The 1954–55 Improvement in Japan’s Balance of Payments

DESPITE THE WEAKNESS caused by structural and other reasons, Japan had a surplus in its over-all balance of payments1 in every year from 1947 through 1952. The year 1953, however, was conspicuously different and attracted special attention. The exceptional nature of this year was heightened by the fact that special government receipts, which had enabled Japan to accumulate reserves since 1950,2 despite large deficits in other balance of payments items, were then at a peak. In 1951 and 1952, when special government receipts averaged $706 million a year, Japan had an average annual payments surplus of about $281 million. During 1953, on the other hand, when such receipts totaled $803 million, there was a payments deficit of $227 million.


DESPITE THE WEAKNESS caused by structural and other reasons, Japan had a surplus in its over-all balance of payments1 in every year from 1947 through 1952. The year 1953, however, was conspicuously different and attracted special attention. The exceptional nature of this year was heightened by the fact that special government receipts, which had enabled Japan to accumulate reserves since 1950,2 despite large deficits in other balance of payments items, were then at a peak. In 1951 and 1952, when special government receipts averaged $706 million a year, Japan had an average annual payments surplus of about $281 million. During 1953, on the other hand, when such receipts totaled $803 million, there was a payments deficit of $227 million.

DESPITE THE WEAKNESS caused by structural and other reasons, Japan had a surplus in its over-all balance of payments1 in every year from 1947 through 1952. The year 1953, however, was conspicuously different and attracted special attention. The exceptional nature of this year was heightened by the fact that special government receipts, which had enabled Japan to accumulate reserves since 1950,2 despite large deficits in other balance of payments items, were then at a peak. In 1951 and 1952, when special government receipts averaged $706 million a year, Japan had an average annual payments surplus of about $281 million. During 1953, on the other hand, when such receipts totaled $803 million, there was a payments deficit of $227 million.

The payments difficulties in 1953 were dramatized by the fact that they were in the form of a sterling crisis. The decrease in exchange assets was all in sterling assets, which reached critically low levels by the middle of 1953. An increased use of import usance (i.e., time) bills facilities made available by London banks helped Japan husband its meager sterling resources. Japan also entered into swap arrangements with these banks, buying sterling for dollars and undertaking to resell it, after a specified period, for dollars. Furthermore, in a total of four transactions between September 8 and December 21, 1953, Japan purchased the sterling equivalent of $124 million from the International Monetary Fund.3 However, this symptom of the problem—the sterling crisis—will not be emphasized in this paper, since, basically, the disequilibrium enveloped the whole range of Japanese payments. It showed up specifically as a sterling problem because Japanese efforts to conserve dollars by buying more from the sterling (and other non-dollar) countries coincided with the imposition of restrictions on the importation of Japanese goods by many of these countries. The precise nature of the payments problem facing Japan in 1953 is discussed below in Part I; both the structural causes of the difficulties and the causes originating in the domestic financial conditions are studied.

Faced with the problem, the Japanese authorities moved late in 1953 to apply a brake to the domestic economic expansion and to discourage imports. The precise measures taken are outlined below in Part II, and the effects of these measures are analyzed in Part III. The payments situation changed strikingly by 1955, and during that year Japan had a surplus of $345 million despite the fact that the special government receipts declined considerably. The fact that this improvement coincided roughly with the inauguration of a domestic disinflationary policy suggests an important causal role for the latter; but this role cannot be easily disentangled from other factors operating either domestically or in the outside world. An attempt will be made to ascertain the extent to which domestic financial policies could be credited with the improvement in the payments situation.

The experience of these years is of topical significance because, largely as a result of an investment boom of substantial dimensions, the payments surplus was again wiped out in 1956 and, according to press reports, a draft of $496 million was made on reserves in the first six months of 1957. Once again the authorities are seeking to handle the situation by relying principally on internal financial measures.

I. Nature of Payments Problem in 1953

Deterioration of payments position

With a deficit of $227 million in 1953, Japan’s payments position in that year showed a net deterioration of about $419 million. The deterioration was almost entirely on trade account, as there was a sharp increase in the volume of imports. The import purchasing power of Japanese exports4 actually increased by about 13 per cent between the two years, export prices falling by 7 per cent and import prices by 10 per cent, while the volume of exports increased by 8 per cent. But the volume of imports increased by as much as 35 per cent, and the trade deficit widened from $412 million in 1952 to $792 million in 1953.

The expansion of imports in 1953 can be attributed primarily to an inflated domestic demand; the satisfaction of this demand was facilitated by an official policy of liberalizing and even encouraging imports, especially from the sterling area and countries with which Japan had bilateral clearing accounts. The importance of the inflated home demand is strongly indicated by the fact that imports of practically all commodities increased; items which on an individual basis are quantitatively unimportant were responsible, when considered as a whole, for most of the total increase. There were also instances—e.g., coal and rayon pulp—in which imported commodities were substituted for domestically produced goods because of favorable prices for the imports. But import policy had a more positive role than merely an enabling one, since a liberalization of imports after a period in which import restrictions were, in general, effective would lead to greater imports even without an increase in home demand. Moreover, the official policy was to encourage imports by providing import trade with preferential treatment—relative to domestic trade—in regard to bank financing.

Exports in 1953 were slightly smaller than in 1952. The proportion of total output of principal commodities that was taken by home demand seems to have increased during the year. Despite severe import restrictions, principally against textiles by certain sterling countries, Japan succeeded in increasing the volume of its textile sales, but not sufficiently to offset the fall in prices and add to exchange earnings. Exports of metals and metal products declined sharply, as there was no longer an abnormally favorable demand for Japanese steel such as had existed in 1952 as a result of the U.S. steel strike superimposed on a generally tight steel supply position. Data collected by the Japanese authorities show that Japanese prices of metal products and machinery were higher than those of its principal trade competitors.

Structural changes

The impact of certain structural changes, affecting both the demand and the supply schedules of foreign exchange, has been of major significance as a cause of Japan’s payments difficulties throughout the postwar years. Therefore it cannot be a sufficient explanation of the 1953 crisis but merely indicates the limitations to the efficacy of disinflationary policy as a solution to the payments problem.

The war did extensive damage to the productive capacity of the country. It has been estimated that about 25 per cent of the total national nonmilitary assets were destroyed; the damage to industrial equipment ranged up to well over 50 per cent in certain lines of power, machinery, and chemical industries.5 In 1947 industrial production was less than 40 per cent of the prewar volume, and exports were only 5 per cent of those in prewar years. The tonnage of the Japanese merchant marine, which before the war was the third largest in the world and carried well over half of Japan’s own trade and a substantial portion of trade between other countries, was reduced by 80 per cent. The balance on account of international transportation became adverse and was an important debit item in the balance of payments.

During the years since the war, several changes have occurred relating both to Japan’s sources of import supplies and to its export markets. Nearby sources of imports in prewar years have been lost because of the loss of colonies and other territories under Japan’s control. Before the war, empire countries6 provided about one third of Japan’s total imports and most of certain essentials, such as rice, soybeans, sugar, and coking coal. Since the war, Japan has been shopping in far distant markets—e.g., in South Asia and even North America for rice and also in North America for metallurgical material.7 Success in efforts to obtain imports from nearer sources has had to wait upon the emergence of alternative sources of supply and has, therefore, been recent and limited.8 The important export markets of Mainland China and Korea, which before the war took about one third of Japan’s total exports, are now practically closed for political reasons. Moreover, in the immediate prewar years, Japan had suffered a sharp reduction in the world demand for its exports of raw silk and silk fabrics, and it has also been faced with the declining importance in world trade of its principal export product, cotton textiles9

With the passage of time, the Japanese economy has been gradually adjusting itself to the changed structural environment, but the adjustment was by no means complete in 1953. The kind of adjustment that has been taking place consists principally of reducing the import content of both domestic consumption and exports. In recent years, the emphasis of industrial and export policy has been to concentrate on the metal, engineering, and chemical industries—industries that require much smaller inputs of imported materials than do textiles; within the textile industry, the emphasis has been on synthetic fibers. Compared with prewar output, the production of chemicals, machinery, and metals and their products has increased much more than has the production of textiles. The increased production of heavy industries and chemicals has enabled Japan to reduce certain imports—some types of machinery, sulphuric ammonia, pig iron, glass, pulp, etc. These developments, together with the recent tendency toward increased domestic demand for artificial, rather than natural, fiber fabrics produced domestically and for durable consumer goods, and the increased consumption of services, are partial explanations of the fact that in the postwar years Japanese imports have amounted to only about 12 per cent of gross national expediture, compared with about 20 per cent before the war.

During the protracted period of adjustment to the unfavorable structural changes, Japan has been helped by special government receipts, which accrue principally as reimbursements for the cost of supporting the UN Korea forces stationed in Japan, from sales to the UN forces under the special procurement program, from U.S. expenditures for the maintenance of its forces in Japan since the peace treaty, and from offshore procurements by the United States, through its International Cooperation Administration, for third countries. Despite large deficits in the rest of the current account, these receipts have, since 1951, either made possible an increase in reserves or, as in 1953, mitigated a decline in them. Although the receipts have not tapered off as rapidly as was originally expected, they are essentially temporary in nature. To only a very small extent, however, are they aid receipts. It is possible that the United States, in making its disbursements, gave some consideration to Japan’s need to increase its exchange earnings; and there was also the fortuitous circumstance of Japan’s proximity to the theater of operations, Korea. However, this supply of exchange, unlike aid receipts, does involve a corresponding demand on Japanese resources. At the time that this demand originally emerged, there was considerable slack in the Japanese economy; at present, on the other hand, it is not improbable that a substantial reduction in these earnings would increase regular Japanese exports.

Price disparity and inflation

In July 1953, the Japanese Economic Counsel Board10 said, “Two domestic factors hinder an increase in exports at present. They are the comparatively high prices of heavy and chemical industry products and the expansion of domestic consumer purchasing power.”11 Although this statement relates, on the external side, only to exports, and, on the internal side, only to consumer expenditures, it emphasizes well the two immediate causes of Japan’s payments difficulties in 1953: price disparity and an inflated domestic demand.

Attempts in the immediate postwar years to check inflation by increasing production were abandoned, with the adoption of the now famous Dodge Stabilization Plan, in favor of attempts to increase production by checking inflation.12 These took the form principally of securing a balance in fiscal transactions, and it is generally agreed that they were eminently successful in checking inflation for the first time since the end of the war. Although international price comparisons without the benefit of a base period are notoriously difficult, the Japanese authorities believed that immediately before the Korean war Japanese prices were at least 10 per cent below the international leve1.13

With the outbreak of the war in Korea, rising world demand for Japanese goods—in the form of both exports and special government receipts—sharply spurred industrial activity. Price increases originated among goods in the export and import categories, but they gradually spread through the rest of the economy, especially since private investments also were stimulated. The increases in both wholesale prices and export prices considerably exceeded those of Japan’s principal trading competitors. “The number of commodities priced above the international level gradually increased.”14

World demand receded after the spring of 1951, and the upward movement in Japanese industrial production and in wholesale prices virtually disappeared. Although some bankruptcies and distress selling did occur, the downward adjustment of the economy was neither especially sharp nor prolonged, because of the cushioning effect of an increase in 1951 in private fixed capital expenditures. Furthermore, substantial wage increases and tax reductions effected toward the end of 1951 and in early 1952 resulted in a sharp rise in consumer spending in 1952; and government purchases of goods and services also increased during the year. As a result, the Japanese economy expanded at a very rapid rate, gross national product increasing by 10 per cent in real terms. The expansion continued into 1953 when, in addition to a further stimulus given to consumer demand by another round of wage increases and tax reductions, a sharp upsurge in domestic investment occurred. In that year, gross fixed capital investment increased by 27 per cent in real terms. Industrial activity was 22 per cent above that in 1952.

Although supported by a substantial increase in imports, such a rapid pace of growth for two consecutive years could not help but generate inflationary pressures. Despite the higher imports, there was a sharp fall in raw material inventories relative to the rate of their utilization. Shortages of labor, in the aggregate, are unimportant in an economy like Japan’s with considerable disguised unemployment. Increasing demand was evidenced, however, by an upward movement in the employment index—which in Japan moves with considerable sluggishness—a decline in the ratio of new applicants to new job openings, a lengthening of hours of work, and a reduction in the number of unemployed (indicated by an official sample survey). Commercial bank credit to the private sector increased by 40 per cent in 1952 and by 26 per cent in 1953, and the money supply by 21 per cent and 14 per cent. Domestic wholesale prices, influenced by the downward pull of export and import prices, declined slightly in 1952, but in 1953 they pushed upward, even as import and export prices fell.

What can be said about the competitiveness of Japanese exports in these years? During the active period resulting from the Korean war, Japan’s average export prices, as mentioned earlier, rose by a greater extent than did those of its competitors. In 1952, Japan largely corrected its position, and it made a further slight gain in 1953 (see Table 5). Export prices as indicators of competitiveness suffer, however, from the important drawback that they are affected by foreign demand conditions. The fall in Japanese export prices in 1952—while those of its competitors increased slightly—was due principally to the fact that, in that year, world trade was most depressed in textiles, which are of greater importance among Japanese exports than among those of its competitor countries. It appears that Japan was not competitive, either in 1950 or in 1953, in respect of metal products, machinery, and other heavy industry products. The reasons for this do not, of course, lie entirely in the accumulated effects of past inflation. There is, in addition, the disadvantage of having to import from distant sources a large proportion of metallurgical raw materials. Also, the cost of domestically mined coal is high, since Japanese seams are narrow, uneven, and broken, and miners have had to contend increasingly with the problem of ground water.

Table 1.

Cash Transactions of the Japanese Government with the Public, Fiscal Years Beginning April 1,1950–551

(In billions of yen)

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Source: Bank of Japan, Economic Statistics of Japan, 1956 (Tokyo, 1957).

The table excludes cash transactions of the Foreign Exchange Special Account, on account of which purchases and sales of foreign exchange are made by the banking system. No sign indicates excess of receipts over payments, and minus sign indicates excess of payments over receipts.

Include accounts of government agencies, such as public corporations, the Japan Development Bank, and the Export-Import Bank of Japan.

Table 2.

Changes in Japan’s Balance of Payments, 1954 and 19551

(In millions of U.S. dollars)

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Adapted from data in International Monetary Fund, Balance of Payments Yearbook.

Imports declined by $10 million in 1954 and increased by $21 million in 1955.

Principally larger export prepayments.

There was no U.S. aid in either 1953 or 1954.

Transportation and insurance, private donations, and, for 1954, official long-term capital and donations, and errors and omissions.

International investment income account, miscellaneous services, and, for 1955, official long-term capital and donations, and errors and omissions.

Table 3.

Indices of Import Purchasing Power of Japanese Exports and Actual Imports, 1951–551

(1950 = 100)

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Based on data from International Monetary Fund, International Financial Statistics and Balance of Payments Yearbook.

Calculated from f.o.b. values and indices of volume.

Unit value of exports divided by unit value of imports.

Terms of trade index multiplied by the export volume index.

Table 4.

Indicators of Japan’s Income, Absorption, and External Balance, 1951–551

(In billions of yen at 1951 prices)2

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Based on statistics of the Economic Planning Board, Tokyo.

The figures for the external balance in this table differ considerably from the surplus or deficit on current account as shown by the balance of payments statistics. Although there was a large payments deficit in 1953, the figures here show a small surplus. A precise identity cannot, in any event, be expected since the figures in the table are obtained by subtracting domestic absorption deflated to 1951 yen values from gross national product similarly deflated; on the other hand, the current account surplus in the payments statistics is obviously derived from values in terms of prices prevailing in the given year. However, the principal factor accounting for the difference is that the share of the expenses of the U.S. forces borne by Japan is included in exports in the national income data as a demand on resources by nonresidents, but it is excluded from exports in the balance of payments data since no exchange transactions are involved.

Deflators: For consumption expenditures, a consumer goods price index weighted 40 per cent for prices in the rural areas and 60 per cent for those in the urban areas; for investment expenditures, a producer goods price index; for gross national product and inventories, an over-all index with a weight of 75 per cent for the consumer goods index above and of 25 per cent for the producer goods index.

Table 5.

Comparison of Prices and Volume of Japan’s Exports with Those of Its Competitors, 1951–551

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Based on data from International Monetary Fund, International Financial Statistics. Belgium, Canada, France, West Germany, Italy, Sweden, Switzerland, the United Kingdom, and the United States are given equal weight in computing the indices for competitors.

Special credit facilities for import trade

The practice of according preferential financial treatment to imports originated with the emergence of an urgent demand for imports of raw materials during the period following the outbreak of the Korean war. Such treatment was especially necessary because, after World War II, private trade had been resumed only at the beginning of 1950, and the international credit standing of Japanese exchange banks had to be strengthened. Several changes were made during 1950–53 in the import finance arrangements—some of them to favor imports from one currency area relative to those from another; it should suffice, however, to give here only a broad outline of the system as it was immediately prior to October 1953 when the Bank of Japan took measures to curtail credit.

Under the “special foreign exchange loans” system, the Bank of Japan provided yen currency to commercial banks at preferentially low interest rates in order to finance the settlement of import bills when they became due;15 the commercial banks could in turn extend the low interest rate credit to the importers. Under the same system, the Bank also gave foreign exchange loans to commercial banks to finance the marginal deposits that they were required to make in order to obtain confirmation of their letters of credit from foreign banks. Second, import bills, like first-class domestic bills and export bills, were eligible for rediscount by the Bank of Japan and thus entitled to the lowest interest rates of the Bank; also, like export bills, they were exempt from the application of the progressive interest rates system. Third, the financial facilities provided for imports extended beyond the transaction of importation per se, especially under the “stamped bills” system, i.e., the system under which the Bank of Japan stamps certain bills acknowledging their high priority. Bills eligible to be stamped in this way were not only those covering payments for freight and insurance, but also those covering funds required by producers for taking delivery of imported goods from importers. The result of all these arrangements was to make the financing of imports very easy and thus to mitigate, to some extent, the disinflationary impact of imports.

II. Policy Measures to Correct Payments Disequilibrium

The measures taken by the Japanese authorities to cope with the payments problem fall broadly into three categories. First, the deficit itself was attacked by intensifying the degree of restriction on imports. Second, the special financial facilities granted for the import trade were withdrawn. Third, a program of disinflation was launched as the authorities were impressed by the close relationship between external and internal disequilibrium.

Tightening of import restrictions

Import control is exercised in Japan by requiring, for all imports, individual licenses which are granted within the framework of an exchange budget prescribing, semiannually, expenditures for imports and invisible payments. From October 1953—the beginning of the second half of the 1953–54 fiscal year—import restrictions were tightened on a selective basis. The budgetary allocations for imports of luxuries and nonessentials were sharply curtailed, but those for imports of industrial raw materials needed for export industries and of machinery and equipment necessary for the rationalization of industry were, in general, maintained. Nevertheless, total allocations for that semiannual period exceeded those of the corresponding period of the previous year by about 5 per cent, as imports of foodgrains—which are seasonally concentrated in the October-March period—had to be increased because of the poor domestic crops in 1953. For the subsequent budget period, however, total allocations were reduced by about 10 per cent.

In addition to the reduction in the size of the over-all exchange budget, the control over imports was tightened by reducing the scope of the automatic approval system of licensing under which licenses for certain commodities are granted automatically at the bank level. The amount of exchange allocated for imports under this system as a proportion of total allocations was halved as between the first half of the fiscal year 1953–54 and the first half of 1954–55.

With a view to checking speculative imports, the percentage of the import invoice value which importers are required to deposit with banks at the time of applying for import licenses was raised, and the permission to fulfill this deposit requirement in terms of a bank letter of guaranty, instead of in cash, was also withdrawn.

Reduction of special credit facilities for imports

By a series of measures taken between October 1953 and April 1954, the Bank of Japan either reduced or totally withdrew the preferential arrangements for import financing. The special foreign exchange loans of the Bank of Japan were first restricted to a small number of import items, and their term was shortened; later, the loans were discontinued. Rediscounts of import bills by the Bank were first restricted to essential items only; subsequently, these bills ceased being eligible for rediscount and became eligible only as collateral for loans on which higher rates are charged, and the terms of these loans were shortened. The number of commodities eligible for stamped-bill privileges was reduced, and the terms of the bills were shortened. Further, the Bank discontinued the stamping of bills covering payments of expenses for freight and insurance on imports and funds needed by domestic producers to take delivery of imported goods from importers.

Program of disinflation

Monetary policy

In October 1953, the Bank of Japan inaugurated a tight money policy. Long before this date, the authorities had been aware of the role of commercial bank credit in strengthening the inflationary pressures. In the latter part of 1951, the Ministry of Finance issued directives to the commercial banks, urging restraint in credit policies and cooperation in channeling funds toward essential industries. The Voluntary Credit Control Committee, composed of representatives of commercial banks, also called upon banks to restrict nonessential loans. These appeals were largely ineffective, however, principally because access to the Bank of Japan remained easy: the lending rates of the central bank were generally lower than lending rates of commercial banks. Credit expansion continued at a rapid pace; as mentioned earlier, commercial bank credit to the private sector increased by ¥ 566 billion, or 40 per cent, in 1952 and by a further ¥ 521 billion, or 26 per cent, in 1953. This expansion was based on liberal support from the Bank of Japan, whose loans to banks increased sharply in 1953.

Apart from renewed efforts to persuade banks to observe restraint in lending, the principal restrictive measure taken by the Bank of Japan in October 1953 was to increase the cost of central bank credit. This choice of the interest rate instrument was only logical, since the banks were heavily in debt to the Bank of Japan. They had practically no reserves that could be immobilized with a stroke of the pen: there were no reserve requirements, legal or conventional, in Japan, and the banks have, in recent years, operated with cash holdings of less than 2 per cent.16 These circumstances, together with the unattractiveness of government securities in comparison with other earning assets of banks and the absence of a suitable securities portfolio with the Bank of Japan, also ruled out the possibility of open market operations.

In its interest rate policy, the Bank of Japan differentiates between banks and also between the types of asset offered by them. Definite lines of credit are established for each bank in accordance with a formula that takes into account several factors, such as the magnitude and nature of the bank’s own funds, the nature of its assets, and the magnitude of its previous borrowing from the Bank. The formula is applied uniformly to all banks but contains some elements which permit a degree of discretion to the Bank of Japan. The basic bank rate applies to only an initial portion of the credit line. A somewhat higher rate, the “first higher rate,” is applied to borrowings above this amount, but within the credit line; and a much higher rate, the “second higher rate,” is applied to further borrowing.17 At each of these levels, different rates are charged for different types of eligible asset.

In the process of credit restriction, the authorities wished to avoid pushing up the general level of interest rates, which was considered to be too high relative to world levels, and thus affecting adversely the competitive position of Japanese exporters. Therefore, the basic bank rate, which had been 5.84 per cent18 since October 1951, was not changed. On the other hand, the range of the credit lines to which the basic rate applied was narrowed, and the higher rates were raised. The resulting increase in the cost of central bank credit is indicated by the increase—from 6.42 per cent in the first half of 1953 to 7.90 per cent in the first half of 1954 and to 8.01 per cent in the second half19—in the average rate on all advances and discounts by the Bank of Japan to commercial banks. Even at the higher level, the average rate was lower than most rates on loans and discounts of commercial banks. But credit restriction was enforced by the fact that the proportion of borrowing from the central bank that fell under the higher rates increased; in addition, at the levels to which they had been raised, the second higher rates exceeded the legal maxima on commercial bank lending rates on the corresponding types of asset.20

The rise in the cost of central bank accommodation was not followed by any substantial stiffening of the lending rates of banks, principally because their actual rates had already reached legal limits. It is difficult to give a precise idea of the changes in the rates on loans and advances because of the variation that obtains between them; but it appears that there was a very mild hardening of the average rates on advances. The actual rise was slight: from 8.96 per cent in October 1953 to 9.04 per cent in December 1954. There was, however, a distinct reversal in the trend of this rate; after declining throughout 1952 and until October 1953, the rate rose gently thereafter.

The reduction in the pace of credit expansion during 1954 cannot be attributed to the reaction of the ultimate borrower to the higher cost of credit. Rather, it seems to have been brought about by the rationing of credit imposed by the commercial banks, that is, by widening the fringe of unsatisfied borrowers. The inducement to introduce credit rationing did not have to come—as it does in some other banking systems—indirectly, via a depreciation in the value of securities as a result of the rise in interest rates; the expansion of loans and advances by the commercial banks did not depend upon a shift from security holdings, but it was fed by Bank of Japan resources. The inducement was therefore provided more directly by a squeeze on the commercial banks’ profit margin, which resulted from the contraction or even elimination of the gap between the Bank of Japan lending rates and the lending rates of the commercial banks. Also important in inducing banks to ration credit were the directives from the authorities to restrict credit expansion. These directives emphasized the need for selectivity in the rationing of credit, if the long-run aim to rationalize and modernize the industrial structure was not to be jeopardized during the process of achieving the shorter-run objective of monetary stabilization.

The results, in terms of the reduced pace of credit expansion, were striking During 1954, the first complete year following the adoption of the restrictive measures, outstanding loans and advances of the Bank of Japan to the commercial banks declined by ¥ 56 billion, in contrast to the increase that had occurred in every year of the postwar period. Outstanding commercial bank loans and advances to the private sector increased by ¥ 250 billion, or by 10 per cent, during 1954. This was the smallest increase, both absolute and relative, in the postwar period.

Fiscal policy

The adoption of an austerity budget for the fiscal year beginning April 1, 1954 constituted the fiscal side of the disinflationary policy. Japanese budgetary procedures are complex and do not lend themselves to simple explanation in familiar terms. In addition to the General Account budget (corresponding roughly to revenue), there are Special Account budgets for foreign exchange transactions that are conducted by the banking system on government account, receipts and expenditures of welfare insurance, postal savings, foodstuffs control, etc. There are also budgets of government agencies, such as the National Railways, the Japan Development Bank, and the Export-Import Bank of Japan.

The element of austerity in the 1954–55 budget consisted principally in a sizable cut in the investment program of the Government. Apart from its own investment expenditures and those of government agencies, the Government has had to provide, in the postwar years, large sums of investment funds to the private sector. Important sources of these funds have been postal savings, postal life insurance funds, counterpart funds of U.S. aid and U.S. surplus agricultural products purchased for yen currency, and current revenues of the General Account. They are entrusted principally to the Trust Fund Bureau and the Industrial Investment Special Account to be channeled through institutions like the Development Bank, the Power Resources Development Corporation, the Export-Import Bank, the Housing Corporation, and the Agriculture, Forestry, and Fisheries Finance Corporations. These institutions also raise small amounts from the public by the issue of bonds, etc.

In the 1954–55 budget, the investment funds budgeted for the private sector, at ¥ 146 billion, were 17 per cent less than in 1953–54; and investments of government enterprises—principally of the National Railways—were reduced by about 22 per cent, to ¥ 26 billion. Outlays on public works, welfare projects, etc., however, at ¥ 195 billion, were about the same as in 1953–54.

In the General Account budget, the austerity consisted only in leveling off expenditures which had been rising steadily throughout the postwar years. In accordance with an official slogan to confine General Account expenditures within the limits of a trillion yen, these expenditures were budgeted at ¥ 999 billion, or about 3 per cent less than in the previous year. The small size of the reduction was due to the need to budget larger outlays for defense, reparations, and social welfare—the last, in part, in order to take care of the hardships caused by the disinflationary measures. The net reduction in total expenditures was secured by effecting economies in administrative and general expenditures and by curtailing loans and investments.

On the revenue side of the General Account budget, levies on luxuries and nonessentials, such as liquor, gasoline, sugar, and playing cards, were raised. However, their contribution to revenue was more than offset by increases in various exemptions from the income tax, viz., the basic exemption, the exemption for dependents, the exemption for life insurance premiums, and the exemption of a portion of the export income from the corporation tax; the tax on interest on deposits was also reduced. On net balance, the proposed revenues were 3 per cent less than in the previous year, and the General Account budget was balanced at ¥ 999 billion. It is clear that, while some of the tax measures may have restrained private consumption or encouraged savings, others may have tended in the opposite direction.

Despite the cuts in investment and other types of expenditure, cash transactions of the Government added more to monetary circulation in this austerity budget year (1954–55) than in the preceding year. Cash transactions of the Government with the public on all accounts other than the Foreign Exchange Special Account—which is excluded because it represents the domestic monetary effect of international transactions, which are quite distinct from other fiscal transactions—resulted in excess disbursements almost one and a half times the excess in 1953–54 (Table 1). Authorities have attributed this principally to the disbursement during 1954–55 of appropriations made during 1953–54.

Developments in financial policy through 1955

The monetary situation eased considerably during 1955. The supply of funds increased as a result of an improvement in the foreign payments situation and the large net cash disbursements that followed the official purchases of the bumper food crops of 1955. The increase in the demand for funds, on the other hand, was not commensurate and, although bank credit increased by about 20 per cent, there was a sharp contraction—of about 85 per cent—in commercial bank indebtedness to the Bank of Japan. The monetary ease induced a gentle downward drift in interest rates, which was encouraged by the authorities. The purpose was not to encourage credit expansion, but to bring the level of Japanese rates closer to world levels; the authorities remained watchful lest inflationary pressures should arise during this process. The reduction did not prove dangerous, as domestic demand was not active over the greater part of 1955.

As the reliance of the commercial banks on the Bank of Japan declined, the structure of higher rates applied by the Bank became largely inapplicable. Therefore, on August 10, 1955, the Bank raised its basic rate from 5.8 per cent to 7.3 per cent and, by making offsetting changes in the higher rate structure, kept the average rate unchanged.

By the time the 1955–56 budget was framed in the early part of 1955, the inflationary trends in the economy had definitely disappeared. Nevertheless, the budgetary authorities continued to be cautious, although they did increase the supply of invertible funds to the power industry, housing, and machinery for export, and also, to a smaller extent, the investment outlays of government enterprises. These increases, however, seem to have been based at least in part on the availability of a new source of funds—the proceeds from the sale of U.S. surplus agricultural commodities. The General Account budget was again balanced at approximately the level of the previous year, although there was some increase in the welfare type of current expenditure. Taxation policy continued unchanged as taxes on luxuries and nonessential goods were raised further; offsetting the gains from these taxes were additional concessions—on the one hand, for the purpose of encouraging savings and, on the other, for relieving the pressure on low-income classes.

Judged from the standpoint of their monetary impact, however, budgetary transactions once again resulted in net cash disbursements almost as large as in the previous year. But this was due to a large excess of disbursements over receipts under the Food Control Special Account resulting from heavy purchases of foodgrains from the bumper crops of 1955. Fiscal transactions other than on the Food Control Special Account were, in fact, in approximate balance during 1955–56.

Appraisal of the disinflationary program

It must be concluded that the fiscal policy aspect of the disinflationary program of 1953–55 was not, in general, as rigorous as the monetary policy aspect. Judged from cash transactions, as well as the nature of tax adjustments and types of expenditure, fiscal policy did not lend additional support to the effort at disinflation. The progressive increase in the inflationary impact of fiscal transactions that was occurring in the immediately preceding years was checked, but a disinflationary force in a positive sense was not provided. This was due in part to the disbursement, during this period of austerity, of appropriations made during an earlier period and for which commitments probably had already been made. Moreover, it seems that, as a practical matter, the authorities did not consider it possible that fiscal policy could play a more positive role than that of being neutral in times of inflation. The burden of taxation was already considered too high, and the lower-income classes had to be granted relief. On the expenditure side also, increasing demands for defense and welfare had to be considered. Investment outlays were reduced. It could, perhaps, be argued that these reductions should have been greater, in order that the burden on monetary policy should not be excessive, but a judgment on this question would require a much more detailed study. It may be remarked, however, that the types of investment that the public authorities undertake—especially in Japan, where the public sector is relatively small—or for which they provide funds to the private sector, are more likely to be in the upper rungs of the scale of necessities of the community; for this reason, they are likely to be spared too severe a retrenchment. The balance between various elements of a disinflationary program is ultimately a matter of national choice, based on considerations which may, in part, be noneconomic.

A related aspect of the question of the balance in financial policy concerns the relative sacrifice required of consumption demand and investment demand. In Japan, as in most instances, the attack was primarily on investment. This is indicated by the more rigorous use of monetary policy; within the field of fiscal policy, also, the emphasis was on pruning investments.

The reasons why any effective program, which is designed to correct conditions wherein domestic demand runs substantially ahead of available resources, must impinge largely on investment expenditures21 apply with special force to Japan. First, investment demand is more autonomous than consumption demand—at least private consumption demand—and is less constrained by the necessity of living within incomes. This is especially true in Japan where, on the one hand, industry relies heavily on the banking system and the Government for investment funds and, on the other, consumer credit has not been well developed. Second, so long as mobility of resources remains less than perfect, it is probably expedient to curtail expenditures on the types of good of which exports would move faster if the pull of domestic demand were to be relaxed. Third, on the scale of necessities, investment comes only after several items of expenditure which, especially in a relatively low-income country like Japan, form the bulk of consumption expenditures. The need to rationalize the industrial structure and to modernize production processes may be great in Japan, but this is essentially a long-term need of which the fruits are available only to posterity.

III. Output, Absorption, and External Balance, 1954–55

Improvement in the balance of payments

The Japanese balance of payments improved sharply from about the spring of 1954. In that year, the payments deficit contracted by $211 million, to $16 million, and in the following year there was a surplus of $345 million. The improvement, amounting in the net to $572 million, appears all the more remarkable since it occurred even as special government receipts contracted by about $300 million (Table 2).

The improvement was largely in the merchandise trade account, for which the deficit in 1955 was less than 10 per cent of that in 1953. Exports increased by $353 million, or 28 per cent, in 1954, and by $395 million, or 25 per cent, in 1955. Imports, on the other hand, were practically unchanged in 1954 and increased by only 1 per cent in 1955. Increases in export prepayments in both years also contributed to the improvement. The U.S. aid in 1955 was largely in the form of surplus U.S. agricultural products sold to Japan for yen currency.

The nature and magnitude of the improvement in the trade balance is brought out strikingly by the data in Table 3 and Chart 1, which are related to the year 1950. In that base year, trade was balanced so that the chart, in portraying the change in the trade position relative to the base year, also indicates the position in absolute terms. The gap between the import purchasing power of exports at going import prices and the actual volume of imports widened progressively during 1951–53 but was almost entirely filled in the following two years, principally because a rapidly rising export volume enhanced Japan’s import purchasing power during the latter period. Imports increased, but only slightly. The parallelism between the export volume curve and the import purchasing power curve shows the negligible role of the terms of trade.

Chart 1.
Chart 1.

Indices of Import Purchasing Power of Japanese Exports and Actual Imports, 1950–551

(1950 = 100)

Citation: IMF Staff Papers 1957, 002; 10.5089/9781451968590.024.A004

1 Import purchasing power of exports is the product of the terms of trade index and the export volume index; see Table 3.

In keeping the value of its imports almost constant, Japan was helped by lower prices of some of the imported commodities, especially foodgrains and textile raw materials. There was also a noticeable draft on domestic stocks of imported raw materials during 1954. Commercial policy played a minor role in cutting down nonessential imports. The primary explanation of the stability of imports is found, however, in the slower rate of domestic growth.

Export promotion measures

The question of the extent to which commercial or exchange policy measures were responsible for the expansion of Japanese exports is pertinent. Some improvement should be attributed to the relaxation of restrictions on Japanese imports by certain countries in the sterling area which had tightened them in 1952–53; the tightening was among the causes of Japan’s payments difficulties in 1953. In January 1954, the United Kingdom agreed with Japan that it would relax its restrictions against Japanese imports, that the Crown Colonies would do the same, and that the United Kingdom would use its good offices in recommending relaxation to the independent members of the sterling area. During 1954, a number of independent sterling area countries and colonies permitted freer importation of Japanese goods.

Japanese commercial and exchange policy has often been criticized as being responsible for a substantial portion of the increase in exports. While certain measures may have provided artificial incentives to exports they do not, in general, appear to be significant. On the other hand, Japan has had to restrict its exports to one of its important markets.

One of the policy techniques which has been criticized is the retention quota. Until August 1953, it was available to exporters to the dollar area for percentages of their export proceeds varying between 5 and 15 per cent, depending on the nature of the commodity. In that month, the system was extended to all exporters at a uniform rate of 10 per cent. There were some transfers of the retained exchange at premium rates, but the authorities were successful in reducing the premium by removing from the list of permissible imports commodities whose importation seemed excessively profitable. In March 1955, the quota was reduced to 5 per cent.22 Since any exchange depreciation involved must haveeen very small, and since the system was in operation, although in a somewhat less extensive form, at least two years before the export expansion began, the retention quota could not have been important in stimulating exports. In fact, the Japanese authorities consider the system only a means of allocating exchange for certain purposes that do not fit easily into the regular exchange budget, especially because there is no previous experience with regard to them; hence the name, “Special Foreign Exchange Allocation System.”

Somewhat more important as export incentives were the export-import links, which were of two types. First, exporters of certain slow moving goods, such as raw silk, machinery, ships, and whale oil, were permitted licenses for highly profitable import commodities, such as Cuban sugar, bananas, and pineapples. However, this system was completely abolished in August 1954. Under the second type of link, imports of certain raw materials are linked to the exports of the products manufactured from them; that is, the volume of exports of a manufacturer is taken into account in making exchange allocations for imports of raw materials. The authorities say that this system provides an administratively convenient criterion for allocating raw materials. It is also significant that the system operated for a number of years prior to the export boom and that its scope was reduced somewhat in 1955.

Some encouragement to exports was provided by certain interest rate and taxation measures taken in 1954–55. The Export-Import Bank, which extends loans for the export of plant and machinery at concession interest rates, further reduced its rates. The Bank of Japan liberalized its low interest rate for discounting export bills. As mentioned earlier, the limits of exemption of export income from the corporation tax were raised.

Since the credit balances accumulated on the bilateral clearing account with Indonesia were proving relatively illiquid, Japan restricted exports to that country from the middle of 1954. Certain goods were made subject to an “export rights” system, and only traders who had imported Indonesian goods of equivalent value were allowed to export them to Indonesia; quotas were imposed on certain other goods. As a result, exports to Indonesia in 1955 fell to about half the amount in 1954.

Relation between output, absorption, and external balance

It has long been recognized that the balance of external payments of a country necessarily reflects the difference between its total output of goods and services and its absorption—use for consumption and investment—of them. On the basis of this identity, it has recently been argued that the analysis of the effects of a policy measure, such as devaluation, designed to influence the balance of payments could fruitfully proceed via the effects of the measure on output and absorption. One objection to this approach has been that the relationships given in the equation are classificatory rather than causal and that, therefore, it is not justifiable to posit a dependence, in any causal sense, of the trade balance on the relationship between output and absorption any more than it is to posit a dependence of absorption on the relationship between output and the trade balance. Whatever the validity of this argument, it applies with the least force to an analysis of deflationary policy along these lines; for, in this case, it is absorption that is frontally attacked with a view to securing the desired results in the external balance, and success depends on the extent to which absorption can be reduced relative to output.

In an economy operating at full employment, an improvement in the balance of payments necessarily requires a reduction in the domestic absorption of goods and services. The austerity that is required is reduced to the extent that gains are made in productivity and extensions occur in productive capacity as a result of earlier investments. Barring such relief, the necessary adjustment can come about at, broadly, three levels: First, a contraction of domestic consumer or investment demand, even without inducing a change in relative prices, could, on the one hand, make more goods available for export and, on the other, dampen the demand for imports. Second, the reduction in domestic absorption could squeeze profit margins and lower the prices of exportable goods relative to those in other countries or make them otherwise more competitive. If, however, the squeeze on profits cannot be passed on to other factors of production, output and employment are likely to decline after a while. In any instance of a serious payments disequilibrium, therefore, a fundamental adjustment at the third level, consisting of a reallocation of factors as between export and domestic industries, will be necessary. Resources released from the domestic goods industries will have to be channeled into export industries. In the absence of a facilitating circumstance, such as a rising world demand, or an assisting policy measure, such as an exchange rate adjustment, the reallocation will be a painful process, involving considerable unemployment.

In the following paragraphs, an attempt is made to view the developments in the Japanese economy during 1954–55 from the standpoint of variations in output and absorption. Since the relevant data are published by the Japanese authorities only in current prices, they have been adjusted for price changes by using a variety of price indices. Such adjustments cannot be very accurate, and the figures should therefore be taken only as indications of the direction and the broad magnitudes of change.

From the data in Table 4 it appears that the principal component of the change in total absorption was inventory investment, although it is interesting to note that there was no decumulation of inventories. The movement of inventories is difficult to explain, since the intended and unintended elements in their variations cannot be separated. While the stringency of credit must have induced inventory liquidation, the decline in sales would result in an unintended accumulation. Evidence is available to indicate that there was indeed an increase in the stocks of finished goods held by manufacturers as well as by dealers. In view of this, the deliberately attempted inventory liquidation is likely to have been even greater than the figures available for actual results. The role of import restrictions is difficult to gauge in the absence of knowledge concerning the import content of inventories. As far as imported raw materials are concerned, the authorities must have considered the existing levels of stocks before making exchange allocations. It must be remembered, however, that the volume of imports did not decline in either 1954 or 1955; the decline that took place in the stocks of imported raw materials could be explained entirely in terms of the expansion of industrial activity. In general, therefore, it seems safe to conclude that the financial policies of the authorities which raised the cost of holding inventories and, perhaps equally important, induced a change in expectations were by far the main factors responsible for reducing the value of inventory investment during 1954. The increase in this type of investment during 1955, compared with that in 1954, was largely the result of an accumulation of government stocks of foodgrains purchased from the bumper crops of that year.

Total fixed investment increased by less than 4 per cent in 1954, as both private and government investment increased only moderately. In the following year, government investment increased further, but a decline in private investment expenditures kept the total almost unchanged. Changes in government investment are essentially autonomous; the fact that it increased only moderately, especially in 1955, was a part of the disinflationary program. The role of domestic policy measures in lessening private investment demand is underscored when it is recalled that exports were increasing during 1954–55 at an annual rate of over 25 per cent. The reaction of this category of demand to the disinflationary policy seems even greater if its trend within these two years, rather than annual totals, are considered. National expenditure data are not available at less than annual intervals; from other indicators of investment, however, it seems that private investment expenditures declined during 1954 and the first half of 1955 from the high levels they had reached earlier. They recovered rather sharply thereafter, partly as a lagged response to rising exports; in any event, the force of disinflationary policy was by then largely spent.

Production increased in both 1954 and 1955 but at a slower pace than in earlier years. Industrial production increased by about 8 per cent in each of the two years. While not small in itself, this rate of advance should be compared with the increase of 22 per cent in 1953. Agricultural production, assisted by favorable weather conditions, also increased by about 10 per cent in both 1954 and 1955.

It is clear that, on the whole, there was no “disabsorption” in the Japanese economy during 1954–55. However, the annual rate of growth of absorption was sharply checked in 1954; output expanded, albeit also at a slower pace, by a magnitude greater than the increase in absorption. The external balance improved correspondingly. Absorption recovered substantially in 1955, but production increased even more, and the improvement in the external balance was larger than in the preceding year.

It cannot be said, therefore, that resources were released from the domestic to the export sector as a result of the disinflationary policy. Rather, resources that became newly available during this period were attracted to the export sector and were not preempted by the domestic sector. Domestic demand having been restrained by the disinflationary policy, the rising tide of world demand with which Japan was favored did not need to compete too severely with it; the foreign demand could be more readily satisfied. With less favorable world demand conditions, the same striking improvement in the balance of payments could not have been secured with the given dose of disinflation. These remarks should not be interpreted to mean that the domestic expenditure policy made no contribution at all to the 1954–55 improvement in the Japanese payments position. It must be emphasized that both factors—the intensification of the pull of foreign demand and the relaxation of the pull of domestic demand—were of equal importance. If domestic expenditures had been left unbridled during 1954–55, the balance of payments probably would not have improved to any significant extent.

Even with its considerable underemployment, the Japanese economy, on the eve of the initiation of restrictive financial policies, could be said to have been operating like an economy at full employment.23 With full employment and no decline in domestic absorption, the increase in resources available to the export sector came largely from two sources. One was the increase in productivity, which is necessarily an important feature of the secular growth of a dynamic economy like that of Japan. Even the year-by-year advance has been substantial in Japan in the postwar years; the gains in 1954 and 1955 averaged about 7 per cent.24 The profit squeeze exerted by the tight money policy may have played some part in encouraging the adoption of such measures as would yield cost reductions quickly.25 The second source was the investment projects undertaken during the 1953 boom, many of which bore fruit during 1954–55 and considerably enlarged productive capacity; it appears that industrial capacity increased as much in the year ended March 1955 as in the preceding year, and one and a half times as much in the year ended March 1956.

As would have been expected, the process of absorption of the new resources by the export sector was slow. This was reflected in the wide-spread prevalence of excess capacity conditions during 1954 and the larger part of 1955. Unemployment also increased.

While this study has emphasized the benefits that accrued to Japan from the expansion of world trade, it should be noted that Japanese exports increased during 1954–55 by a much larger percentage than did world imports.26 In other words, Japan was able to carve out a much larger portion of the total pie for itself, which clearly suggests an improvement in the competitive position of Japanese exports. Data collected by the Japanese authorities show that the competitive advantage in textiles which Japan enjoyed even in 1953 was enhanced during the following two years; the competitiveness of certain heavy industry products also improved sharply in 1954, although some of the gains were lost in 1955. The lower export prices, especially in 1954, were, in part, only at the expense of profit margins; in part, however, the resources that were made newly available and were not absorbed by domestic demand helped make a more basic improvement in the competitiveness of certain exports. As shown in Table 5, the over-all export price reduction during 1954–55 was rather small, in comparison with the spectacular increase in exports; prices are, however, only one of the considerations in competitiveness. In addition to the price reductions, the time interval between orders and deliveries could be kept short, a consideration no less important than prices.27 In some of Japan’s competitor countries, export demand was compounded with domestic demand to produce a strain that was not allowed to raise prices but was reflected in a lengthening of order books.


The role of commercial or exchange policy in bringing about the improvement in the Japanese payments position in 1954–55 was unimportant. While the pull of domestic demand on resources was weakened by the financial policies of the authorities, Japan was also favored by a rapidly rising foreign demand for its products. Principally as a result of reduced availability of credit, inventory building slackened and private investment expenditures failed to increase much in 1954, and they declined in 1955. The investment demand of the Government increased only moderately. These were important factors contributing to the improvement in Japan’s balance of payments in this period.

The austerity required of the Japanese economy was small: There was no domestic “disabsorption” and, even in the field of inventories which bore the brunt of adjustment, there was no disinvestment; only the rate of increase in absorption was reduced. This limited austerity was sufficient, because gains in productivity and extensions in productive capacity resulting from earlier investments brought forth a flow of supplies that were not appropriated by domestic demand but found a broadening outlet in foreign markets.

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Mr. Narvekar, economist in the Far Eastern Division, is a graduate of Bombay University and of Columbia University.


Goods and services, donations, and capital movements other than changes in reserves and related items.


Between 1947 and 1950 the increases in reserves were due to large receipts of aid from the United States.


However, before making the fourth purchase, equivalent to US$61 6 million, Japan repurchased NI 22.2 billion from the Fund with a payment of US$61.6 million. Its net purchases of foreign currency therefore did not exceed $62.4 million, and Fund holdings of yen did not exceed the Japanese quota. In 1955, Japan repurchased yen from the Fund by the payment of U.S. dollars to restore Fund holdings of yen to 75 per cent of the Japanese quota.


Defined as the product of the terms of trade index and the export volume index; see Table 3.


S. Tsuru, Japan’s Economy—Present and Future (Tokyo, Japan Institute of Pacific Relations, 1950), pp. 4–5.


Korea, Kwantung, Manchuria, and Taiwan only. Other empire countries and leased and mandated territories are excluded. The figure relates to 1937–38.


This reliance on the dollar area for essential imports is a partial explanation of Japan’s “dollar problem” in the postwar years, which has been veiled, of course, by special government receipts, which are almost entirely in the form of U.S. dollars.


For example, raw cotton purchases are being shifted from the United States to India and Pakistan, iron ore to India and Malaya, and rice to Southeast Asia.


H. Tyszynski, “World Trade in Manufactured Commodities, 1899–1950,” Manchester School of Economic and Social Studies (Manchester), Vol. 19 (1951), pp. 272–304.


The Economic Counsel Board, known earlier as the Economic Stabilization Board and at present as the Economic Planning Board, is a Department of the Japanese Government.


Economic Counsel Board, Economic Survey of Japan, 1952–53 (Tokyo, 1953), p. 25.


See E. C. Hutchinson, inflation and Stabilization in Postwar Japan (Ann Arbor, University Microfilms, 1954).


Economic Stabilization Board, Economic Survey of Japan, 1951–52 (Tokyo, 1952), pp. 68 and 80; Economic Counsel Board, Economic Survey of Japan, 1952–63 (Tokyo, 1953), p. 110.


Economic Stabilization Board, Economic Survey of Japan, 1950—51 (Tokyo, 1951), p. 8.


Thus these were, in fact, loans in domestic currency although they were called foreign exchange loans.


Legislation empowering the financial authorities to introduce a system of cash reserve requirements for banks was enacted in May 1957. However, the system has not yet been put into effect.


These “higher rates” were consolidated in a single rate in March 1957.


The bank rate is quoted in Japan in terms of sen (one hundredth of a yen) per day. The rate of 5.84 per cent is converted to an annual basis from 1.6 sen per day.


From the Oriental Economist (Tokyo), March 1956, p. 115.


Maximum limits for rates on commercial bank loans are fixed by law; but loans of less than ¥ 1 million or for periods longer than a year are exempt from regulation. In June 1954, the second higher rate of the Bank of Japan for the rediscount of first-class commercial bills was 839 per cent, while the commercial bank rate for discounting them was 8.03 per cent or less.


See Ragnar Nurkse, “The Relation Between Home Investment and External Balance in the Light of British Experience, 1945–55,” Review of Economics and Statistics (Cambridge, Mass.), Vol. 38 (1956), pp. 121–54.


The quota was further reduced to 3 per cent at the beginning of 1957.


As far as the possibility of raising output in the short run by increasing expenditures is concerned, an economy with disguised unemployment is similar to one at full employment. See V.K.R.V. Rao, “Investment, Income and the Multiplier in an Underdeveloped Economy,” Indian Economic Review (Delhi), Vol. 1, No. 1, 1952.


The index on which this comparison is based is not completely satisfactory since the employment data used in its compilation relate only to establishments employing more than 30 workers while the production data relate to all establishments. It is found, however, that a broadening of the employment series does not give substantially different results. There is, moreover, corroborating evidence in some statistical studies indicating a reduction in the number of man-hours required per unit of output and also in the consumption of raw material and energy.


“… production was upped measurably in some industries by a slight touching up of plant or process.… For example, a stripping mill’s capacity was trebled merely by installing a roll stand and a cutting machine.” Economic Planning Board, Economic Survey of Japan, 1955–56 (Tokyo, 1956), p. 8.


A partial explanation of this may lie in the more than proportionate increase during 1955 in the demand for imports by the United States; exports to the United States form a larger proportion of Japan’s total exports than of the total exports of any other leading industrial country. It must again be noted, however, that while total U.S. imports rose by 11 per cent in 1955 and its imports of manufactured goods by 20 per cent, Japanese exports to the United States increased by about 62 per cent. Further, while total U.S. imports in 1954 were lower than in 1953, U.S. imports from Japan were 20 per cent higher.


See R. F. Harrod, “The British Boom, 1954–55,” Economic Journal (London), Vol. 66 (1956), pp. 1–16.

IMF Staff papers: Volume 6 No. 1
Author: International Monetary Fund. Research Dept.