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Japan’s Plan to Double Income

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1964
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M. Fujioka

COMPREHENSIVE economic planning in Japan began in 1955, when the Five-Year Plan for a Self-Supporting Economy was adopted. Two years later a new Long-Range Economic Plan was substituted. In December 1960 another Plan, designed to double the national income in ten years, replaced the two earlier ones. This last Plan has now been in force for three and a half years, long enough to justify at least a tentative effort to appraise it.

An important fact underlying the present Plan is that the rate of growth assumed in the two earlier ones quickly proved to be a great under-estimate. In the 1955 Plan it was assumed that the Japanese economy would grow by 5 per cent a year—meaning that the aggregate supply of goods and services in the community would increase at that rate. It was soon realized that in fact the supply was growing much more quickly, and in the second Plan the assumed rate of growth was 6.5 per cent. This also proved an under-estimate, and the targets set for the end of a five-year period were reached more quickly. In the third Plan, with which we are here concerned, a rate of growth of 7.2 per cent compound was assumed, which meant that the supply of goods and services in 1970, when the Plan was to end, would be twice what it was in 1960, when it began. Allowing for the expected increase in population meanwhile, income per head, which in 1960 was equivalent to $335, is planned to reach $579 in 1970 (prices assumed unchanged), a rise of nearly 75 per cent. By comparison, the national income per head in 1960 was equivalent to $1,085 in the United Kingdom, $957 in the Federal Republic of Germany, $954 in France, and $505 in Italy.

Mr. Fujioka, who until April was an economist in the Far Eastern Division of the Fund, is a graduate of Tokyo University and studied at the University of Chicago. He was formerly a member of the staff of the Japanese Ministry of Finance, to which he has now returned as a Division Chief in the International Finance Bureau.

Outline of the Plan

There is one distinguishing feature about the Japanese Plan which marks it off sharply from most others in Asia, and especially from those of centrally planned economies or developing economies: it is based on the principles of free enterprise and free markets. This means that it lays down specific programs only for that part of the economy which is under government control, such as roads, harbors, factory sites, and water supplies. For the greater part of the economy it lays down only broad guidelines, leaving everything else to the initiative and resourcefulness of private individuals and enterprises. However, there are several over-all guiding principles. First, the industrial structure is to be strengthened by laying stress on the development of those sectors of the economy in which labor is most productive (such as heavy industry and the chemical industry), and also by raising the productivity of individual enterprises. Second, foreign trade is to be fostered, and international economic cooperation encouraged. Third, the efficiency of labor is to be improved by greater training and by emphasis on scientific and technological development applied to industrial problems. Fourth, living standards of the lower-income groups are to be raised, and social welfare fostered.

The expected economic growth is to be achieved by an improvement in economic structure. This can be illustrated by comparing the rate of growth of output expected from different types of economic activity. Employment is expected to grow most rapidly in mining, manufacturing, and construction—and especially the heavy industries and chemical industry—where the Plan foresees an expansion of 3.5 per cent per annum. Nearly as fast a rate of growth of employment—3.2 per cent per annum—is planned for transportation, communications, and public utilities; and a slightly smaller rate—2.7 per cent per annum—for commerce and services generally. On the other hand, employment in agriculture, fisheries, and forestry is expected to decline, at an average rate of 2.8 per cent per annum. In each separate branch of the economy an increase in productivity of about 5.5 per cent per annum is forecast; but since the more efficient branches will be growing, and the less efficient shrinking, the increase in productivity for the economy as a whole is put at 6.6 per cent per annum.

Such rapid progress necessarily implies substantial increases in capital, and it is expected that some 30-32 per cent of the gross national product will be devoted to capital growth. This is actually lower than the ratios achieved in 1959-60 (35 per cent) and 1960-61 (38 per cent), but is nonetheless a very substantial part of the national income to devote to future growth rather than present consumption. The projected growth in capital formation, however, would be realized even if there should be some reduction in the present high level of both personal and business savings.

Problems of the Plan

One pressing problem confronting the planners is the balance of payments. The projected growth would imply that increasingly larger proportions of the national income have to be spent on imported products. It is therefore essential that exports should be increased sufficiently to pay for these imports—which will require an average increase in exports of 9 per cent per annum.

A second important consideration confronting the planners is the unusual structure of Japanese employment. There has for many years existed a dual system, in which large modern industries have developed side by side with small old-fashioned ones, and many of the primary activities, for instance in agriculture, have lagged behind other modern developments. The increase in productivity which is looked for will necessitate the rapid changeover to modern employment methods, in the sense that the workers will be regularly employed for wages rather than engaged as part of a family concern or only irregularly and intermittently in work of any kind.

A third problem is set by prices. To maintain the stability of prices is essential for the success of the Plan. The Plan assumes that prices will remain constant over all, though of course they may fluctuate in the short run, according to the business cycles and depending on the world economic situation. For individual goods or services they may alter, up or down, according to changes in the economic structure.

A Background of Growth

That the Japanese Plan is an ambitious one is very clear. When, a few years ago, the Government of the United Kingdom set a doubling of the national income as a political goal, the time allowed for this was 25 years. Under the Japanese Plan, an equal increase is expected to be achieved in 10 years. While it is of course easier to double a small income than a large one, the contrast is sufficient to suggest doubts whether the Japanese Plan is really practicable.

The best answer to these doubts is an examination of the progress which Japan has already made since World War II. Over the period 1951-60 the supply of goods and services available to the Japanese people has risen at an annual rate of nearly 10 per cent, so that at the end of the period it was about 2½ times as great as at the beginning. During the same years the rate achieved in the Federal Republic of Germany was 7.5 per cent per annum, in Italy 5.7 per cent, in France 4.0 per cent, in the United States 3.3 per cent, and in the United Kingdom 2.4 per cent.

Nor is there any real mystery about how this was achieved; for in Japan fixed capital was being created at a much greater rate, and one which was growing much faster, than in any of the other countries mentioned. This was particularly true of the five years 1956-60, during which capital formation rose by 36 per cent of the increase in the national product. This period was characterized by technical innovation, keen competition among domestic enterprises, and rapid development in heavy and chemical industries. The creation of capital equipment, together with these factors, had immediate effects on the production of other goods; for instance, the output of mining and manufactures, in total, increased 2.3 times in 1956-60. Indeed fixed capital formation—or, more narrowly, private investment in plant and equipment in the case of Japan—constitutes an immediate effective demand on goods and services when it is made, and becomes capacity to supply goods when it is completed. Comparison with other countries shows that in the last decade, in the Federal Republic of Germany and Italy, where the economic growth was fast, the growth in fixed capital formation was also fast.

Although private investment in plant and equipment is essential for economic growth, it must be in a proper proportion to other factors if the growth is to be achieved with domestic and external balance. Private investment in plant and equipment increased enormously just before and after the launching of the Plan: by 41 per cent in the fiscal year before the Plan began and by 32 per cent in the first year of the Plan, surpassing in the first year the amount envisaged in the target year (i.e., in 1970). The investment boom, coinciding with recession in the United States, resulted in balance of payments difficulties; there was also an increase in prices, and other frictions, at the very beginning of the Plan. Some of the temporary frictions were more or less quickly remedied by financial measures, and private investment in plant and equipment has not so far risen further. But assuming that there will be no further increase in investment, only about one half of the added productive capacity brought into being by expansion between 1961 and 1970 could be utilized, assuming also that output increases in accordance with the Plan.

In the recent past, people in Japan have been saving something like 15-20 per cent of their income, a substantially larger proportion than is saved in other industrial countries. However, in the last two or three years consumers’ expenditures, inspired by the availability of durable goods like refrigerators, in addition to higher-quality clothing, processed foods, furniture, household utensils, and more recently recreational activities, have increased even more than income. In the first few years of the Plan period, the increase in private consumption was considerably higher than envisaged, being supported largely by the rapid increase in personal incomes. It may be that the appreciation of the possibilities of an increased standard of living which has developed will begin shortly to diminish still further the proportion of income saved.

Part of the savings which Japan has accumulated in recent years has come from the budget; there have been substantial excesses of receipts over expenditure in the government accounts. Here again there may well be some diminution of savings in the future, if only for the reason that the Government’s share in the Plan will call for heavy expenditure on roads and other forms of social capital. It seems that the real problem of achieving the Plan target lies not in a lack of productive capacity or domestic demand. Had it not been for the problem of external balance the Plan’s prospects of early realization would be better.

A Threat to Stability

A more serious difficulty confronting the Japanese economy as the Plan gets into its stride is a possibility of increasing costs and resulting adverse effects on the Japanese balance of payments. In the newer, larger, and more capitalized industries, it has been possible to raise wages without increasing prices because the massive injections of new capital have steadily increased productivity. But similar wage increases cannot be given in the smaller, older, and less capitalized industries, without either increasing prices or bankrupting the enterprises. However, with the growing shortage of labor, it is also not possible for wages in the one set of industries to rise substantially without similar increases having to be given elsewhere. The result necessarily has been an increase in the prices which consumers have to pay for a variety of goods produced by the less efficient industries, including food, and for personal services. Even though the level of wholesale prices has been kept relatively stable over the business cycles by financial management, consumer prices have been persistently rising.

The problem has been aggravated by a shortage of labor, which Japan has recently felt for the first time since World War II. This complication will, however, be eased within the next few years by a great increase in the size of the employable population, and by the effort to increase labor mobility. It is in fact expected that out of 16.8 million employable persons who will be added to the potential labor force between 1960 and 1970, the increase in the number employed will be only some 7 million. The effect of this will be to reduce the percentage of people of productive age (15 years or over) who are actually employed from 77 to 62. This will be achieved by reducing substantially the number of the under-employed (for example, members of family groups) as full-time employment becomes available at wages sufficient to enable the worker to support his dependents without their working too.

The movement of costs has not attained such a size as to threaten the competitiveness of Japanese industry, especially in export markets (which are mostly interested in the products of the more efficient industries), and if the increases in productivity now aimed at are achieved, the Plan is not in any great danger from them. But higher costs, and the higher wages that cause them, do introduce a complicating factor which will need to be watched.

Exports and Imports

Reference has been made several times to the importance for the Japanese economy of imports from abroad, and therefore of exports to pay for them. It may be worth elaborating slightly this aspect of the planners’ problems.

In the first place, the dependence of Japan on imports is increasing; before the Plan was started they represented 14 per cent of the national income, but they are expected to increase to 17 per cent in 1970. Imports of food and raw materials will increase relatively slowly, but imports of mineral fuels, metal ores and scrap, machinery, and finished miscellaneous products will increase much faster. This change-over in the type of import is a natural result of the growing dependence of Japan on the heavy and chemical industries and of a higher standard of living, coupled with the small natural resources of the country itself. Restrictions on imports, imposed in the difficult days during and after World War II, have been removed progressively in the first few years of the Plan, and the importation of almost all industrial products is expected to be freed in 1964.

As imports increase at an annual rate of 9 per cent, exports also have to increase at about the same rate, which is considerably lower than in the past, but still requires efforts on the part of Japan. To achieve this increase, the planners rely on two things: an increasing concentration of effort in the heavy and chemical industries for export purposes, and the fact that trade between manufacturing countries has grown faster than trade between such countries and the less developed ones (and much faster than trade between the less developed countries themselves). It looks as if the increasing freedom of trade in the world as a whole is making for a greater international exchange of the more elaborate types of product, which should benefit Japan’s efforts. And, of course, it is not as if Japan were seeking to expand its exports without increasing its imports. On the contrary, it is to enable imports to grow that exports have to be pushed—which contributes to the expansion of world trade.

Yet the success of the Plan in this field depends on a number of factors not within Japan’s control. These include not only the rate at which world trade will grow, but also the discrimination against Japanese products which is still practiced by most Western nations. Happily, this discrimination is steadily weakening.

Japan does not, however, depend for the increase of its exports wholly on trade with the developed countries; it is also anxious to increase trade with the less developed countries, in which large potential markets for Japanese products are seen. For this purpose Japan is playing an increasing part in providing credit to the less developed countries, to enable them to press on with development without being held back to the strict limits of what they can currently buy from abroad.

Significance of the Plan

It should be repeated that most of the Plan represents guidelines rather than directives. The growth which Japan seeks to secure will come from the efforts of its industrialists rather than from those of government agencies. The planners’ vision may therefore well turn out to be wrong in details; and indeed they may need to revamp parts of the Plan as events unfold. In fact, in the first three and a half years actual results have departed widely from the lines envisaged in the Plan, although the growth of the economy is well ahead of what was projected. What the Government hopes to do is to provide the climate for the growth of the free market economy: to provide social capital, to stabilize prices as far as possible (partly by changing the emphasis of the budget), and to help foster international trade by negotiating freer access to other countries while continuing to reduce the restrictions on imports into Japan.

The deviation of the actual performance from the Plan is the inevitable outcome of the nature of the Plan itself. The remarkable development of the Japanese economy in the past has not been the result of the obedient execution of government plans, but rather the outcome of the volition and ingenuity of individuals, and it is upon this foundation that the present Plan was constructed. The planners themselves are agreed that it should be subject to re-examination. The Government recently set up a committee to review the Plan and to see whether any important problems are being neglected. One which is certainly not being neglected is how to raise productivity in agriculture and small enterprises, a shift of emphasis from the original conception.

Since the adoption of the Plan the growth of the Japanese economy has been well above the aim. The annual rise in national product has so far averaged 9 per cent, against the planned rate of 7.2 per cent. This must be considered a remarkable achievement; its continuance will depend on the ability of the authorities to maintain price stability and external balance, a task which they are facing with determination.

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