The Cycle in Japan’s Balance of Payments, 1955-58
Author: P. R. Narvekar

ON TWO OCCASIONS during the decade of the 1950’s Japan was faced with a conflict between continuing economic expansion and the maintenance of equilibrium in the balance of payments. The economy has expanded rapidly since 1950. During the period 1950-58, the average annual rate of increase in output was over 8 per cent. However, in 1954 the increase slowed down to less than half that rate, and in 1958 to about one fourth, primarily because of measures taken by the authorities to restrain the tempo of domestic expansion. In both years, these measures were necessitated by serious external payments difficulties. In 1953, Japan had an over-all balance of payments deficit1 of $256 million, in contrast to an average annual surplus of about $300 million in 1951 and 1952. A surplus of $207 million in 1955 was more than halved in 1956, and in 1957 there was a deficit of $526 million (Table 1).


ON TWO OCCASIONS during the decade of the 1950’s Japan was faced with a conflict between continuing economic expansion and the maintenance of equilibrium in the balance of payments. The economy has expanded rapidly since 1950. During the period 1950-58, the average annual rate of increase in output was over 8 per cent. However, in 1954 the increase slowed down to less than half that rate, and in 1958 to about one fourth, primarily because of measures taken by the authorities to restrain the tempo of domestic expansion. In both years, these measures were necessitated by serious external payments difficulties. In 1953, Japan had an over-all balance of payments deficit1 of $256 million, in contrast to an average annual surplus of about $300 million in 1951 and 1952. A surplus of $207 million in 1955 was more than halved in 1956, and in 1957 there was a deficit of $526 million (Table 1).

ON TWO OCCASIONS during the decade of the 1950’s Japan was faced with a conflict between continuing economic expansion and the maintenance of equilibrium in the balance of payments. The economy has expanded rapidly since 1950. During the period 1950-58, the average annual rate of increase in output was over 8 per cent. However, in 1954 the increase slowed down to less than half that rate, and in 1958 to about one fourth, primarily because of measures taken by the authorities to restrain the tempo of domestic expansion. In both years, these measures were necessitated by serious external payments difficulties. In 1953, Japan had an over-all balance of payments deficit1 of $256 million, in contrast to an average annual surplus of about $300 million in 1951 and 1952. A surplus of $207 million in 1955 was more than halved in 1956, and in 1957 there was a deficit of $526 million (Table 1).

Table 1.

Japan: Summary of International Transactions, 1953-581

(In millions of U.S. dollars)

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Based on data reported to the International Monetary Fund by the Japanese Ministry of Finance. No sign indicates credit; minus sign indicates debit.

Excludes the share borne by Japan of the expenses of U.S. forces in Japan; see footnote 3 to Table 5.

Includes exports of nonmonetary gold.

Includes transportation and insurance.

Includes (a) donations, (b) capital (other than changes in short-term assets of central official institutions, net changes in bilateral clearing account balances, changes in the net IMF position, and movements of monetary gold), and (c) net errors and omissions.

To cope with the payments difficulties, the Japanese authorities adopted disinflationary financial programs. Helped also by other factors, the payments situation responded with remarkable promptness, both in 1954-55 and in 1958. An analysis of the improvement, in Japan’s payments position in 1954-55 was presented in Staff Papers, Vol. VI (1957-58), pages 143-69. In the present paper, the experience of subsequent years is reviewed, attention being focused on the mutual interactions between domestic economic fluctuations, budgetary and credit policies, and swings in the balance of payments. Important similarities and differences between the two episodes are indicated.

The causes of the payments difficulties in 1957 are studied in Section I. The payments position began to deteriorate in 1956, when the surplus of the previous year was reduced, but it was only in early 1957 that a sharp draft on reserves occurred. In the spring of that year, the authorities took a series of measures to check the domestic economic expansion and to improve the balance of payments. These measures are outlined in Section II; the subsequent adjustments in the domestic economy which yielded the external payments surplus in 1958 are analyzed in Section III. An attempt is made to disentangle the role of financial policy measures in bringing about the improvement in the payments position from that of other factors operating at home and abroad.

The 1953 payments difficulties were dramatized by the fact that they were in the form of a sterling crisis. Sterling assets having been reduced to critically low levels, Japan entered into dollar-sterling swap transactions with London banks and also purchased sterling from the International Monetary Fund. In its incipient stages, the most recent payments problem also took the form of a sterling shortage. The elimination of the over-all payments surplus in the course of 1956 reflected largely a deterioration in the sterling payments position. Almost three fourths of total sterling assets were used during the year and, by December, the remaining balances were not much more than the amount required as working balances; also, Japan made increased use of facilities for import usance bills and entered into swap arrangements with London banks, buying sterling for dollars and undertaking to resell it, after a specified period, for dollars. However, as the payments difficulties became intensified in 1957, they enveloped the whole range of Japanese payments. Indeed, in 1956-57, just as in 1953, Japan’s payments problem was not confined to payments in a single currency. It showed up specifically as a sterling problem because Japanese commercial policy aimed at shifting import sources to sterling and other soft currency areas, and at emphasizing exports to the dollar area—a policy considered necessary because of the weakness of Japan’s trading position vis-à-vis the dollar area,2 together with the inconvertibility of other major currencies into dollars. Furthermore, the increased transferability of sterling enabled Japan to use that currency to multilateralize its payments arrangements in the non-dollar area, and its net sterling payments to non-sterling countries increased considerably in 1956. This particular symptom of the payments problem—the sterling shortage—will not, therefore, be further considered in this paper.

I. The Domestic Boom and the Deterioration of the Payments Position

Deterioration of payments position

Japan’s payments deficit of $526 million in 1957 meant a net adverse swing of $733 million from the position in 1955. As in 1953, the deterioration was largely the result of a sharp increase in imports and the accompanying increase in net payments for transportation and insurance. The import purchasing power derived from exports3 increased by 22 per cent in 1956 and 7 per cent in 1957, reflecting principally an increase in export volume; the terms of trade shifted favorably in 1956 and adversely in 1957,4 but these movements were relatively small. However, the volume of imports increased by much more than did the purchasing power of exports—by 27 per cent in 1956 and 25 per cent in 1957. The deficit on account of merchandise trade and transportation and insurance widened from $212 million in 1955 to $447 million in 1956, and further to $921 million in 1957.

The increase in imports can be ascribed entirely to rapid domestic economic expansion. Because Japan is short of natural resources, an expansion of its economy depends almost entirely on a liberal importation of raw materials. To make possible the expansion that occurred from 1955 to the middle of 1957, the authorities pursued a policy of providing adequate foreign exchange for imports. Commodity-wise, the increase in imports was quite general. However, since the increase in industrial activity centered around heavy industries, imports of iron and steel scrap and metal ores increased particularly sharply; together with mineral fuels, they accounted for half the total increase. Imports of certain finished and semifinished manufactures, normally of small relative importance, were increased sharply to break certain sectoral bottlenecks. Only rice imports were substantially reduced as two successive large crops were harvested at home in 1955 and 1956. On the whole, the substitution of cheaper imports for domestically produced goods played little part in the import expansion; the expansion was, rather, in commodities which Japan did not produce at all or of which the domestic supply in the short run was highly inelastic.

The deterioration in the payments position occurred despite a large increase in exports in both 1956 and 1957. This was in contrast to the situation in 1953, when a marked decrease in export prices had resulted in a fall in the value of exports. The 1956-57 export expansion was spearheaded by textiles, ships, and machinery. Japan emerged in 1956 as the world’s leading shipbuilder, a flood of foreign orders having been attracted by the early delivery dates offered by Japanese shipbuilders. Only exports of metals and metal products declined in 1956-57, largely because of the pull of domestic demand; machinery of some types was also diverted from the export to the domestic sector. Despite this, the “hardware ration”—the proportion of machinery and transport equipment, metals, and metal products—in Japanese exports, which had been increasing in previous years, increased further in 1956 and 1957 to a figure (33 per cent) comparable with the ratio (35 per cent) for textiles, Japan’s traditional export item.

Special government receipts declined in both 1956 and 1957, but this was not an important factor in the deterioration of the total payments position. These receipts accrue principally as reimbursements for the cost of supporting UN forces for Korea stationed in Japan, from sales to the UN forces under the special procurement program, and from U.S. expenditures for the maintenance of its forces in Japan since the Peace Treaty. Despite large deficits in the rest of the current account, these special receipts have, since 1951, either made possible an increase in reserves or mitigated a decline in them. The deterioration in Japan’s over-all balance of payments position in 1953 was especially conspicuous because in that year these receipts were at a peak of $803 million; the subsequent improvement in the payments position during 1954-55 occurred despite a fall of almost $300 million in these receipts. They continued to decline in 1956-58 but at a slower rate.

Course of demand expansion

An export expansion provided the initial impetus to the 1955-57 boom. The disinflationary measures adopted in late 1953 and early 1954 to help to tackle the external payments difficulties reduced the tempo of economic expansion in 1954. The restraint on domestic demand enabled the export sector to attract resources that had become newly available as a result of gains in productivity and extensions in productive capacity resulting from earlier investments. The process of channeling resources into the export sector was facilitated by a rising world demand. Exports of goods and services increased markedly in 1954, despite a sharp fall in special procurement receipts. Nevertheless, there was some increase in unemployment at home, and excess capacity emerged in manufacturing industry.

The 1954 increase in exports, and expectations of a continuation of that trend, sparked the rise in industrial production that began about September 1954 after a half year of stagnation. In 1955 the export expansion continued unabated. As economic activity expanded, investment in private equipment was stimulated, but only with a time lag because of the existence of surplus industrial capacity. While such investment outlays increased during 1955, for the year as a whole they were somewhat less than in 1954 (Table 2). Manufacturing and mining production increased by about 9 per cent; industrial employment and wage earnings also increased. Partly because of favorable weather conditions, agricultural output in 1955 was 21 per cent larger than in the previous year. These factors, together with some tax concessions, brought about substantial increases in personal disposable income and personal consumption expenditures.

Table 2.

Japan: Changes in Domestic Expenditure, Output, Foreign Trade, and Prices, 1955-June 19571

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Based on statistics of the Economic Planning Agency of Japan. Real output is estimated by using a price index weighted 25 per cent for producer goods prices and 75 per cent for consumer goods prices; the latter in turn is weighted 40 per cent for prices in rural areas and 60 per cent for those in urban areas. No sign indicates increase, and minus sign decrease.

Annual rate for seasonally adjusted data.

The demand expansion was accelerated in 1956. If the “gross expansionary impulse” is defined crudely as the sum of changes in values (at current prices) of investment expenditures and exports, these being considered the active demand factors, its magnitude increased from ¥ 426 billion in 1955 to ¥ 713 billion in 1956. In fact, these figures understate the degree of acceleration of the demand expansion in 1956, because the expansionary impulse in 1955 consisted of an increase in inventory investment which, however, seems to have been chiefly an unintended accumulation of foodgrain stocks by agriculturists and the Government from the bumper crops of that year; as such, it cannot be considered an active demand factor. If the figures are adjusted for this, a significant change in the pattern of demand expansion in 1956 becomes apparent. Whereas in the previous two years exports provided the principal impetus to expansion, in 1956, as the expansionary impulse permeated the domestic economy more thoroughly, private fixed capital investment played the leading role, increasing by some 60 per cent, in contrast to a decline in 1955. Industrial activity was sharply spurred, the increase in production during the year being about two and a half times as much as in 1955. The concomitant increase in industrial wage earnings and personal disposable income brought about a further increase in consumption expenditures.

The first half of 1957 was the final stage of the boom. The demand expansion accelerated further. The rate of growth of exports slowed down considerably, and their importance as an expansionary factor diminished. However, in addition to another sharp increase in private fixed capital investment, the rate of private inventory accumulation doubled in the first half of 1957. The external payments position deteriorated and, as a rapid drain on exchange reserves set in, the authorities moved in May to check the demand expansion.

Factors in the demand expansion


Clearly, the increase in exports of goods and services played a crucial role in the aggregate demand expansion. Chronologically, it initiated the expansion, and thereafter continued to be important at least through 1956. Furthermore, by directly supporting the external payments position, it held in abeyance the operation of the most important constraint on domestic demand expansion; as long as the external payments position was comfortable, the financial authorities apparently did not consider it imperative to check the expansion of demand.

The large and continued export expansion occurred despite a fall in exports of services reflecting reduced special procurement receipts. Commodity exports increased by about 120 per cent during the period 1954-57. It is true that Japan benefited from the expansion of world trade in this period, but its exports increased far more than did world exports.

Fixed investment

Fixed capital investment expenditures almost doubled between 1955 and the first half of 1957. In the latter period, they were at the extraordinarily high level of about a quarter of the total resources available. The increase was largely in private investment; public investment increased only moderately. The inducement to invest has always been high in Japan because of population growth and the need for technological improvements to maintain or better the country’s position in world markets. During the boom, rising export and consumption demand encouraged entrepreneurs to undertake the renovation and enlargement of plant and machinery.

Inventory accumulation

As the boom advanced, shortages and price increases engendered expectations of further shortages and price increases, and, in the final stages of the boom, there were also fears of a possible intensification of restrictions on imports. Almost 40 per cent of the increase in expenditures on gross national product and imports in the first half of 1957 was provided by private inventory investment; and this category of demand represented about 10 per cent of total resources available in this period. Underlying these high percentages is, of course, the fact that inventory investment has always been relatively high in Japan in the postwar years, reflecting the persistently high rate of expansion of aggregate demand, the predominance of a number of small-scale producers in the economy, and the heavy dependence on imports.


The increase in personal consumption expenditures was obviously related to the increase in personal disposable income resulting from the rising industrial output, employment, and wages, and also to the sustained high levels of farm output and income. In this sense, consumption expenditures may be considered a passive demand factor during the boom. Also, the increase in them was much slower than that in total expenditures. On the other hand, the continued, though moderate, increase in consumption did play an important role in stimulating investment. Available evidence suggests that about half the total equipment investment during the boom was intended to meet the rise in private consumption demand.5

Domestic expansion and monetary stability

In its initial stages, the demand and output expansion occurred under generally stable economic conditions. But as the expansion progressed, the economy was increasingly stretched, and during 1956 the expansion clearly assumed the aspects of an inflationary boom. An estimate of the extent to which the expansion in total demand (the sum of consumption, investment, and exports) in 1955, 1956, and the first half of 1957 was met by increased output, larger imports, or higher prices is provided by the data in Table 2.

In 1955, the expansion of output in real terms was about the same as demand expansion, and prices were, in fact, lower than in the previous year. Imports also increased but much less than did exports, and the external balance continued in surplus.

The position was different in 1956 and the first half of 1957. The demand expansion was much larger than in 1955, but domestic output did not increase at all commensurately; only about 45 per cent of the demand expansion in 1956 and 40 per cent of that in the first half of 1957 were met by higher output. The excess demand not only generated price increases at home but also spilled over into large increases in imports. As these exceeded the increases in exports, the external surplus contracted in 1956 and changed into a large deficit in the first half of 1957.

The elasticity of domestic supplies in 1955 reflected the fact that the new plant capacity which had come into existence as a result of the 1952-53 investment boom was not yet being fully operated. Inventories of raw materials, although drawn down in 1954, were adequate at the outset of the year, and no large increase in imports was necessary. Industrial employment did not increase pari passu with production, and the increase in wages was moderate. The money market was easy throughout 1955, chiefly because of the external payments surplus and the large net cash disbursements accompanying official purchases from the bumper food crops. Although the claims of the banking system on the private sector increased by 12 per cent during the year, there was a sharp reduction 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.

With the acceleration of economic expansion in 1956 and the first half of 1957, strains on resources became increasingly evident. Bottlenecks were encountered in three sectors of fundamental importance in the industrial process: steel, electric power, and transportation facilities. A sharp increase in the demand for steel from shipbuilders and machinery manufacturers was superimposed on a world-wide shortage of steel-making materials. The strain on the transportation system was concentrated on the railroads, which carry more than half the inland freight burden. The volume of goods accumulated at railway stations and awaiting movement increased substantially. Order books lengthened, especially in the machinery industry. Shortages of labor, in the aggregate, are unimportant in an economy like the Japanese, which has considerable disguised unemployment, but there was a shortage of some categories of skilled workers. Increasing demand was also evident in an increase in the ratio of new job offers to new applicants, a lengthening of hours of work, and a much larger increase in wages than in earlier years. In 1956, wholesale prices increased by 9 per cent and the cost of living by 3 per cent. In the first half of 1957, there was no further increase in wholesale prices, but the cost of living rose by another 3 per cent.

As the year 1956 progressed, the easy tone of the money market also changed gradually and a marked stringency developed. While the demand for funds increased, the supply increased much less as the external payments surplus was eliminated and government cash transactions resulted in an absorption of funds. Commercial bank indebtedness to the Bank of Japan, which had been largely wiped out in the 18 months or so before April 1956, increased from ¥ 19 billion at that date to ¥ 256 billion a year later. Call money rates increased sharply from May 1956. However, the average of rates on all commercial bank lending continued to decline until the end of the year, partly because of the pressure of interbank competition for lending.

Domestic expansion, exports, and imports

What was the effect of the boom on the competitiveness of Japanese exports? Exports of manufactured goods6 increased by 25 per cent in both 1955 and 1956, although the two years differed markedly in the degree of monetary stability attending the expansion of domestic demand. It must be remembered, of course, that Japan was not alone in experiencing boom conditions in 1956. Competitiveness is obviously a relative matter; while the unit value of Japanese exports in 1956 was 4 per cent higher than in the previous year, the unit value of exports of its main competitors7 also increased by the same percentage, so that Japan’s relative position with regard to price competitiveness remained unchanged. Order books lengthened in Japan, but so did they in the competitor countries. For the United Kingdom, it has been suggested that the lengthening of order books was a more important feature of the boom than increases in either the price level or the level of economic activity.8 Nevertheless, it would appear that any gain in competitiveness made by Japan during 1956 could not have been large.

A statistical analysis of Japan’s export expansion, undertaken to eliminate the portion attributable to the growth of world trade and to the commodity and market pattern of this growth,9 indicates that 39 per cent of the increase in exports of manufactured goods in 1956 was due to increased competitiveness; while this proportion was less than the 61 per cent in 1955, it was nevertheless substantial, especially since the export expansion in 1956 was, in percentage terms, as large as in 1955, and in absolute terms even larger. These figures, therefore, suggest that the competitiveness of Japan’s exports increased substantially in 1956. However, the figure for 1956 is exaggerated by large exports of ships in that year, for which orders were placed 12 or 18 months earlier; they were thus based on the competitiveness of Japanese export terms at that time rather than in 1956. For exports of manufactures other than machinery and transport equipment,10 the entire increase in 1956 was attributable to the expansion of world trade and the pattern of this expansion; whereas 62 per cent of the expansion of these exports in 1955 was attributable to their increased competitiveness, the proportion in 1956 was a small negative magnitude, reflecting some deterioration in their competitive position. This change, rather than the much smaller change from 61 per cent to 39 per cent for total exports of manufactures, is therefore a better indicator of the effect of the domestic boom on the competitiveness of Japan’s exports.

The increase in imports during the boom was much larger than the increase in domestic expenditures; imports as a proportion of expenditures increased from 12.1 per cent in 1954 to 13.4 per cent in 1956 and to 16.4 per cent in the first half of 1957. Such a disproportionate increase during a given period implies either that the increase in domestic expenditures was particularly large in categories of expenditure with a high average import content in the base year, or that the average import content of some or all of the categories of expenditure increased during the period. An interindustry analysis of the Japanese economy for the base year (1954) shows the average import content of private consumption, of gross fixed investment, and of inventory investment to have been about the same. The increase in imports thus seems to have been due to the second cause suggested above. In a country like Japan with limited natural resources, it is to be expected that the marginal import content of domestic expenditures would be higher than the average. This would be particularly true of inventory investment, especially in the vicinity, on either side, of boom-time peaks of such investment. The increase in imports that occurred in the first half of 1957 was particularly sharp because of the large inventory investment that occurred during that period. Moreover, the tendency was aggravated by fears of an intensification of import restrictions.

Financial policies during the boom

As the money market eased in 1955, the Bank of Japan tried to secure repayment of its earlier loans to commercial banks. The repayment progressed satisfactorily; nevertheless, the increase in the liquidity of the banking system was sufficient to permit a substantial expansion in bank credit. In March 1955, the authorities urged commercial banks to reduce interest rates on their loans, and in the following months several specialized financial institutions, official and semiofficial, did so. The authorities stated that their encouragement of a downward movement in interest rates was not intended to encourage credit expansion. Rather, they had taken advantage of what they considered a relatively safe cyclical position to pursue the long-term official policy of bringing the level of Japanese interest rates closer to those in other industrial countries. The higher Japanese rates were considered unfavorable elements in the cost structure of Japanese industry, reacting unfavorably on its international competitive position.

In August 1955, the Bank raised its basic rate from 5.8 per cent to 7.3 per cent.11 However, this change was a technical adjustment and did not represent any effort at curtailing credit expansion. The lending rates of the Bank of Japan vary with the amount of its lending to each bank and with the type of asset on which the lending is based. The first tier of rates, varying with the type of asset, applies for lending up to an amount determined separately 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. A higher tier of penalty rates, similarly variegated, applies to further lending.12 The basic rate of the Bank is the rate in the first tier that is applicable to the discount of commercial bills. In August 1955, all rates were raised by the same percentage points, but the proportion of lending by the Bank to which the lowest set of rates applied was substantially increased, so that the average lending rate of the Bank remained the same immediately before and after the change.

After the middle of 1956, the monetary authorities showed concern at the rapid rate of credit expansion, and urged banks to observe restraint in lending. In August, the Bank of Japan reduced the limit within which it lent at its lower rates, thus enlarging the scope of application of its penalty rates. Nevertheless, the credit expansion that occurred in the following months was based on substantial support from the Bank’s resources. As the money market became increasingly stringent toward the end of 1956 and in early 1957, the Trust Fund Bureau of the Ministry of Finance purchased securities from banks in order to relieve the stringency.

Government expenditures on goods and services increased during the boom but much less than did expenditures of the private sector. The Government’s share in the total increased from 19 per cent in 1954 to 20 per cent in 1955, but declined thereafter to 17 per cent in the first half of 1957. The temporary increase in 1955 reflected primarily involuntary investment in stocks of foodgrains purchased from the large crops of 1955. These purchases were also responsible for the substantial cash deficit that was incurred in government cash transactions with the public during the fiscal year ended March 1956; cash transactions on other budgetary accounts were in approximate balance during that year. In the following fiscal year, there was a large cash surplus, reflecting the effect on tax collections of the rapid increase in economic activity.

II. Measures to Correct Payments Position

The measures taken by the Japanese authorities to cope with the payments crisis may be classified broadly into three categories. First, to obtain immediate relief from the pressure on reserves, there was some attempt to reduce the deficit by increasing the degree of restriction on imports. Second, certain measures were taken to make the financing of imports more difficult. However, as in 1953-54, principal reliance was placed on a domestic financial program of disinflation.

Tightening of import restrictions

Import control is exercised in Japan by requiring, for all imports, individual licenses, which are granted within the framework of a semiannual exchange budget prescribing expenditures for imports and invisible payments. During the two years or so before the payments difficulties set in, Japan made good use of its favorable payments position to enlarge progressively the exchange budget. In continuance of this policy, the exchange budget adopted for the six months beginning April 1957—the first half of the 1957-58 fiscal year—was much larger than that for a year earlier. However, as the decline in exchange reserves assumed serious proportions, the authorities reduced the exchange allocations for certain items—raw cotton and wool—and suspended the issue of import licenses for steel materials. Also, the announcements inviting applications for imports were often delayed, thus discouraging imports administratively. Partly as a result of these measures, and partly because of the gradual abatement of domestic demand, a substantial part of the original exchange budget remained unutilized.

A smaller budget was adopted for the following six months (October 1957-March 1958). However, this could not be considered a tightening of import restrictions because, by that time, import demand had already waned markedly, as the disinflationary measures took further effect; in fact, the actual utilization of exchange in this budget period fell short of even this smaller budget.

Financial measures impinging directly on imports

By a series of measures taken in May and early June 1957, credit facilities for imports were restricted. The foreign exchange held by the Government through Japanese foreign exchange banks was reduced by transferring part of it to the Bank of Japan, so as to make it difficult for the banks to provide finance for imports. The use of sterling import usance (time) bills was restricted by reducing the number of commodities eligible and reducing the term of these bills; interest rates on both U.S. dollar and sterling usance bills were raised. Banks were required to present to the Bank of Japan, for its scrutiny, their plans for opening import letters of credit. Finally, in order to discourage speculative imports, the percentage of the invoice value which an importer is required to deposit as guarantee money with an exchange bank at the time of applying for a license was sharply raised, especially for nonessentials, and the permission to fulfill this deposit requirement by providing a bank letter of guarantee, instead of cash, was also withdrawn.

Program of disinflation

Credit policy

On March 20, 1957, about two months before the disinflationary program was inaugurated, the Bank of Japan raised its basic rate from 7.30 per cent to 7.67 per cent, and, correspondingly, all its other lending rates. However, at the same time, the Bank substantially increased the proportion of its lending which qualified for the lower rates and also relaxed the eligibility criteria for the rediscount of trade bills. On net balance, therefore, the measures on this date had little restrictive effect on credit expansion.13

The measures taken by the Bank from May 1957 onward to restrain credit consisted principally of an increase in the cost of accommodation from it, and an intensification of efforts to persuade commercial banks to observe restraint in lending. Under the conditions of bank liquidity then prevailing, the use of any other instruments of credit control was both unnecessary and impracticable. The banks, in the absence of any legal or conventional reserve requirements, operated with very low cash holdings—less than 2 per cent of total deposits—and had, during the boom, become heavily indebted to the Bank of Japan. These circumstances, together with the unattractiveness to the banks of government securities in comparison with other earning assets, ruled out the possibility of open market operations. Legislative procedures for the establishment of a system of cash reserve requirements were completed in May, but the authorities considered it unwise to introduce them in that abnormal period.

The clearest demonstration of a shift in financial policies came on May 8, 1957 when, impressed by the continued sharp drop in exchange reserves, the Bank of Japan raised the basic bank rate from 7.67 per cent to 8.40 per cent. Correspondingly, the Bank of Japan’s lending rates on other types of asset (with the exception of the rates for export financing) were also raised at both the lower and the penalty levels. Thus the lower level of rates on loans, the form which most of the Bank’s lending at that time had taken, was raised from 8.0 per cent or 8.4 per cent to 8.7 per cent or 9.1 per cent. This technique, adopted by the Bank, of raising the entire structure of its lending rates differed from that employed in 1953. At that time, the lower rates were kept unchanged but the higher rates were raised and the scope of their application enlarged.

After the increase in the central bank rates, the legal maxima of commercial bank lending rates were raised by the same percentage points. In the following months, the banks gradually raised their actual lending rates. It is difficult to give a precise idea of the increase in these rates because they varied with the credit standing of the borrower. However, some stiffening of lending rates did occur, as indicated by the monthly average rate on all commercial bank lending; this rate, which had been declining through most of 1955 and 1956, increased steadily from 8.22 per cent in April 1957 to 8.64 per cent a year later.

It is difficult, in any given situation, to determine precisely the channels by which a change in credit policy ultimately affects credit creation. In the Japanese experience under consideration, two factors seem to have been the most important, one operating on the demand for credit and the other on the supply. The higher cost of credit to the ultimate borrower may have played some part in reducing the demand for it; but more important was the psychological impact on demand of the increase in the bank rate. The belief that such impact is usually stabilizing has come in for considerable criticism in recent literature.14 It should be remembered, however, that the May 1957 change in the Japanese bank rate was one of a series of measures taken at about that time on the broad front of credit and budgetary policy. It was part of a determined effort by the authorities to burst the boom, and it was evidently interpreted by the market as such; on the announcement of the new rate, the stock market suffered the sharpest break since the Korean War. It appears, therefore, that the increase in the bank rate, as the most demonstrative symbol of the whole disinflationary program, did have the effect of bringing about a change in expectations regarding future levels of economic activity.15

On the supply side, inasmuch as lending rates of banks were raised along with the cost to them of central bank credit, the restraint on credit expansion by the banks clearly did not come via a squeeze on bank profits, as it had done in 1953. At that time, while the Bank of Japan’s rates were raised, the legal ceilings on commercial bank rates were not raised, and these rates could not move upward because, in general, they were already at the legal limits.

The most important factor on the supply side was the close guidance of the lending activities of commercial banks by the Bank of Japan through the administration of its discount policy. The central bank discount “window” in Japan is not merely “a mechanical facility aiding the smooth functioning of the deposit money process.” 16 As reflected in the extremely low cash reserves of banks and their large borrowings from the Bank of Japan, it has the more fundamental role of providing reserve money to commercial banks as a basis for their credit creation whenever the Bank considers it safe to do so. Correspondingly, of course, the administration of the discount “window” affords the Bank a powerful lever of control over banks, and through them over general business conditions. From May 1957 onward, the Bank carefully screened the monthly lending plans of each bank, and tried to reduce such lending to amounts that it considered safe and, in the process, to obtain gradual repayment of its own loans to banks. Within the general framework of credit restraint, the Bank urged commercial banks to have due regard for the needs of small-scale enterprises, bottleneck sectors, and export financing.

The tempo of credit expansion slackened considerably during the year following the adoption of the restrictive measures, i.e., from the middle of 1957 to the middle of 1958. During this period, private sector indebtedness to the banking system increased by 18 per cent, in contrast to an increase of 29 per cent from mid-1956 to mid-1957. Nevertheless, the 1957-58 expansion must, in itself, be considered substantial. It occurred in part because of the reduced self-financing capacity of business enterprises resulting from the effect on profits of the decrease in demand and from the efforts of the enterprises to increase their liquidity, which had been squeezed in the earlier boom period. As for loans for plant and equipment, these were largely for projects undertaken before the disinflationary program was inaugurated.

Budgetary policy

When the disinflationary program was inaugurated, the 1957-58 fiscal year had already commenced and the budget had been adopted; it visualized a moderate cash deficit in government transactions with the public. The budgetary side of the disinflationary program consisted of a set of measures designed to bring about, instead, a substantial absorption of cash.

Budget as originally adopted. The Japanese budget includes, in addition to the General Account budget (corresponding roughly to revenue in other countries), several Special Account budgets, such as those relating to foreign exchange transactions (which in Japan are conducted by the banking system on government account), and the receipts and expenditures of welfare insurance, postal savings, food-grain control, etc. Budgets of government agencies, such as the National Railways, the Japan Development Bank, and the Export-Import Bank of Japan, are also included. Each of these budgets includes interaccount transfers, and no consolidated budget is available on an accrual basis. For assessing the budgetary situation as a whole, the total of net cash transactions of all these accounts is used.

At the time that the budget was compiled, it was estimated that total General Account revenues, at unchanged tax rates, would be ¥ 200 billion more than in the previous year, as a result of the expansion of the economy. It was decided to utilize half this amount to provide income tax reductions by moderating the degree of progression in income tax rates and, to a smaller extent, by increasing the basic exemption, the exemption for the first dependent, and that for earned incomes. The authorities thought that these tax concessions would not unduly stimulate consumer expenditures, in part because to a large extent they would benefit middle and high income groups, and in part because the backlog of demand in the earlier postwar years had been filled.

The other half of the increase in revenues was to be utilized to increase General Account expenditures. Larger outlays were budgeted for public works, principally road repairs and improvement of harbor and port facilities, and for welfare types of expenditure, such as education, pensions, housing, and social insurance.

The loans and investment program of the Government (included in various special accounts) was considerably enlarged. In addition to its own investment expenditures and those of government agencies, the Government has provided in postwar years large sums of investment funds to the private sector. Important sources of such funds have been postal savings, postal life insurance funds, counterpart funds of U.S. aid, proceeds of U.S. surplus agricultural products purchased for yen, 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 Japan Development Corporation, the Housing Corporation, and the Agriculture, Forestry, and Fisheries Finance Corporation. These institutions, as well as the government enterprises, also raise some funds from the market by the issue of debentures, and, of course, they provide a part of the funds from their own receipts, either current earnings, such as railway revenues, or repayments of loans previously made.

In the original 1957-58 budget, the investment funds budgeted for the private sector and for government enterprises, at ¥ 241 billion, were almost 40 per cent more than in the previous year. Larger provision was made for investment in the development of power resources—one of the important bottleneck sectors—and in housing.

The authorities expected all budgetary cash transactions during the year to result in a deficit of ¥ 35 billion.

Subsequent adjustments in the budgetary program. In June 1957, as a part of the disinflationary program then being adopted, the budgetary authorities decided to aim for a surplus of ¥ 100 billion instead of the ¥ 35 billion deficit earlier visualized. However, these figures overstate to some extent the budgetary adjustments contemplated. For, in arriving at the original estimate of a deficit of ¥ 35 billion, no credit had been allowed for the proceeds of the resale to banks of debentures earlier purchased by the Trust Fund Bureau;17 under the terms of the original purchase agreement, this resale had to be undertaken during the 1957-58 fiscal year. In June, a ¥ 50 billion credit was taken for the resale proceeds of these securities.

The authorities also decided to reduce to normal levels government stocks of foodgrains accumulated from the bumper crops of the two preceding years; this was expected to yield another ¥ 50 billion.

Further, a postponement of budgetary expenditures on the loans program and on public works and building repair projects of government offices was announced. The saving from these sources was estimated at ¥ 35 billion.

In fact, cash transactions of the Government with the public during 1957-58 resulted in an absorption of funds considerably larger than that aimed at by the authorities (Table 3). The resale of securities to banks was completed, as planned, in the last quarter of 1957 when there were seasonal deficits in other government cash transactions. Government inventories of rice were reduced substantially, and some of the sales to consumers were made at increased prices. There were some savings from the postponement of expenditures on public works. Although the deferred portion of the government loans and investment program was substantially restored toward the end of the year because of the changed economic environment, there was perhaps some saving on this account also. In any event, any shortfall between the target amount and actual savings in the last three items was more than made up by a substantial excess of actual tax collections over original estimates.18 On net balance, a cash surplus of ¥ 146 billion was achieved, a result ¥ 181 billion better than had been estimated before the adoption of the disinflationary program.

Table 3.

Japan: Net Cash Transactions of Government Accounts, Fiscal Years Ended March 31, 1956-591

(In billions of yen)

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Source: Bank of Japan, Economic Statistics of Japan, 1960.

Plus sign indicates an excess of receipts over payments and minus sign an excess of payments over receipts. Data exclude transactions of the Foreign Exchange Special Account, which are quite distinct from other fiscal transactions.

Including accounts of government agencies.

The supply of money

By reducing the tempo of bank credit expansion and bringing about a large surplus in government cash transactions with the public, the disinflationary program helped to halt the increase in monetary circulation that had taken place throughout the preceding boom. In the second quarter of 1957, for the first time in three years, the money supply did not increase, and, in the third, it declined somewhat.19 By the first quarter of 1958, it was 3 per cent lower than in the first quarter of 1957. In the first quarter of 1956 and of 1957, there had been an increase of about 18 per cent over the money supply in the first quarter a year earlier. The improvement would be even more marked if money of domestic origin alone were considered, for, in the 1957-58 period, net foreign assets declined much less than in the preceding year.

Financial policies and developments through 1958

By the spring of 1958, economic conditions had changed sufficiently to make a continuation of the monetary squeeze no longer necessary. Domestic demand was well under control, prices were declining, and above all, the payments position had improved sufficiently to yield continual accretions to exchange reserves. In the budget for the fiscal year which began on April 1, the General Account was balanced as usual, but its scale was expanded. Some small tax concessions and an increase in the government loans and investment program were provided. An over-all cash deficit of ¥ 46 billion was expected, in contrast to the surplus of the previous year. However, in the prevailing economic conditions, this budgetary program could not be considered unsafe. Throughout the year, the authorities successfully resisted pressures for the adoption of a supplementary budget designed specifically to stimulate economic activity,20 and the year ended with a cash deficit of ¥ 57 billion.

In June 1958, and again in September, the Bank of Japan lowered its lending rates, which, after the increases in 1957, had been at the highest level since 1901. In June the basic discount rate was cut by 0.73 percentage point, and in September by a further 0.37 percentage point to 7.30 per cent. All other lending rates of the Bank were also reduced correspondingly on both occasions, except that in June 1958 the rates for export financing were not lowered. These had not been raised with other rates in May 1957 and had, in fact, been reduced in the following month. The degree of preference given to exports, even when partly offset by the June 1958 reduction in other rates, was considered adequate. Following each of the two reductions in the Bank’s rates during 1958, the National Federation of Bankers’ Associations decided to reduce the maximum interest rates on various types of commercial bank lending by the same percentage points.

The authorities emphasized that the interest rate reductions were not designed primarily to stimulate a demand expansion. They urged commercial banks to continue restraint on lending and to try to repay their borrowings from the Bank of Japan. Also, to discourage any tendency toward competition between banks to lend, the Bank of Japan made suitable changes in the formula determining the scope of application of its penalty rates, enabling it to take fuller cognizance of the lending practices of each bank. As in 1955, the authorities stated that the interest rate reductions were primarily steps in furtherance of the long-run policy of reducing the level of interest rates in Japan.

In the second half of 1958, there was some acceleration in the pace of credit expansion, but this seemed moderate in the light of the recovery in economic activity that commenced about the middle of the year. The increase in the money supply was resumed as a result of this faster credit expansion, the government cash deficit, and the improvement in the external payments position.

With the improvement in the external payments position, the earlier tightening of import financing was reversed in the first half of 1958.

III. Adjustment of Internal Economy and External Balance, 1957-58

Improvement in the balance of payments

The Japanese balance of payments improved sharply from about the end of 1957. In 1958, there was a payments surplus of $302 million, in contrast to the deficit of $526 million in the previous year.

Imports and related payments on freight and insurance, which had increased in earlier years and were primarily responsible for the deterioration in the payments position, declined sharply in 1958. Imports, at about $2.5 billion, were 23 per cent less than in 1957. This was due chiefly to a decrease in volume (Table 4), but the fall in world prices of primary products also contributed to the decline.21

Table 4.

Japan: Indices of Import Purchasing Power of Exports and Actual Imports, 1951-581

(1950 = 100)

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

Based on f.o.b. values.

Based on c.i.f. values.

Unit value of exports divided by unit value of imports.

Terms of trade index multiplied by export volume index.

There was a small increase in the volume of exports; however, this was largely offset by lower prices and, as a result, the value of exports, which had been rising rapidly in the four preceding years, remained almost unchanged in 1958. Nevertheless, the balance on merchandise trade account changed from a deficit of $402 million in 1957 to a surplus of $371 million in 1958. Because of lower freight rates, the decline in freight and insurance payments, which contributed to the improvement in the payments position, was more than proportionate to the fall in imports.

The data in Table 4 and Chart 1 bring out strikingly the nature and magnitude of changes in the trade balance from 1950 to 1958. These data, being related to the year 1950 when trade was approximately balanced, not only portray the change in the trade position relative to the base year but also indicate the position in absolute terms. The gap that opened during 1951-54 between the import purchasing power of exports at current import prices and the actual volume of imports was almost entirely closed in the following two years, principally because a rapidly rising export volume enhanced Japan’s import purchasing power during the latter period. A progressively widening gap again emerged in 1956-57 but was more than closed in 1958. However, the manner in which the gap was closed was different. Helped by an improvement in the terms of trade (which had not occurred between 1953 and 1955), the purchasing power of exports increased, but much less than in the previous period because of the slower expansion of exports. On the other hand, the active factor in the improvement in the trade balance was a sharp decline in the volume of imports, which had, in fact, increased somewhat in 1953-55.

Chart 1.
Chart 1.

Japan: Indices of Import and Export Volumes and Import Purchasing Power, 1950-581

(1950 = 100)

Citation: IMF Staff Papers 1961, 002; 10.5089/9781451929850.024.A003

1 Based on data in Table 4.

Relation between output, absorption, and the external balance

What adjustments in the domestic economy yielded the external payments surplus? The nature of the adjustment may be analyzed in terms of a long-recognized relationship, i.e., that the balance of external payments of a country is the difference between its total output of goods and services and its absorption of goods and services for consumption and investment. One objection to this approach may be that the relationship given in the equation is definitional rather than causal, and that it is no more justifiable to posit a dependence, in any causal sense, of the trade balance on the relationship between output and absorption than it is to posit a dependence of absorption on the relationship between output and the trade balance. However, this argument applies with the least force to an analysis of the effects of disinflationary 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, except to the extent that gains are made in productivity and extensions occur in productive capacity as a result of earlier investments. A disinflationary financial policy, acting on domestic consumption or investment demand, could, even without inducing a change in relative prices, make more goods available for export and at the same time damp the demand for imports. However, in any instance of a serious payments disequilibrium, disinflationary measures will probably have to induce appropriate changes in relative prices so as to bring about a reallocation of factors between export, import-competing, and purely domestic industries. Since the mobility of resources is normally far from perfect, this reallocation is a painful process, involving considerable unemployment unless favored by a facilitating circumstance, such as a rising world demand, or assisted by a policy measure, such as an exchange rate adjustment.

In a country exporting manufactured goods, especially of the hardware variety, there is likely to be a high degree of substitutability between exports and domestic investment. Nevertheless, in the absence of a rising, or at least a stable, world demand, the main burden of response to a disinflationary policy is likely to fall on imports, the equilibrium in external payments being attained at a reduced level of both domestic economic activity and external trade.

In the following paragraphs, developments in the Japanese economy during 1957-58 are viewed from the standpoint of variations in output and absorption. The relevant data are published by the Japanese authorities only in current prices; they have, therefore, been adjusted for price changes by using a variety of price indices. Since some of the adjustments are admittedly not fully satisfactory, the figures should be taken only as indications of the direction and broad magnitudes of change.

As indicated in Table 5, domestic absorption, after having increased rapidly during the period 1955-57, declined slightly in 1958. This decline was due to some reduction in private inventory investment, in contrast to a large accumulation in 1957. All other categories of national expenditure increased in 1958.

Table 5.

Japan: Income, Absorption, and External Balance, 1953-581

(In billions of yen at 1954 prices)2

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Based on statistics of the Economic Planning Agency of Japan.

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 in fixed capital, a capital 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 capital goods index.

The share borne by Japan of the expenses of U.S. forces in Japan is included in exports in Japanese national income data, as a demand on production by nonresidents, but is excluded from exports in the balance of payments data. In order to make the figures for external balance in this table comparable with those for the goods and services account in the balance of payments statistics, the share borne by Japan of the expenses of U.S. forces is excluded from exports and included in government consumption expenditures. The remaining difference between the external balance as shown here and that in balance of payments statistics is due primarily to the fact that the figures here are obtained by subtracting domestic absorption deflated to 1954 yen values from gross national product similarly deflated, while the balance of payments statistics are in current prices.

Government investment in inventories is included in government investment in fixed capital.

Private inventories had continued to grow in the months following the adoption of the disinflationary measures, but at a sharply reduced rate. In the second quarter of 1957, inventory investment (additions to inventories) was at the high annual rate of about ¥ 1,200 billion.

By the third quarter, it had declined to less than one third of this amount; and, by the second quarter of 1958, there was net disinvestment at an annual rate of about ¥ 200 billion. The attempted reduction in inventories in the earlier stages must have been even larger than indicated by these figures, for it was partially offset by an unintended accumulation by manufacturers of stocks of finished goods.

The disinflationary financial measures probably played a significant causal role in reducing inventory investment. Such investment is probably too short term in nature to be materially affected by any practicable change in interest rates. However, as pointed out above, Japanese financial measures operated more by reducing the availability of credit than by raising its cost. This reduced availability must have discouraged inventory investment, especially as bank credit is almost the only source of external financing for this category of expenditure. The proportion of stocks in Japan that is financed by bank credit is not known, but it is probably larger than in the United Kingdom, where it has been estimated at 16 per cent22 and is considered significant. The disinflationary measures thus made inventory investment more difficult; even more important, they made it less desirable through their effect on expectations about the future course of demand.

In addition to the disinflationary measures, another factor impinged on the state of entrepreneurial expectations about the middle of 1957, reducing the incentive for building up stocks. This factor was the fear that the downturn in the U.S. economy and the decline in the prices of primary products would cause prospects in export markets to deteriorate. It is, of course, impossible to determine quantitatively which of these two was the more important factor. However, judging from the extent to which the fears of an adverse export market were entertained in Japan at that time, it does appear that they strongly reinforced the deterrent effect of the disinflationary measures on stock building activity.

It is also possible that the tightening of import restrictions played some part in reducing inventory investment. However, this influence was not important since the tightening was neither pronounced nor prolonged.

Total investment in fixed capital increased sizably in 1958, although the increase was less than in 1957. However, the total conceals a marked reduction in the rate of increase of private investment in equipment; after having averaged 33 per cent in the two previous years, it was held down to a moderate 8 per cent in 1958. The fact that there was no actual reduction in such investment may be attributed to continued expenditures on projects that had already been initiated and the interruption of which would have been wasteful. The effect of official policies on new investment projects is more clearly evident in data on private orders for machinery; such orders declined markedly after the middle of 1957, and in 1958 they were considerably less than in 1957.

Total purchases of goods and services by the Government for both consumption and investment purposes increased in 1958, whereas they had decreased in 1957. This is not surprising, since disinflationary objectives governed fiscal policy only in the latter part of 1957 and early 1958. Indeed, the budgetary expenditures postponed during this period were incurred in the subsequent months of 1958, and an enlarged budget was adopted for the fiscal year that began in April. Moreover, in the budgetary plank of the disinflationary program, any plan to reduce government purchases of goods and services played only a small part.

Private consumption expenditures continued to grow in 1958 at about the same moderate pace as in the previous two or three years. This strength of consumer demand could be explained partly by the fact that the 1957-58 recession affected mainly profits. Unemployment increased with the growth of the labor force; but employment did not fall, partly because of trade union pressure and partly because the traditional employer-employee relationship in Japan discourages the dismissal of employees in times of poor business. Wage payments per worker increased, although much less than before. Consumer demand was also supported by the high level of farm income accruing from the sale of bumper crops at government support prices.

Production increased in 1958 but at a much slower pace than in earlier years. Industrial production declined from June 1957 to March 1958 by about 11 per cent; although it recovered sharply in the following months, output in 1958 was no higher than in 1957. Agricultural production increased by somewhat more than 3 per cent in 1958.

Clearly, it was a small decumulation of stocks in contrast to the large accumulation of the previous year, and a slackening of the rate of increase of private investment, which brought about the reduction in the absorption of resources by the domestic economy in 1958. At the same time, output increased, albeit more slowly than before. The external balance improved correspondingly.

The discussion in the preceding paragraphs is based on a comparison of the two full years, 1957 and 1958. In fact, however, the external balance improved considerably during 1957. The large deficit in the first half of the year was reduced considerably in the third quarter; and in the fourth, a sizable surplus emerged, which was further enlarged in 1958. The improvement in the second half of 1957 reflected entirely a substantial reduction in domestic absorption, chiefly in the form of a cut in inventory investment; output declined during the period. By contrast, the further improvement in external payments in 1958 reflected, as seen above, partly a reduction in domestic absorption and partly an increase in output.

The form of adjustment in the domestic economy that produced the external payments surplus in 1957-58 was similar to that in 1954-55, in that the brunt of the adjustment was borne by investment in inventories.23 However, there was a significant difference between the experiences of the two periods. While in 1958 there was a definite, though small, reduction in the absorption of resources by the domestic economy, in the earlier period absorption continued to increase and only the rate of increase slowed down. Even in the field of inventories, expenditures on which proved the most volatile of total national expenditures, there was no disinvestment; only the size of investment was smaller.

Why was the degree of austerity required of the economy in 1957-58 larger than in 1954-55? For one thing, the amplitude of the swing in the payments position was larger. From a deficit equivalent to 1.3 per cent of gross national product in 1953, the balance on external payments changed to a surplus equivalent to 0.9 per cent in 1955. Between 1957 and 1958, the swing was from a deficit of 2.1 per cent of gross national product to a surplus of 1.7 per cent.

However, there was a more fundamental difference between the two periods. In 1954-55, Japan was favored by a rapidly rising world demand for its products. Such a circumstance facilitates the reallocation of resources necessary for securing an improvement in the external balance, and minimizes, or even dispenses with, any downward adjustment of the economy. If there is scope for expanding domestic output, either because employment is less than full or through gains in productivity, it can be channeled into the export sector with relative ease provided that domestic demand can be restrained. In 1954-55, resources were not released from the domestic to the export sector as a result of the disinflationary policy. Rather, the disinflationary measures prevented the domestic sector from preempting the resources that became newly available during this period. Some increase in domestic absorption was permitted, but the rising tide of world demand took up, with relative ease, a substantial por tion of the new resources, and the external payments position im proved.

By contrast, the world trade environment, in the context of which the adjustments in Japan’s economy had to take place in 1957-58, was markedly unfavorable. In 1957 the expansion of world trade, in both volume and value terms, slowed down, and in 1958 world trade in fact declined. In the face of these adverse world demand conditions, the channeling of resources into the export sector was a more painful process. This is reflected in the data in Table 4; the decline in export prices was about the same as from 1953 to 1955, but the increase in the volume of exports was much smaller. Consequently, the burden of adjustment in the external position fell on the import side, and balance was secured only by exercising a greater restraint on domestic absorption than was necessary in 1954-55.

IV. Conclusions

It is evident that determined financial measures to check the expansion of demand in 1956-57 were not taken until external payments developments made them necessary. The credit policy pursued until May 1957 may be said to have been one of active ease in the sense that the central bank, through its own liberal lending policies, made credit conditions easier than would have otherwise obtained. It is, of course, likely that, as the boom developed, the Bank of Japan turned down an increasing proportion of requests for its assistance. In the disinflationary program adopted in May-June 1957, budgetary policy was evidently a more important plank than it had been in the disinflationary program of 1954. In the austerity budget year 1954-55, government cash transactions added more to monetary circulation than in the preceding year. In consciously aiming for a budgetary surplus in 1957-58, the authorities made an important departure from their earlier policy of keeping budgetary operations merely neutral in times of inflation.

The role of changed entrepreneurial expectations in bringing about the desired adjustments in the economy is indicated by the available evidence on the income velocity of money. It has been seen that the disinflationary measures succeeded in restricting the supply of money. The view is now widely held that monetary policy, however successful in restricting the money supply, is frustrated in its attempt to restrict aggregate expenditure, by a more intensive utilization of the available money supply. However, the Japanese economy did not respond to the disinflationary measures in this destabilizing manner; in fact, the income velocity of money decreased from about the middle of 1957 (Table 6). It is possible that there was little scope for a further increase in velocity; at the height of the boom in the second quarter of 1957, it was already at one of the highest rates attained in about six years. Nevertheless, the decrease that occurred from the middle of 1957 must be attributed primarily to the fact that at that time the earlier bullish tone in the economy disappeared and a somewhat bearish tone emerged. The adoption of a broad program of disinflation played, of course, an important role in inducing this change, crucial to the reduction in domestic demand. However, the fears, widely entertained at that time, of a fall in world demand and therefore of a decline in Japan’s exports were an additional causal factor. Of course, while such fears damp domestic demand, they contribute to an improvement of the external balance only to the extent that they prove false. Fortunately, the actual reduction in world trade was not large and Japan’s exports did not decline in 1958.

Table 6.

Japan: Income Velocity of Money, 1953-581

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Calculated on basis of money supply series published by the International Monetary Fund in International Financial Statistics for the period up to August 1957; data for subsequent months through 1958 calculated on same basis. Quarterly averages have been adjusted for seasonal changes by Robert F. Emery, a member of the staff of the Division of International Finance, Board of Governors of the Federal Reserve System. Expenditures data used are gross national product minus government expenditures, seasonally adjusted.

Better terms of trade helped in improving the external balance in 1958, but the larger part of the improvement took the form of a reduced volume of imports. Here, import restrictions did no more than buy time. The main factor was the reduction in domestic demand. However, the reduction in import volume was proportionately much larger than the cut in total domestic absorption. The explanation seems to lie in the fact that the small reduction in domestic absorption was the net result of a large fall in inventory investment, substantially offset by increases in all other categories of expenditure. Reflecting their different marginal import contents, the fall in imports resulting from the change in inventory investment far exceeded the rise resulting from the increases in other expenditures.


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


Balance on goods and services, donations, and capital movements other than changes in reserves and related items; see footnote 5 to Table 1.


A weakness arising, in part, out of the reliance since World War II on that area for raw materials and food supplies. The “dollar problem” was, however, veiled by special government receipts, which are almost entirely in US. dollars, and Japan, therefore, enjoyed fairly substantial dollar surpluses in most postwar years.


Defined as the product of the export volume index and the terms of trade index; see Table 4.


The price indices used in the computation of the terms of trade are derived from customs returns, and the import price index is based on c.i.f. values. The deterioration of the terms of trade in 1957 reflects to some extent the increase in freight rates after the Suez crisis. A Laspeyres index of f.o.b. import prices is not available.


Economic Planning Agency, Economic Survey of Japan, 1957-1958 (Tokyo 1958), p. 30.


The discussion is confined to exports of manufactured goods because the analysis in the following paragraph can, in Japan’s case, be most meaningfully carried out for these goods, which constitute about 85 per cent of Japan’s total exports and which represent an important part of total world trade in manufactures.


See an index of the unit value of exports of manufactured goods from the 12 leading exporters published in the United Nations, Monthly Bulletin of Statistics. The 12 countries are Belgium-Luxembourg, Canada, France, the Federal Republic of Germany, India, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.


R. F. Harrod, “The British Boom, 1954-55,” The Economic Journal, Vol. LXVI (1956), pp. 1-16.


For details of this analysis, see Staff Papers, Vol. VIII (1960-61), p. 96.


Chemicals, which contributed only a small fraction of the total export expansion, are excluded.


That is, from 1.6 to 2.0 sen per hundred yen a day. Interest rates are quoted in Japan in terms of sen (one hundredth of a yen) a day; they are given in this paper as percentages per annum.


Until March 20, 1957, there were two sets of these penalty rates, one higher than the other.


It was also on March 20, 1957 that the two levels of penalty rates were consolidated into one, 1.095 per cent higher than the initial rate for each type of asset.


See, for example, Warren L. Smith, “The Discount Rate as a Credit-Control Weapon,” The Journal of Political Economy, Vol. LXVI (1958) pp. 171-77.


As pointed out on p. 406 below, there was another important factor impinging on entrepreneurial expectations and thus operating to reduce the demand for credit. At this stage, however, only the mechanism by which credit policy influenced credit creation is considered.


The U.S. Federal Reserve discount “window” can be described in this manner, perhaps with some qualification. See discussion between R. V. Roosa and C R. Whittlesey on “Credit Policy at the Discount Window,” The Quarterly Journal of Economics, Vol. LXXIII (1959), pp. 207-16 and 333-38.


See p. 392 above. This entire purchase and sale transaction really pertained to monetary rather than budgetary transactions. However, this does not affect the present argument, since the purchase transaction was included in budgetary accounts and it was clear that, when it took place, the resale transaction would also be included in the accounts.


Japanese revenue estimates are normally on the conservative side; the average of “excess” collections during fiscal years 1951-52 to 1955-56 was 15 per cent.


Based on seasonally adjusted quarterly averages of outstanding amounts at the end of each month.


During the fiscal year, two supplementary budgets were in fact adopted, but the total amount involved was small and it was financed from current revenues. About half of the expenditures was to provide relief from natural disasters.


The data on unit value of imports in Table 4 are based on c.i.f. values and, therefore, reflect also the sharp fall in freight rates.


R. G. Hawtrey, Towards the Rescue of Sterling (London, 1954), p. 91, cited by Ragnar Nurkse in “The Relation Between Home Investment and External Balance in the Light of British Experience, 1945-1955,” Review of Economics and Statistics, Vol. XXXVIII (1956), p. 126.


That the adjustment in 1954 was in investment in inventories is evident from the statistics. For 1955, the statistics in fact show a substantial increase in such investment and a small decrease in private investment in fixed capital. However, since the increase in inventory investment in 1955 seems to have been chiefly an unintended accumulation of foodgrain stocks by agriculturists and the Government, the main factor in slowing down the growth of absorption in 1954 and 1955 taken together may still be said to have been the change in investment in inventories.

IMF Staff papers: Volume 8 No. 3
Author: International Monetary Fund. Research Dept.