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Appraisal of Japan’s Plan to Double Income

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1963
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M. Fujioka*

An economic plan to double the national income in ten years was adopted by the Japanese Government in December 1960.1 The purpose of the plan is to maintain the high rate of economic growth realized in the past decade, in order to raise further the living standards of the people and to attain full employment. In the first year of the plan (the fiscal year beginning April 1, 1961), the growth in gross national product (GNP) is estimated to have reached 10 per cent,2 compared with the average annual rate of 7.2 per cent envisaged for the plan period. The investment-induced boom resulted in a marked deterioration in the balance of payments; also, the vigorous economic activity entailed various frictions and problems, some of which were only vaguely anticipated in the plan, if not neglected.

The plan is briefly outlined in Section I below, and some background on its drafting is given. The basic factors of Japan’s economic growth in the past and the prospects for the future are discussed in Section II. Active private investment in such industries as iron and steel, non-ferrous metals, machines, chemicals, and coal and petroleum products has played an important role in the rapid economic expansion of recent years. It has increased the output capacity of the nation and raised the productivity of industry. However, the rapid economic expansion has given rise to various problems, of which the most conspicuous are the change in the price and cost structure and the balance of payments, the former conditioning and the latter limiting economic growth in future.

The change in the price and cost structure, which has been characterized by a downward trend of wholesale prices and an upward trend of consumer prices, is discussed in Section III. The downward trend of wholesale prices reflects rising output capacity and productivity, which is deflationary through its effect on demand, and the upward trend of consumer prices reflects rising wages, which may produce a cost inflation. A faster rise in wages than in prices is important to achieve a doubling of income in real terms at home, but a slower rise in wages than in productivity is necessary to maintain external competitiveness.

The prospects for exports and imports are discussed in Section IV. As GNP grows, imports are expected to increase more than proportionately; therefore, an expansion of exports is of vital importance to the plan. The improvement in Japan’s payments position heretofore owes much to the strengthening of the export industries, in spite of discrimination against Japanese goods by a number of other industrial countries. In view of the growing world market, elimination of discrimination against Japan by these countries will, together with assistance to less developed countries, become more important and will raise the limit imposed by the balance of payments on Japan’s economic growth.

There is little doubt about the potentiality of the Japanese economy to achieve the target of the income-doubling plan, provided that world trade grows sufficiently, say at an annual rate of 4–5 per cent; but the over-all success of the plan depends, to a large extent, on the domestic policies adopted to implement it. Since the plan is fundamentally of the nature of a guide for the national economy, based on the principles of free enterprise and free markets, much is left to the initiative and ingenuity of private enterprise. However, a market economy has inherent difficulties, particularly in Japan where competition is excessive and the operation of the market mechanism is too often accompanied by a great social sacrifice. How to harmonize the basic principle of a free economy with the modern concept of social welfare remains an important problem. This problem is discussed in Section V.

I. Background and Outline of Plan

Background of plan

This plan is not the first one in Japan to set out a comprehensive long-range economic program. Two major plans comparable to the present one are the Five-Year Plan for Self-Support Economy, adopted in 1955, and the New Long-Range Economic Plan (five years), adopted at the end of 1957. The first plan, following the pattern set out by Dr. Gerhard Colm,3 assumed a full employment economy; the second plan was drawn up on the assumption of a certain warranted rate of growth. The first plan obviously erred in applying a full employment model to the Japanese economy, which is characterized by unemployment and underemployment. The annual growth rate of 5 per cent envisaged in the plan soon proved to be a gross underestimate of the growth potential of the postwar Japanese economy; the major targets were reached or surpassed in the first few years. The second plan, which assumed that a growth rate of 6.5 per cent a year was the maximum warranted for equilibrium in the balance of payments, for a balance of saving and investment, and for stability of prices, proved overcautious; a higher rate of growth was easily achieved, and again the major targets were realized in the first few years. The rate of growth achieved during this period was unprecedented, not only in Japan but also throughout the world (excluding the communist bloc countries); GNP for the fiscal year 1960/61 (April 1960/March 1961) was estimated at ¥ 13,000 billion (at fiscal 1958/59 prices), which was 2.4 times that recorded ten years earlier and 1.5 times that recorded five years earlier.

Before drafting the present plan, the Economic Planning Agency (EPA) prepared a perspective of the Japanese economy in the coming twenty years, in which the merits and demerits of the past two plans were reviewed, factors for future economic expansion were analyzed, a common framework for analyzing and setting targets for various sectors was selected, and a suitable macro-model for the Japanese economy was gradually completed. The present plan, which replaces the five-year plan of 1957, was, therefore, drawn up in recognition of the historical fact that the rapid expansion of the economy in recent years could be ascribed not merely to the process of rehabilitating a war-devastated economy but also to basic factors inherent in the economy. The plan also considers the changing economic circumstances that Japan will face in the years ahead. First, the advance of technological innovation and modernization, which so far has been limited to certain industries and enterprises, will spread to a broader segment of the economy, including small enterprises, and at the same time will affect the consumption pattern of the people. Second, the rate of population growth will slacken, and the annual new labor force, after increasing in the first few years of the plan because of the postwar “baby boom,” will decline rapidly thereafter. Third, it is expected that the annual rate of expansion in world trade, which was 6.2 per cent in the last decade (1950–59), will slacken to about 4.5 per cent in the coming ten years, but that trade between advanced countries will grow faster than the average.

The target of the plan is to attain in fiscal 1970/71 a GNP of ¥ 26,000 billion (at fiscal 1958/59 prices), which is twice the estimated GNP in fiscal 1960/61. The increase in GNP at compound rate that is expected is 7.2 per cent during the ten years and 7.8 per cent starting from the base period (average of 1956/57–1958/59, selected for statistical convenience). In conformity with this growth rate, various equations and parameters were selected for aggregate demand and supply, and employment. In the target year, national income (as distinct from GNP) will be ¥ 21,300 billion ($59.2 billion), and per capita income will be ¥ 208,000, the equivalent of $579. In 1960, per capita income in Japan was only $335, whereas it was $1,085 in the United Kingdom, $957 in the Federal Republic of Germany, $954 in France, and $505 in Italy.4

The fundamental idea of any economic plan in Japan since World War II has been that it should be based on the principles of free enterprise and free markets. The present plan has followed this idea further than the previous ones in that it gives priority to some important problems only, instead of emphasizing details for every field. From this viewpoint, the national economy is divided into two parts, the public sector and the private sector. Only for the former are some concrete and practical programs set out; for the latter, the plan gives only a forecast and minimum guidance, leaving everything else to the initiative and resourcefulness of private individuals and enterprises.

Outline of plan

The ultimate objectives of the plan are to improve the standard of living and to make a marked advance toward the attainment of full employment. In order to achieve these goals, the plan calls for balanced growth of the economy, with monetary stability as the necessary condition. Table 1 summarizes the main proposals in the plan.

Table 1.Japan: Planned Annual Average Increase in Productivity, Employment, and Gross National Product, 1961–70(In per cent)
Productivity

Per Unit

of Labor
EmploymentGross

National

Product
Primary industry5.6–2.82.8
Secondary industry5.53.59.0
Tertiary industry5.52.78.2
Transportation, communication, and public utilities5.63.28.8
Entire economy6.61.27.8
Source: Japanese Government, Economic Planning Agency, New Long-Range Economic Plan of Japan (1961-1970), Doubling National Income Plan (published in English by the Japan Times, Ltd., Tokyo, 1961).
Source: Japanese Government, Economic Planning Agency, New Long-Range Economic Plan of Japan (1961-1970), Doubling National Income Plan (published in English by the Japan Times, Ltd., Tokyo, 1961).

The five elements in the plan are (1) expanding social overhead capital, such as roads, harbors, factory sites, and water facilities, which tend to lag behind direct productive capital, (2) strengthening the industrial structure by increasing the relative importance of the sectors where labor is more productive, such as the heavy and chemical industries, as well as by raising the productivity of individual enterprises, (3) promoting foreign trade and international economic cooperation, (4) improving the quality of labor and promoting science and technology, and (5) improving the living standards of the low-income group and increasing over-all social welfare.

The plan emphasizes improvement of the economic structure. In particular, it stresses the expansion of secondary industry (mining, manufacturing, and construction, and especially the heavy and chemical industries), with a fast rise in its relative contribution to national income as well as to total employment. It also aims at a substantial expansion of tertiary industry (including transportation, communications, and public utilities). On the other hand, for primary industry (agriculture, forestry, and fisheries) it estimates only a small increase in output and a substantial decrease in the number employed. The change in the economic structure is to be accompanied by a corresponding change in the pattern of exports.

The annual increase in gross domestic capital formation during the period is assumed to be more than 8 per cent and in the number of employed, more than 1 per cent. Capital formation will make up almost 32 per cent of aggregate demand in the target year, which is higher than the 30 per cent in the base year but lower than the actual results of fiscal 1959/60 (35 per cent) and fiscal 1960/61 (38 per cent). Savings will exceed gross domestic capital formation by a small margin in the target year. The share of personal savings in total savings is expected to fall slightly from that in the base year, on the assumption of an average ratio of personal savings to disposable income of 15 per cent, which again is much lower than the actual results in 1959/60 and 1960/61.

The over-all balance of payments is expected to yield a surplus of $200 million in the target year, the trade surplus being $410 million, the deficit on invisibles $230 million, and net capital receipts $20 million. An expansion of exports to $8,490 million in the target year is essential to cover the necessary imports of $8,080 million and leave a surplus of $410 million on trade account; this means an annual increase of more than 9 per cent for both exports and imports, and also implies that the importance of exports of capital goods will increase in the period.

The various targets in the plan are expressed in real terms, and it is assumed that the general price level will be stable during the ten years, as stability of prices is considered a necessary condition for the smooth fulfillment of the plan. However, it is admitted that prices may fluctuate in the short run, according to the business cycle and depending on the world economic situation; and that prices for individual goods and services may alter, according to changes in the economic structure and in the relative supply of labor and capital.

The central field of the plan is the public sector, where the Government has direct means of control. The responsibility of the Government is to foster positive factors for economic growth and to eliminate negative factors; to maintain price stability, while providing the funds needed for economic growth; and to lessen business fluctuations by proper fiscal and monetary policies. The role of the Government is thus to create favorable conditions for the private sector to assume the initiative in development.

The plan describes, in fair detail, the desired targets and the measures to be pursued by the Government in achieving these objectives. The total amount of government investment considered necessary during the period is specified for each key program, such as road construction, housing, flood control, and educational facilities. However, the actual investment for each program is to be decided on a year-to-year basis when the budget is compiled, the prevailing economic situation being taken into consideration.

The part of the plan devoted to the private sector emphasizes that the plan provides only forecasts of the national economy on which enterprises can base their long-range plans. The role to be played by the Government is limited mainly to creating the fundamental conditions for a market economy where enterprises can assume the initiative. The remaining controls over industry will be removed as soon as possible, and to the extent feasible. Foreign exchange restrictions will be eliminated, and, for a transitional period thereafter, tariff policy will gain in importance. However, the protection to be accorded to industry, by either tariffs or other measures, will be limited to promising infant industries for a minimum period of time. Liberalization of restrictions on trade and payments, and the resulting intensification of international competition, are expected to accentuate competition among enterprises and to promote evolution of the industrial structure. While the Government is to see that fair competition is preserved and monopolization and cartelization avoided, for the benefit of the consumer and the public in general, it is required to promote the international competitiveness of industry and to help to improve the industrial structure.

Finally, the plan illustrates the outlook for the standard of living, enrichment of which is the ultimate objective of the plan. The first improvement in living standards is to be modernization of employment, in the sense that more of the labor force is employed as wage earners rather than as family workers, or as regular workers rather than as temporary workers, and with higher wages and better working conditions, in larger factories. This is considered highly important, in view of the fact that a surplus of labor and underemployment have characterized the Japanese economy up to the present day. As the rapid expansion of secondary industry, particularly the heavy and chemical industries, takes place, a greater share of total employment will be provided by this sector, with higher productivity rewarded by higher wages. Since the increase in GNP is largely accounted for by an increase in productivity rather than by an increase in employment (Table 1), there will be considerable scope for an increase in the wage rate. Earned income will increase 3.3 times while national income increases 2.67 times; simultaneously, the share of earned income in non-primary industries is expected to rise slightly relative to corporate income. As the wage rate increases, the wage differential between big enterprises and small enterprises, which has been one aspect of the so-called dual structure of the Japanese economy,5 will be narrowed. Working conditions will be improved in the meantime, resulting in shorter hours of work.

The second improvement planned in the standard of living is an increase in consumption, as a result of the increase in personal income. By the target year, the per capita income of a wage earner will be 2.4 times that in the base year, and more will be spent for housing and cultural purposes. The Government will undertake to improve environmental facilities, which are beyond the reach of consumers’ free choice. Thus, the plan envisions a better life for the people as the national income doubles, although the targets in the plan are admitted to be all too far from the ideal.

II. Basic Factors for Economic Growth6

In the last decade, the Japanese economy achieved a high rate of growth. During the period 1951–60, the average annual rate of growth in GNP in real terms was nearly 10 per cent and the pace of expansion did not slacken, except for cyclical fluctuations (Table 2). In the early years of the period, the high rate of growth was attributable both to active private consumption and to investment; in the later years, investment was the main factor. Whereas the average ratio of gross fixed capital formation to GNP was about 18 per cent in 1951–55, it was 28 per cent in 1956–60. The high rate of economic growth since 1952 has been achieved with relative stability of prices and a considerable strengthening of the balance of payments position.

Table 2.Japan: Growth, in Real Terms, of Gross National Product (GNP) and Components of Gross National Expenditure, 1947–62(In per cent)
Components of Gross National Expenditure
Private gross capital formationGovernment expenditureNet receipts

from

abroad

(9)
Fixed

capital

formation,

Cols. 3 + 7

(10)
Fiscal Year

Beginning

April 1



Growth

in GNP

(1)
Private

consumption

(2)
Fixed

investment

(3)
Inventories

(4)
Total,

Cols,

3 + 4

(5)
Consumption

(6)
Fixed

investment

(7)
Total,

Cols.

6 + 7

(8)
194710.061.913.210.623.86.911.618.5–4.224.8
194816.460.213.412.425.89.88.918.7–3.722.3
19493.964.211.18.519.611.28.019.2–3.019.1
195012.262.110.97.918.811.35.917.21.916.8
Average10.662.112.29.988.19.88.618.4–1.820.8
195113.559.910.510.921.411.05.416.42.315.9
195210.563.411.46.718.111.86.218.00.517.6
19536.763.312.25.818.011.28.319.5–0.720.5
19543.363.312.13.415.511.38.219.51.720.3
195510.362.211.27.018.210.87.117.91.718.3
Average8.968.411.56.818.311.27.018.80.618.6
19569.060.515.87.623.410.36.616.9–0.822.4
19577.959.718.14.622.710.17.717.8–0.225.8
19583.261.018.70.319.010.49.019.40.627.7
195917.955.720.17.227.39.58.818.3–1.328.9
196013.253.424.46.330.79.39.418.7–2.833.8
Average10. 858.119.46.824.69.98.318.8–0.987.7
1961110.052.524.95.430.318.4–1.2
196215.453.923.62.025.620.6–0.2
Source: Japanese Government, Economic Planning Agency, White Paper on National Income, Fiscal 1960 (in Japanese).

Official estimates at current prices made in January 1962.

Source: Japanese Government, Economic Planning Agency, White Paper on National Income, Fiscal 1960 (in Japanese).

Official estimates at current prices made in January 1962.

Economic growth in the form of increases in GNP is achieved by the expansion of the output capacity of a nation, coupled with a comparable increase in effective demand. Inflation, in the ordinary sense, will be avoided if the expansion in demand does not exceed that of output capacity. International payments difficulties will be avoided if the expansion in output capacity is accompanied by an increase in productivity, thereby contributing to increases in export competitiveness, and to decreases in the dependence of the national economy on imports (with no account taken, for the moment, of the foreign market situation). Where the expansion in production is carried out mainly by the private sector, the expansion of private investment in equipment plays a pivotal role in economic growth.

Private investment in equipment

The remarkable rise in the ratio of gross fixed capital formation to GNP during the last decade was due mainly to the striking upswing of private investment in equipment that began in 1956. The annual rate of expansion for the five years 1956–60 was 29 per cent in real terms, against 9 per cent during the five years 1951–55. Such investment contributed 36 per cent of the total increase in GNP during 1956–60, against 6 per cent during 1951–55.7 Mining and manufacturing production increased 2.3 times in 1956–60; 41 per cent of the increase was induced by the increase in private investment in equipment.8 The rate of increase in GNP was higher than that in other industrial countries, and the rate of increase of fixed capital formation may be said to have been disproportionately higher. In the ten years 1950–59, the rate of growth of GNP in Japan was nearly 30 per cent greater than that in Germany, where the situation after World War II was similar to that in Japan; for fixed capital, Japan’s rate of expansion was nearly 60 per cent greater than Germany’s (Table 3). The relation seems to have been more marked in recent years. The unusual growth in Japan may be explained by a change in the industrial structure that started in 1956, viz., the process of heavy and chemical industrialization, which requires a proportionately higher rate of investment than other industry. In Germany, this kind of heavy industrialization took place as early as 1930, but the process thereafter was slower than in Japan.9

Table 3.Selected Industrial Countries: Average Annual Rates of Growth of Real Gross National Product (GNP) and Its Components, 1950–59(In per cent)
GNPPrivate

Consumption
General

Government

Consumption
Fixed

Capital

Formation
Japan
1950–5919.58.38.215.3
1951–6019.68.37.918.0
1951–5518.99.68.711.2
1956–60110.26.97.124.8
Germany, Federal Republic of7.57.35.69.8
Italy5.74.37.08.2
France4.04.03.64.9
United States3.33.26.72.1
United Kingdom2.42.22.04.5
Sources: For Japan, Japanese Government, Economic Planning Agency, White Paper on National Income, Fiscal 1960 (in Japanese); for other countries, United Nations, Yearbook of National Accounts Statistics, 1960.

Fiscal years beginning April 1.

Sources: For Japan, Japanese Government, Economic Planning Agency, White Paper on National Income, Fiscal 1960 (in Japanese); for other countries, United Nations, Yearbook of National Accounts Statistics, 1960.

Fiscal years beginning April 1.

The rapid expansion in private investment in equipment in heavy and chemical industries in the process of their industrialization is explained first by a higher capital stock per employee in these industries. The increase in investment was slow up to 1955, when the growth of these industries was slow. While total manufacturing production increased by 400 per cent during 1947–55, output of machinery, the most typical heavy industry, and that of textiles, the most typical light industry, also increased by 400 per cent. However, from 1956 onward, the pace of expansion of private investment was accelerated, reflecting the increasing importance of the heavy and chemical industries. While manufacturing production as a whole in 1960 was 2.3 times that in 1956, output of machinery was 4.4 times, and that of textiles 1.6 times, as great. The rapid progress in the structural improvement of Japanese industry in 1956–60 was a consequence of a series of technical innovations that started in 1956, and the investment boom was brought about by keen competition among domestic enterprises attempting to invest in larger and more efficient equipment.

A second explanation is that investment induced investment through the demand for capital goods. Investment induces more investment than does private consumption or government expenditure. Investment for the production of capital goods absorbed 24 per cent of total investment in 1955, but 42 per cent in 1960.

Third, the marginal capital coefficient, expressed as the ratio of private capital investment to the increase in GNP, rose because of the longer gestation period of capital investment for heavy and chemical industries (such as the improvement of port facilities for iron and steel), larger units (for petrochemicals and high-degree synthetic chemicals), more multilateral factory operations, and larger capacity constructed to meet future demand. The coefficient rose from 1.1 for 1951–55 to 1.9 for 1956–60,10 in spite of the fact that the ratio of plant in operation to total capacity increased during the period.

Thus, the continued expansion of private investment in equipment since 1956 has, in a sense, been self-inducing and self-sustaining. The increasing capacity resulting from the investment was obscured by the immediate demand created by the investment itself. However, investment for the sake of investment cannot last forever, from the very nature of investment. The maintenance of an equivalence between supply and demand becomes of prime importance to balanced economic growth.

Supply and demand

Investment is thus a demand factor in the immediate period and a supply factor in the following period. The pivotal role of private investment in equipment in the Japanese economy is explained by the relation between its expansion and the growth of GNP. Although various factors determine the possible growth of GNP in a predominantly private enterprise economy like Japan, the first limit, in a physical sense, is set by the private investment that brings about the increase in the nation’s output capacity.11

In the eight fiscal years before the inauguration of the present plan (fiscal 1953/54–1960/61, which cover two business cycles), GNP increased by ¥ 8,547 billion (about 2.4 times). During this period, wholesale prices declined by 6 per cent. The combination of a rapid increase in GNP with a moderate decline in prices was obviously made possible by a corresponding increase in output capacity. This relationship is illustrated by Table 4, in which it is assumed that net new investments in equipment materialize in the following year in an equivalent increase of output capacity for industry as a whole,12 and that the portion of gross private investment in equipment which does not contribute to the increase in output capacity was 11 per cent for fiscal 1952/53–1955/56, 13 per cent for fiscal 1956/57–1958/59, 14 per cent for fiscal 1959/60–1960/61, and 15–20 per cent thereafter, gradually increasing over the next ten years.13 The cumulative increase in output capacity from 1953/54 to 1960/61 was ¥ 8,685 billion, about the same as the increase in GNP.14Table 4 shows that in a short period of one year, when the ratio of increase in GNP to the increase in output capacity was more than 1.5, wholesale prices rose sharply; that they declined markedly when the ratio was far less than 1.0; and were relatively stable when the ratio was between 1.0 and 1.5. Assuming prices are flexible as in the past, it may be concluded that supply and demand can be balanced with a constant price level, if the ratio of increase in GNP to the increase in output capacity is maintained at about 1 in the long run, and presumably between somewhat below 1 and 1.5 in the short run.15

Table 4.Japan: Relation Between Capacity and Demand, Fiscal Years 1952/53–1970/71(In billions of yen)
Fiscal

Years

Beginning

April 1



Private Investment

in Equipment1

(1)
Increase

in Output

Capacity2

(2)
Gross

National

Product

(GNP)

(3)
Increase

in GNP

(4)
Col. 4 ÷

Col. 2

(5)
Percentage

Increase or

Decrease (–)

in Wholesale

Prices3

(6)
19527136,118
19538016347,0859671.532.3
19547607137,4663810.53–3.0
19557776768,2367701.15–0.7
19561,3736929,2931,0571.535.3
1953–562,7153,1751.171.04
19571,6931,19510,1508570.70–3.5
19581,6501,47310,3952450.20–6.8
19592,1701,43612,5732,1781.542.5
19603,0701,86614,6652,0921.12–1.6
1957–605,9705,3120.90–4.24
1953–608,8658,5470.98–1.54
1961 (estimate)3,7502,64016,7602,0950.79+0.5
1962 (estimate)3,6903,18817,6609000.28–2.6
1961–70 (estimate)30,11227,45612,7910.42
Sources: Based on Japanese Government, Economic Planning Agency, White Paper on National Income, Fiscal 1960 (in Japanese); and Bank of Japan, Economic Statistics of Japan, 1961 (in Japanese).

Investment in producers’ fixed assets only.

Calculated by deducting a portion equivalent to replacement from private equipment investment in the preceding year—see text, page 161.

Based on Bank of Japan statistics for 1952–55 and Economic Planning Agency statistics for 1956–61. The former are compiled on 1952 weights, and are considered obsolete for more recent years. The latter are compiled on 1955–57 average weights of manufactured products. The new series is linked with the old in 1955.

Indicates changes in price level between fiscal 1952/53 and the period concerned.

Sources: Based on Japanese Government, Economic Planning Agency, White Paper on National Income, Fiscal 1960 (in Japanese); and Bank of Japan, Economic Statistics of Japan, 1961 (in Japanese).

Investment in producers’ fixed assets only.

Calculated by deducting a portion equivalent to replacement from private equipment investment in the preceding year—see text, page 161.

Based on Bank of Japan statistics for 1952–55 and Economic Planning Agency statistics for 1956–61. The former are compiled on 1952 weights, and are considered obsolete for more recent years. The latter are compiled on 1955–57 average weights of manufactured products. The new series is linked with the old in 1955.

Indicates changes in price level between fiscal 1952/53 and the period concerned.

The future trend of private investment in equipment is difficult to forecast. Investment is already high; the estimated amount in fiscal 1961/62, the first year of the plan, surpassed the target for 1970/71, and the same amount is expected in fiscal 1962/63, in spite of the stringent financial measures taken. For several reasons, this tendency may not continue. Investment directed toward the improvement of the industrial structure may slacken as the level of Japanese industry nears that of more advanced countries, assuming that the present pace of technological progress in the more advanced countries continues unchanged. Investment induced by investment will, by its nature, shrink as capital accumulation reaches a certain level, because investment eventually depends on consumption, which is less explosive than investment. Also, the upward trend of the marginal capital coefficient cannot persist for long, because, in the period following a large investment, additional output may be obtained with a small addition of capital. The modernization and rationalization of industries carried out to meet the problems created by trade liberalization will be completed sooner or later. Technical innovation may exert a capital-saving effect. However, in spite of all these factors, it is not likely that private investment in equipment will decline substantially in the coming years.

Let us assume most conservatively that private equipment investment in the coming decade will cease to increase secularly from the present level of about ¥ 3,700 billion a year, in contrast to the actual increases of 33 per cent for fiscal 1959/60, 41 per cent for fiscal 1960/61, and 22 per cent for fiscal 1961/62. Then, the aggregate increase in output capacity in the coming decade would amount to ¥ 30,112 billion. Now the plan assumes that in 1970/71 GNP will be ¥ 26,000 billion at fiscal 1958 prices, which is equivalent to ¥ 27,456 billion at 1960 prices, and therefore represents an increase of ¥ 12,791 billion over the 1960 level. Consequently, the increase in GNP would be only 42 per cent of the increase in capacity. This would undoubtedly mean an economy too deflationary to be endured over a long period of time. On the assumption that private equipment investment is not cut down substantially, the alternative seems to be to expand demand whenever and wherever feasible and desirable, at a slightly faster pace than that envisaged in the plan.

Prospects for demand

One of the ultimate objectives of the plan is to enable the people to enjoy a higher standard of consumption, both in quantity and in quality, and also a considerable amount of leisure. Reflecting economic prosperity, real per capita consumption expenditure increased by 25 per cent during 1956–60, and the pace of increase has accelerated since the middle of 1958, when the so-called consumption revolution began. Changes in the pattern of consumption are evidenced in the increased spending on high-quality clothing, processed foods, furniture, and household utensils, and, above all, on consumer durable goods and recreation. In 1960 alone, owners of television sets increased by 3.5 million (27 per cent more than in 1959), of washing machines by 1.5 million (30 per cent), and of electric refrigerators by 0.8 million (67 per cent).16 In February 1962, 79 per cent of total households in urban areas owned television sets, 58 per cent owned washing machines, and 28 per cent owned electric refrigerators.17 The active domestic demand for consumer durables was, at the same time, a strong stimulant to the rapid expansion of the machinery industry, which in turn stimulated capital goods production.

Following the increase in purchases of consumer durable goods, the so-called leisure boom set in, as people spent more money for recreation. For instance, in the calendar year 1960, 57 per cent of total households took pleasure tours away from home, averaging 2.8 times a year. In fiscal 1960/61, sales of railway passenger round-trip tickets increased by 41 per cent. Skiing, golf, and boating, once confined to the wealthy, have become sports of the common people. This change has brought prosperity to tertiary industries, but has accentuated the need to expand transportation and other public facilities.

The consumption revolution and leisure boom were strong causes of the expansion of domestic demand, inducing further investments and absorbing the output from the new capacity created. However, peculiar to Japan is the fact that rising consumption expenditures have not been accompanied by a decline in saving. In fact, the average propensity to save out of disposable income has risen in recent years. It was 14 per cent in fiscal 1955/56 and 19 per cent in fiscal 1960/61, compared with an annual average of 15 per cent estimated for the next ten years in the plan.18 Many theories have been offered to explain the high rate of saving in Japan, which exceeds that in most other industrial countries, but none of them is fully convincing. Probably, both the social pattern of living and the moral viewpoint exert considerable influence on personal saving habits. If so, it will take some time to lower the present high level of saving. However, the recently begun revolution in the consumption pattern of the people will accelerate, supported by the income-doubling policy and by emulation inspired by the demonstration of consumption possibilities now prevailing in Japan. Since the high saving rate in recent years was made possible by an unusually rapid increase in personal disposable income, which even surpassed the rapid increase in consumption, it is quite likely that, with some slackening in the rate of increase in income and with rapidly rising consumption, the saving rate will turn down in the coming years. A promising subject for personal spending in the immediate future is residential construction, which is relatively backward in Japan. In future, an increase in residential construction may offset some slackening in private investment in equipment.

Government expenditure is another prospective type of demand. As pointed out in the plan, investment in social overhead capital, such as roads, harbors, and land reclamation, has lagged considerably behind private productive capital, and may become a bottleneck in economic growth. Also, more expenditure for social welfare is greatly needed. The plan envisages only a slight increase in government expenditure relative to GNP, and most government expenditure is to be met by taxes and other current revenue, as at present. In view of the fact that the government budget has yielded a surplus19 every year in the last decade, despite government efforts to reduce taxes in several years, in order to prevent a surplus, there is little doubt that government expenditure can be expanded on a basis of sound finance.

The last, but by no means least important, type of demand is exports. The importance of exports for a policy of long-run growth is not in their creation of effective demand, but in their import purchasing power. It is estimated that the import purchasing power created by $100 million (¥ 36 billion) of exports would enable Japan to increase its GNP by ¥ 240 billion (6.6 times its imports), on the assumption that the marginal propensity to import is 15 per cent,20while the direct effect of exports in creating effective demand is of the order of magnitude of about ¥ 50 billion, depending on the multiplier applied.21

The importance of exports as a limiting factor to economic growth is explained by the fact that, if exports increase by ¥ 36 billion, the expansion in demand from other factors as well as exports must be contained within ¥ 240 billion since an increase of GNP by the latter amount induces an increase of ¥ 36 billion in imports. This means, in turn, that domestic investment, both government expenditure and industrial investment, must be kept in a certain proportion to exports.22 Thus, the relation between aggregate supply and demand is important not only for internal balance, but also for external balance.

III. Change in Price and Cost Structure

The rapid economic growth, centering around active private investment in equipment, has introduced various frictions into the economy. Although the plan envisages some distinct changes in the economic structure, the frictions that might arise from these changes are supposed to be avoided. The frictions now apparent are deterioration of the balance of payments, lagging public investment, labor shortages, and rising consumer prices. The present deterioration in the balance of payments can be considered temporary, because the expansion in private investment, being directed to the modernization and rationalization of industry, will strengthen the international competitiveness of Japanese industry. The lagging of public investment in infrastructure behind productive investment is the result of the too rapid growth of the latter. The shortage of labor in the past two years, which is most marked in high school graduates, is attributable, to a large extent, to the transitional change in the population structure after World War II, as the postwar “baby boom” will be reflected in an increase in the labor force only in fiscal 1962/63. However, the change in the cost-price structure now taking place because of these frictions is of a more fundamental nature.

Labor shortage and rising wages

As a result of the continuing economic boom, Japan has recently experienced a shortage of labor for the first time in the postwar years. This shortage, which was first felt in big and growing enterprises, became a serious problem when it affected small enterprises, which are heavily dependent on low-wage labor. Wages were raised both in big enterprises and in small enterprises, but with a narrowing of the disparity between them. Also, the employment pattern began to be modernized. A further narrowing of the disparity between wages in big and in small enterprises, and a further modernization of the employment pattern, in order to solve the problem of the dual structure of the Japanese economy, are prime objectives of the plan. These objectives pose, at the same time, a problem of change in the cost-price structure. In manufacturing industry generally, increases in wage costs have been matched by increases in productivity, and prices have remained stable; the increase in productivity has been achieved by an intensification of capital per unit of labor. However, small enterprises with low financial resources, and businesses which furnish personal services, have few means of increasing productivity, and if their wage costs have risen, they have been confronted with the alternatives of either going out of business or increasing the prices of their products. Farmers cultivating small units of land have had the same problem. The rise in consumer prices, which cover a variety of commodities, personal services, and foods, reflects this situation.

It is estimated that the total population of productive age (15 years or over) will increase by 16.8 million in the plan period and will amount to 79 million in the target year, while the number of employed will increase by only 7 million, to 48.7 million. The reduction in the rate of employed to total population of productive age, from 77 per cent to 62 per cent, signifies a great improvement in the employment structure, as a result of rising income per capita. This implies a decrease in the number of underemployed (family workers, underpaid workers, etc.) and a rise in income per worker that enables him to support his dependents. The number of employed will decrease in primary industry, while it increases in the secondary and tertiary industries. Also, family workers and individual business owners will decrease, while wage earners increase. The improvement means a great step forward in achieving full employment and solution of the dual economy. It is unlikely that a chronic shortage of labor will become a bottleneck in economic growth. However, it is possible that a rapid rise in wage rates may initiate a cost inflation and thereby result in a slowing down in the rate of growth of real income and a weakening of the international competitiveness of industry.

Change in price structure

While wholesale prices have been stable in the past eight years, indicating a balance between supply and demand, consumer prices have risen by 15 per cent. The tendency for consumer prices to rise has been aggravated in recent years by cost increases. During 1956–60, the index of consumer prices rose by 8 per cent, of which service charges accounted for about a third; higher prices for agricultural products (including cattle and fisheries), industrial products, house and land rents, and public utility rates also were of importance.

The rapid rise in house and land rents is understandable in the process of urbanization and industrialization, especially in such a densely populated country as Japan. The rise in public utility rates stemmed from a normalizing of the prices charged for public utilities, which had been held down in the early stages of postwar reconstruction, when other prices advanced. The increase in the rates was necessary, to a large extent, to cover capital costs, but also to meet the increase in wage costs. The rise in prices for agricultural products was due to various causes: a lag in the change of the production pattern to meet changing demands, seasonal and temporary shortages in production in the most recent period, and deficiencies in the marketing system and facilities. It was also due to an increase in labor costs, which was made possible in some instances by protection accorded to domestic agriculture in order to support agricultural income. The rise in the prices of industrial products mainly concerned those manufactured by small enterprises, which cannot easily absorb increased labor costs by raising productivity. The rise in the prices of personal services was almost wholly attributable to the rise in labor costs.

While the plan assumes general price stability, it foresees some rise in consumer prices, to be offset by a decline in wholesale prices. In fact, wholesale prices have been relatively stable in the long run, aside from cyclical fluctuations. During 1953–60, wholesale prices in Japan declined by 6 per cent, whereas in selected other major industrial countries they rose by considerably more than 6 per cent (Table 5). In the short run, wholesale prices fluctuated more violently in Japan.23

Table 5.Selected Industrial Countries: Indices of Wholesale Prices, 1953–60
JapanFederal Republic

of Germany1
United Kingdom2United States
Index

(1953 =100)
Percentage

change
Index

(1953 =100)
Percentage

change
Index

(1953 =100)
Percentage

change
Index

(1953 =100)
Percentage

change
195499–198–2100100
195598–1101+3103+3100
1956102+4103+2107+4104+4
1957102105+2110+3107+3
195893–9106+1111+1108+1
195995+2105–1112+1109+1
196094–1107+2113+1109–1
Change from 1953 to 1960–6+7+13+9
Sources: Data for Japan are from the Bank of Japan and the Japanese Government, Economic Planning Agency; for other countries, from International Monetary Fund,International Financial itistics.

Industrial wholesale prices.

Prices of industrial output.

Sources: Data for Japan are from the Bank of Japan and the Japanese Government, Economic Planning Agency; for other countries, from International Monetary Fund,International Financial itistics.

Industrial wholesale prices.

Prices of industrial output.

The long-run stability and the short-run instability of wholesale prices in Japan in 1953–60 can be explained by a combination of the following factors. First, although wages rose faster in Japan than in most other industrial countries, labor productivity rose even faster. Second, price competition among enterprises is keener in Japan than in many other countries. Fluctuations in effective demand exert a stronger influence on prices than on output, because of rigid employment relations in Japan. Also, cost reductions easily result in a decline in prices. Third, flexible adjustments of effective demand by way of monetary policy can be regarded as having been a stabilizer of the long-run price level. Fourth, the decline in prices of imported raw materials since 1953 has helped to push down the over-all price level.

The widening gap between consumer prices and wholesale prices is characteristic of the present change in price structure. It is important in two ways for the income-doubling policy. First, it permits a rise in income of people engaged in such fields as personal services, small enterprise, and primary industry, where an increase in productivity is difficult to achieve by means of capital investment. The tendency for prices to become higher for labor-intensive goods and services and lower for capital-intensive goods and services indicates a movement toward the U.S.-European price structure24 and also a step toward the solution of a problem peculiar to Japan, i.e., its dual economy.

Second, if the increase in consumer prices causes a spiral of cost inflation, it will reduce the expected increase in real income and weaken the international competitiveness of Japanese industry. The tendency for consumer prices to rise in a growing economy seems to have been common all over the world since World War II. The problem has been accentuated in Japan by the fact that the economic growth has been too rapid for the economy to adapt itself quickly to the new situation. In order to minimize the adverse effect of rising prices on the family budget, it may be necessary to change the pattern of consumption, which has been excessively dependent on personal services. The adoption of policies to increase the mobility of labor and to improve the commodity marketing system will also be necessary. In any event, the most essential wage policy is that wage increases be kept within the increase in productivity for the economy as a whole.

Productivity and the cost structure

The present situation in Japan is, in fact, far from a cost inflation, if that means a rise in prices resulting from wage increases in excess of the over-all rise in productivity. Although the increase in consumer prices is due to an increase in wages in low-wage enterprises greater than that in productivity, the average increase in productivity for all industry is still higher than the increase in wages: while the rise in wages in manufacturing industry was 34 per cent during 1955–60, productivity increased by 47 per cent in the same period.25

The plan assumes that an annual rate of growth in GNP of 7.8 per cent will be achieved partly by an increase in employment (1.2 per cent), but mainly by an increase in productivity (6.6 per cent). The increase in productivity is assumed to be about the same for each of the major industrial sectors, and the variations in the size of their contributions to the growth in GNP are attributable mainly to variations in the changes in employment in each sector (Table 1, p. 154). The growth in GNP is largest in secondary industry, because it has the largest increase in employment, and smallest in primary industry, because it has a decrease in employment. The growth in productivity for the economy as a whole is greater than for any of the sectors, because of the large increase in the proportion of total employed labor that is engaged in nonprimary industries, where productivity is substantially higher. This implies that the increase in GNP is accompanied by an agricultural revolution and an improvement in the industrial structure, centering around the increase in productivity. An increase in productivity is the key factor of the income-doubling plan, because it is necessary to achieve the plan’s prime purpose of increasing per capita income. The share of income going to labor could be increased by a faster rise in wages than in the remuneration of other factors of production, but this, if unaccompanied by an increase in productivity, would merely result in a redistribution of income, per capita income remaining unchanged.

Although a rise in labor costs exceeding the increase in productivity in some sectors of the economy has produced rising consumer prices in recent years, it has not resulted in any appreciable cost-push effect on prices of most industrial products. The cost structure of industry underwent a change during 1955–60. While capital (interest plus depreciation), management, and sales costs increased, labor and material costs declined. In view of the fact that the wholesale price index fell slightly and the profit ratio rose during this period, the reduction in production costs is quite noticeable. Labor costs declined in spite of a considerable rise in wage rates; raw material costs also decreased, chiefly because of a reduction of 27 per cent between 1953 and 1960 in the ratio of the value of raw materials consumed to the value of production. The reduction in cost was thus the result of the increase in productivity brought about by vigorous investment in equipment in the age of technical innovation. 26

The present change in the cost-price structure, manifested in a rise in wages and consumer prices, does not mean a cost inflation, to say nothing of a demand inflation. However, the successful realization of a policy for growth requires constant watch over the cost-price situation, although the present plan has no elaborate policy in this respect. The internal balance of prices and wages will have to be maintained not only to ensure a doubling of real national income, but also to ensure external balance by preventing the domestic price level at the present exchange rate from rising faster than the international price level.

Japan’s exports in 1960 were 3.18 times those in 1953, while world exports were 1.51 times the 1953 figure. The faster expansion in Japan’s exports was due, among other things, to a strengthening of the price competitiveness of Japanese industry. A comparison of major economic indicators in 1960 for the six largest exporting countries (1953 = 100) is given in Table 6. The increase in Japan’s exports was the greatest, the next largest increases being those of Germany and France. International comparisons of productivity are difficult to make, but a rough indicator is given by the ratio of the index of manufacturing production to the index of employment in manufacturing industry. The rise in manufacturing production per unit of labor was highest in Japan. Although the increase in real wages was high, both domestic wholesale prices and export prices declined in Japan more than in any other country shown. Export prices declined as markedly in France as in Japan, but this was partly due to the devaluation of the French franc.

Table 6.Major Exporting Countries: Exports, Productivity, Wages, and Prices in 1960 as Percentages of 1953
JapanFederal

Republic of

Germany
FranceUnited

Kingdom
United

States
Canada
Exports318237181139130128
Manufacturing production (A)280183178129117118
Employment in manufacturing (B)1541371061099697
Productivity (A/B)180134168118122122
Wages1129141130114113116
Wholesale prices94107130113109104
Export prices9410194110108106
Sources: International Monetary Fund, International Financial Statistics; United Nations, Monthly Bulletin of Statistics; and Table 5 (p. 169).

In real terms. Prepared by the Bank of Japan, by deflating nominal wages by consumer price indices. See Bank of Japan, Monthly Statistics of Foreign Economies (in Japanese), March 1962.

Sources: International Monetary Fund, International Financial Statistics; United Nations, Monthly Bulletin of Statistics; and Table 5 (p. 169).

In real terms. Prepared by the Bank of Japan, by deflating nominal wages by consumer price indices. See Bank of Japan, Monthly Statistics of Foreign Economies (in Japanese), March 1962.

IV. Prospects for Exports and Imports

Being less well endowed than many other countries with natural resources, Japan is heavily dependent on imports, and exports are the main limiting factor to economic growth. The need to expand exports in order to grow will become even more important during the plan period, since dependence on imports is expected to increase slightly. The expansion of output capacity and the strengthening of productivity provide a great chance to expand exports. However, the expansion will depend not only on export competitiveness but also on foreign market situations; foreign markets are not necessarily favorable to Japanese goods, even if they are competitive in price.

Dependence on imports

Reflecting the change in the Japanese industrial structure and consumption pattern, the commodity composition of imports has changed markedly during the past years. Between 1953 and 1960, the ratio of foods and textile raw materials to total imports declined from 54 per cent to 30 per cent, but the ratio of metal ores and scrap, mineral fuels, machinery, and chemicals increased from 30 per cent to 46 per cent. Other items increased from 16 per cent to 24 per cent. The decline in the ratio of foods was due to increased domestic agricultural production, and the decline in the ratio of textile materials and the rise in the ratio of mineral fuels, metal ores and scrap, and machinery was the result of heavy and chemical industrialization. The increase in the ratio of machinery and other items was also partly attributable to import liberalization. The dependence on imports, expressed as the ratio at current prices of total imports to GNP, remained stable during this period, except for 1957, when the Suez crisis caused speculative imports for inventory investment (Table 7). The stability resulted from various downward pressures, which were substantial enough to offset the basic upward pressure. The first of these was a decrease in imports of foods, which declined from 3.3 per cent of GNP in 1953 to 1.4 per cent in 1960. The second was a decline in import prices, which amounted to 18 per cent. Thirdly, technological improvements made it possible to reduce the portion of imported raw materials needed for a unit of manufactured output. Fourthly, the import control system in Japan helped to restrain imports, especially at times of domestic economic boom.

Table 7.Japan: Ratio of Imports to Gross National Product, 1953–60(In per cent)
At Current PricesAt 1955 Prices
195312.711.5
195411.711.5
195510.910.9
195612.912.9
195715.314.8
195810.912.1
195910.813.0
196011.514.8
Source: Japanese Government, Ministry of International Trade and Industry, White Paper on Foreign Trade, 1961 (in Japanese), p. 184.
Source: Japanese Government, Ministry of International Trade and Industry, White Paper on Foreign Trade, 1961 (in Japanese), p. 184.

It is quite doubtful that these factors will continue to reduce Japan’s dependence on imports in the future. When measured in real terms, to eliminate the effect of the decline in import prices, dependence on imports clearly shows an upward shift since 1956, when the recent investment boom began. The amount of imports induced by a unit of investment is larger than that induced by a unit of consumption.27Not only did the proportion of private investment in equipment to GNP increase, but the import component of private investment also rose. This latter increase is considered to have been due partly to increased imports of machinery, as restrictions on such imports have been liberalized. As import liberalization progresses, increased imports of finished goods related to both investment and consumption are expected to tend to push up dependence on imports. In fact, the plan envisages that imports as a percentage of GNP will rise from 14 per cent in the base year (at 1958 prices) to nearly 17 per cent in the target year, on the assumption that import liberalization will take place in the earlier years of the plan period. The largest rise is expected to be in finished goods, such as machinery and consumption goods, followed by semifinished goods and mineral fuels. The increase in imports of raw materials as a whole will be smaller, despite a rapid rise in imports of metal ores and scrap; the increase in imports of foods will be least of all.

There is little possibility that a reduction in imports of foods will greatly reduce Japan’s dependence on imports in future, in view of the already low level of such imports. Also, a further decline in import prices cannot be counted on, especially in view of the world-wide recognition of the importance of supporting the prices of primary products. On the other hand, keen competition among industrial countries may cause the prices of manufactured goods to decline. It may be safe to assume constant terms of trade for Japan in future, despite the faster decline in import prices than in export prices in the past.28 Consequently, the prospects for dependence on imports may be expected to be the resultant of two counteracting forces: the upward pressure of increasing imports of finished goods as a result of the liberalization, and the downward pressure of decreasing imports of raw materials as a result of technical improvements.

The ratio of the value of raw materials consumed to the value of manufacturing production declined by 27 per cent between 1953 and 1960 (Table 8). Although consumption of imported raw materials increased faster than domestic raw materials, because of the limited supply of the latter, the ratio of the value of imported raw materials consumed to that of manufacturing production also declined substantially (by 20 per cent). The increasing importance of heavy and chemical industries in the manufacturing sector will further accelerate this downward trend. It is estimated that the value of imports consumed for the production of $100 value added is $25 for the heavy and chemical industries and $36 for light industry.29 Also, the development of heavy and chemical industries will strengthen the competitiveness of Japanese industry and reduce the dependence on imports of the economy as a whole. Thus, the immediate effect of heavy and chemical industrialization, evidenced by the increased imports of machinery, will be considerably offset in the long run by this counteracting tendency. On the whole, the net increase in dependence on imports will not be great and will slacken in future.

Table 8.Japan: Ratios of the Value of Raw Materials Consumed to the Value of Manufacturing Production, 1953–100(1968=100)
Ratio of Value of

Raw Materials

Consumed to

Value of Manufacturing

Production

(A)
Ratio of Value of

Imported Raw

Materials Consumed

to Total Raw

Materials Consumed

(B)
Ratio of Value of

Imported Raw

Materials Consumed

to Value of

Manufacturing

Production1

A×B

100
1954969996
1955949389
19569110092
19578510590
19587710280
19597610682
19607310880
Source: Bank of Japan, Economic Statistics of Japan, 1961 (in Japanese).

Calculated from unrounded figures.

Source: Bank of Japan, Economic Statistics of Japan, 1961 (in Japanese).

Calculated from unrounded figures.

Change in export pattern

It is clear from what has been stated earlier that the price competitiveness of Japanese industry has been considerably improved in recent years, and that this has contributed to the increasing share of Japan’s exports in world trade. However, equally important has been the fact that the Japanese industrial structure has been adapted to the changing world trade pattern, both area-wise and in respect of commodity composition and the quality of commodities. The elasticity of Japan’s exports in relation to world income is considered to be relatively high. During 1954–60, this elasticity ranged from 2.6 to 3.9 in normal years, i.e., years in which world income was growing at an annual rate of about 5–8 per cent. However, it was irregularly high in 1954, at 21.3, and low in 1958, at 0.4; these were years in which world income grew by less than 2 per cent (Table 9). Although it is difficult to ascertain numerically the portions of the increases in Japan’s exports that should be ascribed to income effects or price effects, the persistent change in Japan’s export pattern toward commodities for which demand is more income elastic, and toward areas where income has been rising faster, has undoubtedly raised the elasticity of Japan’s total exports. Table 9 gives the relevant figures. While world exports increased by about 50 per cent between 1953 and 1960, exports of manufacturing countries to each other increased by more than 100 per cent. Exports of manufactured goods by manufacturing countries increased by 50 per cent between 1953 and 1959, but exports of heavy industrial and chemical products increased by 60 per cent, compared with a 30 per cent increase in light industrial goods.30 Japan’s exports to North America and Europe as a ratio to total Japanese exports increased from 32 per cent in 1953 to 45 per cent in 1960. Japan’s exports of heavy industrial and chemical products increased from 34 per cent of its total exports in 1953 to 41 per cent in 1960; by commodity, the weight has shifted from ships, steel, and transistors, which are rather labor intensive, to machinery, which needs more advanced technology. In addition, Japan has succeeded in selling new products in the world market. Between 1955 and 1960, 35 new products, such as transistor radios, nylon, plastics, and automobiles, made up 22 per cent of the total increase in exports.

Table 9.Trends of World Exports and of Japan’s Exprots, 1954–60
Percentage Change from Previous Year1960 Data

as Percentage

of 1953 Data
1954

(1)
1955

(2)
1956

(3)
1957

(4)
1958

(5)
1959

(6)
1960

(7)
Income of world excluding Japan (A)1.87.38.25.41.55.26.711401
Japan’s exports (B)27.723.424.414.30.620.117.3318
B/A21.33.23.02.70.43.92.6
World exports49117–5612151
Exports of manufacturing countries to each other211191611–714202123
Sources: International Monetary Fund, International Financial Statistics and Annual Reports; and Japanese Government, Ministry of Finance, Monthly Statistics, based on United Nations statistics.

Estimate; figure for 1960 excludes several countries for which data are not yet available.

Countries in the European Economic Community, countries in the European Free Trade Association (except Denmark for 1954–55 and Portugal for 1958–60), United States, Canada, and Japan.

Estimate.

Sources: International Monetary Fund, International Financial Statistics and Annual Reports; and Japanese Government, Ministry of Finance, Monthly Statistics, based on United Nations statistics.

Estimate; figure for 1960 excludes several countries for which data are not yet available.

Countries in the European Economic Community, countries in the European Free Trade Association (except Denmark for 1954–55 and Portugal for 1958–60), United States, Canada, and Japan.

Estimate.

A strategic feature of the income-doubling plan is the reorientation of the export pattern, as well as of the domestic output structure, toward heavy and chemical industries. As the ratio of heavy and chemical industries to total manufacturing industry, in terms of value added, rises from 61 per cent in fiscal 1959/60 to 73 per cent in the target year, the ratio of heavy industrial and chemical products to total exports is expected to rise from 38 per cent to 54 per cent. Although the ratio of heavy and chemical industries to total manufacturing industry of Japan reached 70 per cent in 1961—as high as, or higher than, in the United States, the United Kingdom, Germany, or France31—the ratio of heavy industry and chemical products to total Japanese exports (41 per cent in 1960) is far lower than the corresponding ratios in those countries.32 The discrepancy between the domestic industrial structure and the export structure indicates the backwardness of Japanese industry, in that a larger part of the heavy and chemical industries has not acquired an advantage in comparative cost when confronted with international competition. The changes in the export pattern and the domestic output structure are interdependent. Development of heavy and chemical industries is considered necessary, because of the pattern of world trade, and suitable for the Japanese economy, because these industries require comparatively more advanced science and technology than natural resources. Heavy and chemical industrialization can power economic growth. It is particularly important for the future expansion in Japan’s exports, because world demand for such products is more elastic in respect of world income, and rapid expansion in exports can be expected only by specializing in such products.

This concept is obviously different from the theory of comparative cost in a static sense. Although some heavy and chemical industries have not established comparative advantages in Japan and some light industries still maintain comparative advantages, the direction of the export pattern envisaged in the plan may well be justified in a dynamic process of economic growth. This is especially true for Japan, where the traditional advantages of abundance of labor and low wages are disappearing. The reorientation of Japan’s export pattern is also promising, as world demand for manufactured products is being diversified and more opportunities are being offered to any manufacturing country to participate in the horizontal division of labor in world production.

Prospects in world markets

The export pattern being thus improved to meet the world demand, the final problem to be overcome in order to secure the fast expansion of exports lies in the world market situation. In spite of the rapid expansion of exports in the postwar years, Japan’s share in world exports in 1960 (3.6 per cent) was still below the prewar peak in 1937 (4 per cent). The plan forecasts that the Japanese share will reach 5.6 per cent in fiscal 1970/71, assuming that world exports expand at an annual rate of 4.5 per cent in the coming decade, against the rate of growth of more than 6 per cent in the past decade. In order to achieve this, Japan’s exports will have to increase at an annual rate of 10 per cent, which is considerably lower than in the recent past, when exports increased by about 18 per cent annually. Moreover, the present level of Japanese exports is considered too low compared with the prewar level in Japan and other trading countries. Foreign trade was 13 per cent of GNP in 1960 for both exports and imports, whereas in 1934–36 it was 23 per cent. In 1960, the ratio of exports to GNP was 25 per cent for Germany and 26 per cent for the United Kingdom. Increasing output capacity, increasing productivity, and adaptability to world demand should enable Japan to increase exports in future. However, world trade is not in practice based wholly on the price mechanism or on a free market system. There are various factors which obstruct Japan’s exports, the most serious of which is the discrimination against Japanese goods by European countries.

The plan considers that the future of Japan’s exports will increasingly depend on exports of highly processed goods to advanced areas. However, severe discrimination against Japanese goods is exercised by European countries by invoking Article 35 of the General Agreement on Tariffs and Trade (United Kingdom, France, and others), and through discriminatory import restrictions (Italy, France, United Kingdom, and others). In exports to the United States and Canada, Japan is obliged to observe voluntary restraint. Japan’s exports have obviously been hampered by these measures. Exports to North American countries (mostly United States and Canada), whose policies toward Japanese goods are most liberal, have expanded greatly. The ratio of Japan’s exports to this area to Japan’s total exports increased from 23 per cent in 1937 to 33 per cent in 1960. On the other hand, although exports to Europe are rising gradually, their ratio to total exports has not changed noticeably from the prewar ratio, despite the rapid growth in that region. In view of the further integration of the European Economic Community (EEC) and the possible accession of the United Kingdom to the EEC, the importance of Europe’s expanding demand will be far greater for Japan in future as a potential export market.

It is encouraging for Japan that the recent negotiations between European countries and Japan have shown signs of improved trade relations. Furthermore, the United States is proposing a freer trade policy. Although international competition is expected to be intensified all over the world, any reduction in the degree of discrimination against Japan will be a favorable factor for Japan’s exports.

The plan recognizes that it may not be easy to increase exports to the less developed countries, because of the insufficient purchasing power of these countries and also because of their attempts to be self-sufficient in light industrial goods. However, one of the themes of the plan is to promote Japan’s international economic cooperation, particularly with developing countries. The plan estimates Japan’s capital investment abroad at $3,540 million during the ten years—$630 million in the target year alone. When the amount of credits to be extended to developing countries ($1,500 million in the target year) is included, the total of funds to be extended in that year to developing countries, $2,130 million, is more than 20 times that of the base year, and will amount to 2.9 per cent of Japan’s GNP.

V. Economic Planning for a Market Economy

The present plan was put into effect from the fiscal year beginning April 1, 1961. The economic developments and fluctuations in the first year of the plan were so remarkable and violent that they were sharply at variance with the trend envisaged in the plan. The increase in GNP achieved, 13 per cent in real terms, was greater than that envisaged in the plan: private investment in equipment exceeded the target for ten years ahead, prices rose by about 4 per cent, and the deficit on current transactions amounted to about $1,000 million. Moreover, the various frictions and imbalances described earlier became more acute.

Ever since the plan was first studied, it has been criticized for its methodology, political implications, and assumptions regarding the economic structure; the phenomena just mentioned are cited by critics as evidence of the failure of the plan. The plan is admittedly a flexible one and allows for various fluctuations in the course of progress toward the target at the end of ten years. No intermediate or yearly targets are set out in the plan. Nevertheless, it is quite appropriate and important to review the plan at this time, because the free market economy is vulnerable to violent business fluctuations and structural changes, and the success of the plan depends greatly on success in controlling these fluctuations and adjusting the economy to the structural changes.

Significance of economic planning

The present plan is intrinsically a forecast for a free market economy. It is not like one prepared in centrally planned economies or in developing economies, where the sector of the economy under direct or indirect control of the government is broader than in Japan. Economic planning has been considered desirable in market economies where the government has assumed responsibility for preventing business fluctuations and achieving full employment: objectives that are believed to be attainable by adequate economic policy. Economic planning is becoming more popular today as a means of attaining long-run economic growth rather than of preventing short-run cyclical fluctuations. National or social aspirations for a prosperous economy have motivated this tendency, and the advance in technical knowledge has contributed to it. The present plan of Japan may be said to be typical of this development, in placing emphasis on economic growth.

Although the annual rate of growth of 7.2 per cent forecast for the coming ten years is lower than the 10 per cent achieved in the last decade, it will probably be higher than can be expected for most other industrial countries. The plan is based on the belief that various factors exist in the Japanese economy to make such a high rate of growth possible, even though postwar reconstruction is no longer a factor, and that at this stage of economic development this potentiality can be better realized by means of a free economic system than by direct governmental controls.

Inherent difficulties in a market economy

It is true that economic development in postwar Japan has owed much to the free competitive system, but it is also undeniable that the excessive competition peculiar to Japanese society has, to a large extent, been responsible for the violent business fluctuations and frequent balance of payments deteriorations. In a rapidly growing economy, where each entrepreneur is optimistic about future demand, free competition for a larger share of the market takes the form of seeking to establish larger productive capacity than that of other entrepreneurs. For lack of a single decision-making system, competition in investment in plant and equipment takes place and continues, if unobstructed by some other limiting factor, until enterprises realize too late that their products cannot be sold remuneratively. Past experience has taught Japanese entrepreneurs that the earlier they invest, the greater are their chances to win. The criticism is often made that the optimistic attitude of enterprises has been further stimulated by the income-doubling plan. It is also said that excessive competition among commercial banks, which are the main suppliers of investment funds to big enterprises, has facilitated excessive competition among enterprises. Although a deterioration of the balance of payments, the limiting factor of economic growth, has compelled the authorities on several occasions to adopt stringent financial policies to limit investment, full adjustment through the price mechanism, on which a free economy depends, has required a longer process of trial and error with unavoidable social losses.

When the growth of a market economy is to be accompanied by a structural change another problem arises. The price mechanism is less effective in bringing about a required change in the economic structure than in bringing about marginal adjustments, and since the core of the Japanese plan is a structural improvement of the economy, there are many things to be done from time to time by positive policies and measures.

Policies for the balanced growth of the economy

Planning in a market economy is based primarily on the freedom and initiative of individuals. In the main, it is intended to harmonize individual economic activities and public welfare through the use of fiscal and monetary measures to affect the operation of the price mechanism. A plan can be a decisive instrument only in fields where the government has direct or indirect means of control. In an economy where the private sector occupies the larger part, a plan can give only an economic background against which individual enterprises can draw up their own plans. However, plans of enterprises are different from the government plan in respect of the attainment of shares of the market. Where private competition is keen, a government plan aimed at economic growth is likely to give too much confidence to enterprises seeking larger shares. To prevent the undesirable effects of excessive competition, either government intervention or business self-adjustment is required. The former is apt to result in the distortion of the price mechanism and the introduction of bureaucracy; the latter tends to result in monopoly and cartelization. A compromise has to be worked out somewhere. It is desirable that an economic plan in such a society should place more emphasis on a description of possible imbalances, both economic and social, which may emerge in the course of rapid economic growth, rather than on a presentation of a bright outlook.

Economic planning for the balanced growth of the economy should be such as to foster the potential energy, and correct the intrinsic deficiencies, of a market economy. Although fiscal and monetary policies are supposed to play the fundamental role, their role is limited chiefly to controlling aggregate demand. In a dynamic process of economic growth, there are problems whose solution requires additional policies: in Japan, for example, modification of competition in investments, rectification of the dual economy, modernization of employment conditions, establishment of a proper wage system, curbing of rising consumer prices, strengthening of export competitiveness, maintenance of fair competition, and prevention of excessive competition. Policies regarding budgeting, taxation, prices, wages, labor, monopoly, and the industrial, as well as the banking, system will be important. This means that some element of control is needed in a market economy when the objective of balanced growth is to be pursued. The plan shows awareness of these problems. What is important is the day-today outcome of individuals’ efforts and the flexible implementation of policy by the authorities. From this point of view, a shorter-run plan might be drawn up, pointing out imminent problems.

The success of economic development depends on human efforts more than anything else. An economic plan for a market economy is merely a sophisticated guidebook; it proves to be useful if it does not hinder personal initiative, and useless if it is not implemented by flexible policy. When the great growth potentiality of the Japanese economy is considered, there is little doubt about achievement of the plan. From the present pace of expansion, it appears that the targets may be attained one or two years earlier than expected.

Observations sur le plan du Japon destiné à doubler le revenu national

Résumé

Le Japon a adopté un plan décennal visantà doubler son revenu national à partir de 1961, en vue de maintenir le taux élevé de croissance économique qu’il a réalisé dans la décennie des années 1950. La rapide expansion économique de ces dernières années a été marquée notam-ment par l’activité de l’investissement privé dans des industries telles que sidérurgiques, mécaniques, industries des métaux non ferreux, des produits chimiques, du charbon et du pétrole. II en est résulté une augmentation de la capacité de production ainsi que du rendement industriel du Japon. Malgré la perspective d’un changement dans sa direction, la croissance économique risque d’etre entravée par divers problèmes que cette rapide expansion récente a soulevés. Les plus frappants sont le changement dans la structure des coûts et des prix et la balance des paiements, le premier déterminant la croissance économique future et la seconde la limitant. Le changement dans la structure des coûts et des prix a été caractérisé par un fléchissement des prix de gros et une hausse des prix à la consommation qui tradui-sent: d’une part, l’augmentation de la capacité et de la productivité industrielles, augmentation qui a pour effet de réduire la demande effective, et d’autre part, le relèvement des salaires qui peut provoquer une inflation ayant son origine dans la hausse des coûts. La balance des paiements est importante parce que l’augmentation des importations par rapport à celle du produit national brut est censée être plus que propor-tionnelle, alors que les exportations dépendent non seulement de leur capacité concurrentielle mais également de la situation sur les marchés mondiaux, en l’occurrence, du degré de discrimination dont les marchan-dises japonaises sont l’objet de la part d’autres pays industrieis.

Le plan décennal constitue essentiellement pour l’économie nationale une règle de conduite qui est fondée sur le principe de la libre entre-prise et de marchés libres. C’est pourquoi il est prédisposé aux diffi-cultés propres à une économie de marché, ce dont témoignent les résultats acquis la premiere année, résultats qui accusent une nette différence par rapport à ceux qui étaient prévus dans le plan. Les ob-jectifs du plan décennal pourraient étre atteints un ou deux ans avant la date prévue, mais un certain nombre de problèmes de caractère tant structurel que cyclique, qui toutefois ne sont pas complètement négligés dans le plan, semblent encore devoir être résolus.

Apreciación del plan adoptado por el Japón para doblar su ingreso nacional

Resumen

El Japón adoptó un plan para doblar su ingreso nacional durante el decenio iniciado en 1961 con miras a mantener la alta tasa de desarrollo económico alcanzada durante el decenio anterior. Uno de los factores que han desempeñado un papel importante en la rápida expansión económica lograda en los últimos años ha sido la actividad desplegada por la inversión privada en industrias tales como las del hierro y el acero, metales no ferrosos, maquinaria, productos químicos, carbón y petróleo. Como consecuencia de esto han aumentado la capacidad productiva de la nación y la productividad industrial. Aunque se espera que más adelante ocurrirá un cambio en la estructura del desarrollo económico, la reciente y rápida expansión económica ha dado lugar a varios problemas que pueden llegar a entorpecer ese proceso de desarrollo. Entre éstos se destacan el cambio experimentado en la estructura costos-precios y la balanza de pagos, el primero determinando y la segunda limitando el futuro desarrollo económico. El cambio registrado en la estructura costos-precios se ha caracterizado por la tendencia hacia la baja de los precios al por mayor y la tendencia hacia el alza de los precios al consumidor, que reflejan, por una parte, una capacidad y productividad industriales en aumento, lo que redunda en una disminución de la demanda efectiva, y por otra, el movimiento ascendente de los salarios, que puede provocar una inflación por el alza de los costos. La balanza de pagos constituye un factor importante porque se espera que a medida que aumente el producto nacional bruto el incremento de las importaciones será pro-porcionalmente mayor, en tanto que las exportaciones no solamente están supeditadas a su capacidad competidora, sino también a las circunstancias que imperan en los mercados mundiales, entre otras el grado de discriminación que exista en los demás países industriales contra las mercancías de origen japonés.

El plan decenal es fundamentalmente una pauta para la economía nacional, que se basa en el principio de la libertad de empresa y de mercados; de ahí que sea susceptible a las dificultades inherentes a toda economía de mercado, como se desprende de los resultados obtenidos durante el primer año, los cuales difieren con mucho de las líneas trazadas en el plan. Cabe la posibilidad de que la meta fijada para este decenio se logre alcanzar uno o dos años antes de la época prevista, pero parece existir una serie de problemas, tanto estructurales como cíclicos, a los que hay que buscar solución, pese a que tampoco habían pasado completamente inadvertidos en el plan.

Mr. Fujioka, economist in the Far Eastern Division, is a graduate of the Law School of Tokyo University and studied at the University of Chicago. He was formerly a member of the staff of the Japanese Ministry of Finance.

Japanese Government, Economic Planning Agency, New Long-Range Economic Plan of Japan (1961–1970): Doubling National Income Plan (published in English by the Japan Times, Ltd., Tokyo, 1961).

Official estimate made in January 1962. However, a preliminary estimate made by the Economic Planning Agency in August 1962 shows a 13 per cent growth in GNP in real terms.

Gerhard Colm, The American Economy in 1960 (National Planning Association, Washington, 1952).

Based on data in International Monetary Fund, International Financial Statistics.

The dual structure of the Japanese economy is usually understood to mean the coexistence of advanced nonprimary industry and backward primary industry, of modernized big enterprises and premodern small enterprises, and of marked differentials in wages and living standards in various sectors of the economy.

This paper aims at analyzing the salient features of the Japanese economic growth in recent years, insofar as it conditions the future course of the income-doubling plan. It is not intended to explain comprehensively all the basic factors influencing economic growth in Japan.

Japanese Government, Economic Planning Agency, Economic Survey of Japan (1960–61) (published in English by the Japan Times, Ltd., Tokyo, July 1961), p. 22.

The remaining 59 per cent comprises 24 per cent derived from increases in household expenditures, 9 per cent from inventory investment, 12 per cent from government expenditures, and 14 per cent from exports and others. Ibid., p. 201.

The stage of heavy and chemical industrialization here referred to is one where the net value added in the heavy and chemical industries in peacetime exceeds some 50 per cent of that in manufacturing industry as a whole. This ratio exceeded 50 per cent in Japan in 1956 and rose to nearly 60 per cent in 1959 and 63 per cent in 1960. See Japanese Government, Ministry of International Trade and Industry, White Paper on Foreign Trade, 1961 (in Japanese), pp. 189, 218, and 307.

Calculated from gross investment in the same year as the increase in GNP, on actual value. Economic Survey of Japan (cited in footnote 7), p. 206.

See also Japanese Government, Ministry of International Trade and Industry, Monthly Statistics (in Japanese), March 1962, pp. 56–57.

For a discussion of the dual role of fixed investment in influencing the growth of output and of the usefulness of segregating producers’ investments in fixed assets from those investments whose impact upon capacity is more indirect, see United Nations, World Economic Survey, 1959, pp. 22–23.

It has been argued by Dr. Shimomura that private investment in equipment in a certain year is roughly equivalent to the increase in output capacity in the following year. His argument has two steps. First, on the basis of the time needed at present for the completion of construction works of various types, and of the present custom that payments are made in installments from the time of starting work to its completion, he assumes that private equipment investment in a given year (which comprises payments for various stages of different construction works) is approximately equal to the total value of equipment completed in the following year. Second, he gives statistical evidence that the total value of newly completed equipment in a certain year is approximately equal to the increase in output capacity in the same year. See 0. Shimomura, For the Realization of Economic Growth (in Japanese), Tokyo, December 1958, pp. 384–88.

This portion should be understood as the replacement that is necessary to maintain the existing level of output capacity in a physical sense, which is obviously different from depreciation for accounting purposes. Statistics of replacement so defined are not available. The ratio of depreciation fluctuated widely in the past, but the general trend was rising. It was 7–9 per cent during fiscal 1952/53–1955/56 for all industries (10–12 per cent for manufacturing alone), 8.5–10 per cent (12–13 per cent for manufacturing) during fiscal 1956/57–1958/59, 9–10 per cent (13–14 per cent) during fiscal 1959/60–1960/61, and 11–25 per cent (15–22 per cent) for the first half of fiscal 1961/62. The percentages for replacement cited in the text take into account the rising trend of depreciation and the increasing weight of manufacturing industry, especially the heavy and chemical industries, in the coming ten years, but the actual magnitude of the percentages does not mean much, because the present purpose is to show the year-to-year change in the marginal relation between supply and demand.

An index of output capacity for manufacturing industry, compiled by the Japanese Ministry of International Trade and Industry, in 1960 was 1.91 times the 1955 index; GNP in 1960 was 1.78 times that in 1955. The parallelism of this increase in output capacity and in GNP may mean that the capital coefficient is much lower than those usually considered, for which the reason appears to be that only net private equipment investment is taken into account in the calculation. This is appropriate because, although public investments, such as roads and housing, are important on both the demand and supply sides, they are not directly productive by themselves, and their relation to output can be flexible. What determines the growth in output capacity directly is private equipment investment, and its magnitude has a direct bearing on the supply and demand situation. Inclusion of public investment will merely raise the capital coefficient, with a wide margin of fluctuation, and obscure the present point of discussion.

In the short run, fluctuations in demand may result in increases and decreases in the rate of operation of plant, rather than in prices.

EPA survey in August 1961.

EPA survey in February 1962.

The plan expresses concern that the rising trend of saving might bring about a shortage in private consumption expenditure and imbalance between demand and supply.

Excess of government revenue (mostly taxes, but including surplus of government enterprises and other income) over government expenditure (purchase of goods and services, transfer payments, subsidies, and net payments abroad).

Average for fiscal 1959/60 and 1960/61.

The multiplier to be applied here is the reciprocal of the sum of the marginal rate of saving, marginal rate of taxation, and marginal rate of import. The marginal rate of saving and the marginal rate of taxation were 058 and 025 on the average, respectively, for fiscal 1957/58–1960/61, the most recent business cycle. The marginal rate of import was 0.15 on average for the two recent years when import restrictions were being gradually reduced. When these rates are used, the multiplier is 1.47.

The following condition is needed to maintain balance of payments equilibrium: increase in government expenditure (ΔG) + increase in industrial investment (ΔI)=marginal rate of saving (ΔS) + marginal rate of taxation (ΔT)marginal rate of imports (ΔM)×increase in exports (ΔX). Using the figures for Japan we have ΔG+ΔIΔX=ΔS+ΔTΔM=3.5, which is the limiting proportion mentioned in the text.

According to a Bank of Japan survey (Monthly Economic Review, July 1961), the average fluctuation of wholesale prices in the period 1953–60, calculated 100Σ(xx1)212x1 where x denotes the monthly index and x1 the average index for the year, was 1.48 for Japan, but was 0.64 for the United Kingdom, 0.51 for Germany, and 0.45 for the United States.

According to an EPA survey, the purchasing power parity of the yen for consumer goods and services (mainly labor-intensive goods) is ¥ 204 per US$1, whereas the official rate of exchange is ¥ 360 per US$1.

Economic Survey of Japan (cited in footnote 7), p. 444.

According to a Bank of Japan survey of 512 major enterprises, the added value of manufacturing industry (0) increased by more than 100 per cent during fiscal 1956/57-1960/61, the number of workers (N) by 26 per cent, and labor productivity (O/N) rose by 64 per cent. Putting O/N = O/K × K/N, where K denotes book value of tangible fixed assets, excluding those not yet productive, it is found that O/K decreased by 2 per cent and K/N increased by 68 per cent. From this it is clear that the rise in labor productivity is principally the result of labor-saving production methods via heavier capital investment per unit of labor.

According to an input-output analysis of the Japanese Ministry of International Trade and Industry (MITI), the average propensity to import in 1960, expressed as a percentage of the value of demand, was 7.6 per cent for household consumption, 4.4 per cent for government consumption, 12.6 per cent for inventory increases, 115 per cent for private investment in equipment, 9.9 per cent for government investment, 14.1 per cent for exports, and 9.2 per cent for total demand. The percentages are related conceptually to the sum of GNP and imports at current prices. See MITI, White Paper on Foreign Trade, 1961 (in Japanese), p. 184.

Between 1953 and 1960 export prices declined by 6 per cent while import prices declined by 18 per cent; thus the terms of trade improved by 14.6 per cent.

White Paper on Foreign Trade, 1961 (cited in footnote 27), p. 187.

Based on United Nations, Monthly Bulletin of Statistics.

For 1959 it is estimated at 57 per cent for the United States, 61 per cent for the United Kingdom, 53 per cent for Germany, and 58 per cent for France, according to a MITI survey. See White Paper on Foreign Trade, 1961 (cited in footnote 27), p. 218.

Estimated at 81 per cent for the United States, 78 per cent for the United Kingdom, 83 per cent for Germany, and 71 per cent for France, according to a MITI survey, loc cit.

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