s. International pressure to dismantle quota and tariff barriers mounted, and Japan began moving in this direction.1970s
The 1970s began with the end of the fixed exchange rate for the yen (a change brought about mainly by rapidly rising Japanese trade and current account surpluses) and with a strong rise in the value of the yen under the new system of floating rates. The sense of dependence on imported raw materials grew strong, when crude petroleumPetroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
and other material prices rose during the 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
and supply was uncertain. Japan faced sharply higher bills for imports of energy and other raw materials. The new exchange rates and the rise in raw material prices meant that the surpluses of the decade's beginning were lost, and large trade deficits followed in the wake of the second oil price shock in 1979
1979 energy crisis
The 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
. Expanding the country's exports remained a priority in the face of these raw material supply shocks, and during the decade exports continued to expand at a high annual average rate of 21 percent.
1980s
During the 1980s, however, raw material prices fell and the feeling of vulnerability lessened. The 1980s also brought rapidly rising trade surpluses, so that Japan could export far more than was needed to balance its imports. In response to these surpluses, the value of the yen rose against that of other currencies in the last half of the decade, but the surpluses proved surprisingly resilient to this change. With these developments, some of the resistance to manufactured imports, long considered luxuries in the relative absence of raw materials, began to dissipate. Japan had caught up. Now an advanced industrial nation, it faced new changes in its economy, on both domestic and international fronts, including demands to supply more foreign aid and to open its markets for imports. It had become a leader in the international economic system through its success in certain export markets, its leading technologies, and its growth as a major investor around the world. These were epochal changes for Japan, after a century in which the main national motivation was to catch up with the West. These dramatic changes also fed domestic developments that were lessening the society's insularity and parochialismParochialism
Parochialism means being provincial, being narrow in scope, or considering only small sections of an issue. It may, particularly when used pejoratively, be contrasted to universalism....
. The large surpluses, combined with foreign perceptions that Japan's import markets were still relatively closed, exacerbated tension between Japan and a number of its principal trading partners, especially the United States. A rapid increase in imports of manufactured goods after 1987 eased some of these tensions, but as the decade ended, friction still continued.
The processes through which Japan is becoming a key member of the international economic community continued into the 1990s. Productivity continued to grow at a healthy pace, the country's international leadership in a number of industries remained unquestioned, and investments abroad continued to expand. Pressures were likely to lead to further openness to imports, increased aid to foreign countries, and involvement in the running of major international institutions, such as the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF). As Japan achieved a more prominent international position during the 1980s, it also generated considerable tension with its trade partners, especially with the United States, although these have dissipated more recently as the growth of Japan's economy has slowed.
Foreign investment
Through most of the postwar period foreign investment was not a significant part of Japan's external economic relations. Both domestic and foreign investments were carefully controlled by government regulations, which kept the investment flows small. These controls applied to direct investment in the creation of subsidiaries under the control of a parent company, portfolio investmentPortfolio investment
The purchase of stocks, bonds, and money market instruments by foreigners for the purpose of realizing a financial return, which does not result in foreign management, ownership, or legal control.Some examples of portfolio investment are:...
, and lending. Controls were motivated by the desire to prevent foreigners (mainly Americans) from gaining ownership of the economy when Japan was in a weak position after World War II, and by concerns over the balance of payments
Balance of payments accounts of Japan (1960-90)
In its balance of payments accounts, Japan has traditionally run a deficit in services. Trade in services includes transportation , insurance, travel expenditures, royalties, licensing fees, and income from investments...
deficits. Beginning in the late 1960s, these controls were gradually loosened, and the process of deregulation accelerated and continued throughout the 1980s. The result was a dramatic increase in capital movements, with the biggest change occurring in outflows—investments by Japanese in other countries. By the end of the 1980s, Japan had become a major international investor. Because the country was a newcomer to the world of overseas investment, this development led to new forms of tension with other countries, including criticism of highly visible Japanese acquisitions in the United States and elsewhere.
Asia
The developing nations of Asia grew very rapidly as suppliers to and buyers from Japan. In 1990 these sources (including South KoreaSouth Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
, Taiwan
Taiwan
Taiwan , also known, especially in the past, as Formosa , is the largest island of the same-named island group of East Asia in the western Pacific Ocean and located off the southeastern coast of mainland China. The island forms over 99% of the current territory of the Republic of China following...
, Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, Indonesia
Indonesia
Indonesia , officially the Republic of Indonesia , is a country in Southeast Asia and Oceania. Indonesia is an archipelago comprising approximately 13,000 islands. It has 33 provinces with over 238 million people, and is the world's fourth most populous country. Indonesia is a republic, with an...
, and other countries in Southeast Asia
Southeast Asia
Southeast Asia, South-East Asia, South East Asia or Southeastern Asia is a subregion of Asia, consisting of the countries that are geographically south of China, east of India, west of New Guinea and north of Australia. The region lies on the intersection of geological plates, with heavy seismic...
) accounted for 28.8 percent of Japan's exports, a share well below the 34 percent value of 1960 but one that had been roughly constant since 1970. In 1990 developing Asian countries provided 23 percent of Japan's imports, a share that had risen slowly from 16 percent in 1970.
As a whole, Japan had run a surplus with noncommunist Asia, and this surplus rose quickly in the 1980s. From a minor deficit in 1980 of US$841 million (mostly caused by a peak in the value of oil imports from Indonesia), Japan showed a surplus of nearly US$3 billion with these countries in 1985 and of over US$228 billion in 1990. The shift was caused by the fall in the prices of oil and other raw materials that Japan imported from the region and by the rapid growth in Japanese exports as the region's economic growth continued at a high rate.
Indonesia and Malaysia both continued to show a trade surplus because of their heavy raw material exports to Japan. However, falling oil prices caused trade in both directions between Japan and Indonesia to decline in the 1980s. Trade similarly declined with the Philippines, owing to the political turmoil and economic contraction there in the 1980s.
South Korea, Taiwan, Hong Kong, and Singapore constituted the newly industrialized economies (NIEs) in Asia, and all four exhibited high economic growth during the 1970s and 1980s. Like Japan, they lacked many raw materials and mainly exported manufactured goods. Their deficits with Japan increased from 1980 to 1988, when the deficits of all four were sizeable. Over the 1970s and 1980s, they evolved a pattern of importing components from Japan and exporting assembled products to the United States.
Japan's direct investment in Asia also expanded with the total cumulative value reaching over US$32 billion by 1988. Indonesia, at US$9.8 billion in 1988, was the largest single location for these investments. As rapid as the growth of investment was, however, it did not keep pace with Japan's global investment, so Asia 's share in total cumulative investment slipped, from 26.5 percent in 1975 to 17.3 percent in 1988.
- For trade relations with the People's Republic of ChinaPeople's Republic of ChinaChina , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...
, see Sino-Japanese relationsSino-Japanese relationsChina and Japan are geographically separated only by a relatively narrow stretch of ocean. China has strongly influenced Japan with its writing system, architecture, culture, religion, philosophy, and law...
.
China is now Japan's largest export market, surpassing the U.S. despite a drop in overall trade, according to recent figures from the Japan External Trade Organization. Japan's exports to China fell 25.3% during the first half of 2009 to $46.5 billion, but due to a steeper drop in shipments to the U.S., China became Japan's largest trade destination for the first time. China is also Japan's largest source of imports.
Middle East
The importance of the Middle EastMiddle East
The Middle East is a region that encompasses Western Asia and Northern Africa. It is often used as a synonym for Near East, in opposition to Far East...
expanded dramatically in the 1970s with the jumps in crude oil
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
prices. The 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
put a break to the high rates of economic growth Japan enjoyed in the 1960s, and Japan was deeply concerned with maintaining good relations with these oil-producing nations to avoid a debilitating cut in oil supplies. During the 1980s, however, oil prices fell
1980s oil glut
The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s Energy Crisis. The world price of oil, which had peaked in 1980 at over US$35 per barrel , fell in 1986 from $27 to below $10...
and Japan's concerns over the security of its oil supply diminished greatly. Still, measures were taken to reduce Japanese dependency on oil as energy source. After the end of the Cold War
Cold War
The Cold War was the continuing state from roughly 1946 to 1991 of political conflict, military tension, proxy wars, and economic competition between the Communist World—primarily the Soviet Union and its satellite states and allies—and the powers of the Western world, primarily the United States...
, Japan tried to win Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
as another source of oil, but so far Japanese-Russian relations
Japanese-Russian relations
Relations between Russia and Japan are a continuation of Japanese-Soviet relations. Relations between the two nations are hindered primarily by a dispute over the Kuril Islands, a dispute that is long-running, but rarely gets serious enough to concern other nations...
remain tense because of territorial disputes. Other oil sources include Indonesia and Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
.
The Middle East represented only 7.5 percent of total Japanese imports in 1960 and 12.4 percent in 1970, with the small rise resulting from the rapid increase in the volume of oil consumed by the growing Japanese economy. By 1980, however, this share had climbed to a peak of 31.7 percent because of the two rounds of price hikes in the 1970s. Falling oil prices after 1980
1980s oil glut
The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s Energy Crisis. The world price of oil, which had peaked in 1980 at over US$35 per barrel , fell in 1986 from $27 to below $10...
brought this share back down to 10.5 percent by 1988—actually a lower percentage than in 1970, before the price hikes had started. The major oil suppliers to Japan in 1988 were Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
and the United Arab Emirates
United Arab Emirates
The United Arab Emirates, abbreviated as the UAE, or shortened to "the Emirates", is a state situated in the southeast of the Arabian Peninsula in Western Asia on the Persian Gulf, bordering Oman, and Saudi Arabia, and sharing sea borders with Iraq, Kuwait, Bahrain, Qatar, and Iran.The UAE is a...
. Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
, Iraq
Iraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
, and Kuwait
Kuwait
The State of Kuwait is a sovereign Arab state situated in the north-east of the Arabian Peninsula in Western Asia. It is bordered by Saudi Arabia to the south at Khafji, and Iraq to the north at Basra. It lies on the north-western shore of the Persian Gulf. The name Kuwait is derived from the...
were also significant, but smaller, sources. These three countries became less important oil suppliers after 1980 because of the Iran-Iraq war
Iran-Iraq War
The Iran–Iraq War was an armed conflict between the armed forces of Iraq and Iran, lasting from September 1980 to August 1988, making it the longest conventional war of the twentieth century...
(1980–88), Iraq's invasion of Kuwait in 1990, UN sanctions and the 2003 US invasion of Iraq
2003 invasion of Iraq
The 2003 invasion of Iraq , was the start of the conflict known as the Iraq War, or Operation Iraqi Freedom, in which a combined force of troops from the United States, the United Kingdom, Australia and Poland invaded Iraq and toppled the regime of Saddam Hussein in 21 days of major combat operations...
.
As imports from the Middle East surged in the 1970s, so did Japan's exports to the region. Paralleling the pattern for imports, however, this share fell in the 1980s. Amounting to 1.8 percent in 1960, exports to this region rose to 11.1 percent of total Japanese exports in 1980 but then declined to 3.6 percent by 1988.
Part of Japan's strategy to ensure oil supplies is to encourage investment in oil-supplying countries. However, such investment have never kept pace with Japan's investments in other regions. The country's expanding need for oil helped push direct investment in the Middle East to 9.3 percent of total direct investments abroad by Japanese companies in 1970, but this share had fallen to 6.2 percent by 1980 and to only 1.8 percent by 1988. The Iran-Iraq War (1980–88) was a major factor in the declining interest of Japanese investors, exemplified by the fate of a large US$3 billion petrochemical complex in Iran, which was almost complete when the Islamic revolution
Iranian Revolution
The Iranian Revolution refers to events involving the overthrow of Iran's monarchy under Shah Mohammad Reza Pahlavi and its replacement with an Islamic republic under Ayatollah Ruhollah Khomeini, the leader of the...
took place in Iran in 1979. Completion was delayed first by political concerns (when United States embassy personnel were held hostage) and then by repeated Iraqi bombing raids. The project was finally canceled in 1989, with losses for both Japanese companies and the Japanese government, which had provided insurance for the project.
In the 1990s, urbanization
Urbanization
Urbanization, urbanisation or urban drift is the physical growth of urban areas as a result of global change. The United Nations projected that half of the world's population would live in urban areas at the end of 2008....
in several Gulf states, especially Dubai
Dubai
Dubai is a city and emirate in the United Arab Emirates . The emirate is located south of the Persian Gulf on the Arabian Peninsula and has the largest population with the second-largest land territory by area of all the emirates, after Abu Dhabi...
, led to a number of profitable contracts for Japanese construction companies
Construction industry of Japan
In Japan, the mainstay of infrastructure development is the construction industry, which employed 9.4 percent of the labor force in 1990 and contributed some 8.5 percent of GDP. After the two oil crises in the 1970s, construction investment turned sluggish, and the share of construction investment...
.
Western Europe
Japan's trade with Western EuropeWestern Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...
grew steadily but had been relatively small well into the 1980s considering the size of this market. In 1980 Western Europe supplied only 7.4 percent of Japan's imports and took 16.6 percent of its exports. However, the relationship began to change very rapidly after 1985. West European exports to Japan increased two and one-half times in just the three years from 1985 to 1988 and rose as a share of all Japanese imports to 16 percent. (Much of this increase came from growing Japanese interest in West European consumer items, including luxury automobiles.) Likewise, Japan's exports to Western Europe rose rapidly after 1985, more than doubling by 1988 and accounting for 21 percent of all Japan's exports. By 1990 Western Europe's share of Japan's imports had risen to 18 percent and the share of Japan's exports that it received had risen to 22 percent.
In 1990 the major European buyers of Japanese exports were West Germany
West Germany
West Germany is the common English, but not official, name for the Federal Republic of Germany or FRG in the period between its creation in May 1949 to German reunification on 3 October 1990....
(US$17.7 billion) and Britain
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
(US$10.7 billion). The largest European suppliers to Japan were West Germany (US$11.5 billion), France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
(US$7.6 billion), and Britain (US$5.2 billion). Traditionally, West European countries had trade deficits with Japan, and this continued to be the case in 1988, despite the surge in Japan's imports from them after 1985. From 1980 to 1988, the deficit of the West European countries as a whole expanded from US$11 billion to US$25 billion, with much of the increase coming after 1985. That diminished somewhat to US$20.7 billion in 1990, before rising sharply to US$34 billion in 1992.
Trade relations with Western Europe were strained during the 1980s. Policies varied among the individual countries, but many imposed restrictions on Japanese imports. Late in the decade, as discussions proceeded on the trade and investment policies that were expected to prevail with European economic integration in 1992, many Japanese officials and business people became concerned that protectionism directed against Japan would increase. Domestic content requirements (specifying the share of local products and value added in a product) and requirements on the location of research and development facilities and manufacturing investments appeared likely.
Fear of a protectionist Western Europe accelerated Japanese direct investment in the second half of the 1980s. Total accumulated Japanese direct investments in the region grew from US$4.5 billion in 1980 to over US$30 billion in 1988, from 12.2 percent to more than 16 percent of such Japanese investments. Rather than being discouraged by protectionist signals from Europe, Japanese businesses appeared to be determined to play a significant role in what promises to be a large, vigorous, and integrated market. Investment offered the surest means of circumventing protectionism, and Japanese business appeared to be willing to comply with whatever domestic content or other performance requirements the European Union might impose.
Latin America
In the 1970s, Japan briefly showed enthusiasm over BrazilBrazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
ian prospects. A vast territory richly endowed with raw materials and with a sizable Japanese-Brazilian minority in the population, Brazil appeared to Japanese business to offer great opportunities for trade and investment. However, none of those expectations have been realized, and Japanese financial institutions became caught up in the international debt problems of Brazil and other Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
n countries.
In 1990 Japan received US$9.8 billion of imports from Latin America as a whole and exported US$10.2 billion to the region, for a surplus of US$429 million. Although the absolute value of both exports and imports had grown over time, Latin America had declined in importance as a Japanese trading partner. The share of Japan's total imports coming from this region dropped from 7.3 percent in 1970 to 4.1 percent in 1980, remaining at 4.2 percent in 1990. Japan's exports to Latin America also declined, from 6.9 percent in 1980 to 3.6 percent in 1990.
Despite this relative decline in trade, Japan's direct investment in the region continued to grow quickly, reaching US$31.6 billion in 1988, or 16.9 percent of Japan's total foreign direct investment. This share was only slightly below that of 1975 (18.1 percent) and was almost equal to the share in Asian countries. However, over US$11 billion of this investment was in Panama
Panama
Panama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The...
—mainly for Panamanian-flag shipping, which does not represent true investment in the country. The Bahamas also attracted US$1.9 billion in investment, mainly from Japanese financial institutions but also in arrangements to secure favorable tax treatment rather than real investments. Brazil absorbed US$5 billion in Japanese direct investment, Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
absorbed US$1.6 billion, and other Latin American countries absorbed amounts below US$1 billion in the late 1980s.
Latin American countries lie at the heart of the Third World
Third World
The term Third World arose during the Cold War to define countries that remained non-aligned with either capitalism and NATO , or communism and the Soviet Union...
debt problems that plagued international financial relations in the 1980s. Japanese financial institutions became involved as lenders to these nations, although they were far less exposed than United States banks. Because of this financial involvement, the Japanese government was actively involved in international discussions of how to resolve the crisis. In 1987 Minister of Finance Miyazawa Kiichi put forth a proposal on resolving the debt issue. Although that initiative did not go through, the Brady Plan that emerged in 1989 contained some elements of the Miyazawa Plan. The Japanese government supported the Brady Plan by pledging US$10 billion in cofinancing with the World Bank and the IMF.
Japan has signed a Free Trade Agreement with Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
.
International Trade and Development Institutions
Japan is a member of the United NationsUnited Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
(UN), the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF), the Organization for Economic Co-operation and Development (OECD), and the General Agreement on Tariffs and Trade
General Agreement on Tariffs and Trade
The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...
(GATT). It also participates in the international organizations focusing on economic development, including the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
and the Asian Development Bank
Asian Development Bank
The Asian Development Bank is a regional development bank established on 22 August 1966 to facilitate economic development of countries in Asia...
.
As a member of the IMF and World Bank, for example, Japan played a role in the effort during the 1980s to address the international debt crisis brought on by the inability of certain developing countries to service their foreign debts as raw material prices fell and their economies stagnated. As a member of the IMF, Japan also cooperates with other countries in moderating the shortrun volatility of the yen and participates in discussions on strengthening the international monetary system.
Japan's membership in the OECD has constrained its foreign economic policy to some extent. When Japan joined the OECD in 1966, it was obliged to agree to OECD principles on capital liberalization, an obligation that led Japan to begin the process of liberalizing its many tight controls on investment flows into and out of Japan. Japan is also a participant in the OECD's "gentlemen's agreement" on guidelines for government-supported export credits, which places a floor on interest rates and other terms for loans to developing countries from government-sponsored export-import banks.
GATT has provided the basic structure through which Japan has negotiated detailed international agreements on import and export policies. Although Japan had been a member of GATT since 1955, it retained reservations to some GATT articles, permitting it to keep in place stiff quota restrictions until the early 1960s. Japan took its GATT obligations seriously, however, and a number of American disputes with Japan over its import barriers were successfully resolved by obtaining GATT rulings, with which Japan complied. Japan also negotiated bilaterally with countries on economic matters of mutual interest.
The international organization with the strongest Japanese presence has been the Asian Development Bank, the multilateral lending agency established in 1966 that made soft loans to developing Asian countries. Japan and the United States have had the largest voting rights in the Asian Development Bank, and Japan has traditionally filled the presidency.
As Japan became a greater international financial power in the 1980s, its role in financing these trade and development institutions grew. Previously, the government had been a quiet participant in these organizations, but as its financial role increased, pressure to expand voting rights and play a more active policy role mounted.
By the early 1990s, Japan's influence and voting rights in the World Bank and IMF and other multilateral development banks increased. Japan's financial and policy positions become more prominent. Tokyo had assumed a leading role at the Asian Development Bank for a number of years. At the World Bank, Japan's voting share represented about 9.4 percent, compared with 16.3 percent for the United States. Japan also made several "special" contributions to particular World Bank programs that raised its financial status but did not alter its voting position. Japan planned to participate in the East European Development Bank, making a contribution of 8.5 percent, the same as the United States and major West European donors. Japan also displayed a growing prominence in IMF deliberations, helping ease the massive debt burdens of developing countries, and generally supported efforts in the early 1990s at the GATT Uruguay Round
Uruguay Round
The Uruguay Round was the 8th round of Multilateral trade negotiations conducted within the framework of the General Agreement on Tariffs and Trade , spanning from 1986-1994 and embracing 123 countries as “contracting parties”. The Round transformed the GATT into the World Trade Organization...
of trade negotiations to liberalize world trade and investment.
List of the largest trading partners of Japan
These figures do not include services or foreign direct investment, but only trade in goods. The fifteen largest Japanese trading partners with their total trade (sum of imports and exports) in billions of US Dollars for calendar year 2010 are as follows:| Country | Exports | Imports | Total Trade |
|---|---|---|---|
 People's Republic of China |
149.1 | 152.8 | 301.9 |
 United States |
118.2 | 67.2 | 185.4 |
 South Korea |
62.1 | 28.5 | 90.6 |
 Republic of China |
52.2 | 23.0 | 75.2 |
 Australia |
15.8 | 45.0 | 60.8 |
 Thailand |
34.1 | 21.0 | 55.0 |
 Indonesia |
15.9 | 28.1 | 44.0 |
 Hong Kong |
42.1 | 1.5 | 43.7 |
 Saudi Arabia |
6.5 | 35.8 | 42.2 |
 Malaysia |
17.6 | 22.6 | 40.2 |
 Germany |
20.2 | 19.2 | 39.5 |
 United Arab Emirates |
7.3 | 29.2 | 36.5 |
 Singapore |
25.1 | 8.1 | 33.3 |
 Russia |
8.0 | 16.1 | 24.1 |
 Qatar |
1.1 | 21.6 | 22.8 |
This list does not include the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
which is a single economy and trading bloc (including Germany from the above list). The EU as a whole would be Japan's 3rd largest trading partner (11.1% of inports, 13.3% of exports) in 2010.