INTERNATIONAL TRADE JAPAN’S PAYMENTS SETBACK IS CASTING LONG SHADOWS

Press, Volume CVIII, Issue 31623, 8 March 1968, Page 8

INTERNATIONAL TRADE JAPAN’S PAYMENTS SETBACK IS CASTING LONG SHADOWS

(By

C. GORDON TETHER

("L6mbard‘'J in the "Financial Times", London)

(Reprinted by arrangement)

i, •2 ne of the P° tei »tially more formidable of the unknown factors that will go a long way to determine how far Britain can turn devaluation to account for strengthening her export earnings concerns the forthcoming reaction of the Japanese to the discovery that their economic miracle is now entering the “awkward stage.” This is the stage at which rising living standards tend to find expression in an altogether disproportionate expansion in the demand for imported goods.

In spite of the fact that the escalation of the war in Vietnam has raised American procurement spendings in Japan well beyond the SUSIOOOm per annum mark, the Japanese balance of payments has suffered a marked deterioration during the last year. So far the new deficit has been to a large extent financed from the proceeds of increased short-term borrowing abroad. Yet even so reserves recently dipped below the SUS2OOOm level for the first time in several ’ ears. And if—as is more than probable foreign money to bridge the gap proves increasingly hard to come by, the erosion of reserves could soon begin to constitute a- much more serious worry. Ringed Round Japan has, of course, grappled successfully with payments deficits of similar substance on a number of Occasions since her economic

miracle first began to get under way in the first half of the 19505. But the present one gives particular cause for concern. For it is a deficit with a difference. The nature of the difference was very capably ringed round by Mr Sata, head of one of the country’s largest commercial banks, when he addressed an international gathering in Tokyo a week or two back. The payments problems of the past were caused, be pointed out, by over-heating of the Japanese economy resulting from excessive investment in capital development. In consequence, they could be fairly easily disposed of by taking steps to reduce the economic temperature. The present problem by contrast stemmed from a steep rise in imports that had its roots in the rapid growth of personal consumption. As a result, it could not be expected to be nearly as responsive to general econo-

mic restraints as earlier versions, of the payments crisis had proved to be. Indeed, according to Mr Sata, it could well be two or three years before the Japanese payments position recovers sufficient strength to permit tbe country to get back on to the miracle course. Emphasis On Meat It may be remembered that towards the end of the first half of the 19605, Italy suddenly found that the rise in living standards produced by Vie many years of rapid economic expansion was beginning to be reflected to a disproportionate extent in the growth of the demand for foreign goods the increased emphasis on meat in the popular diet having, for example, given rise to a quite spectacular rise in imports under this heading. It would seem that the Japanese are now coming to realise that their own economic miracle has reached a stage at which it is running into the same obstacle—in short that a powerful new disruptive force of an enduring kind has been introduced into the balance of payments picture.

Their reaction to this discovery will have implications Of importance for many countries besides Japan herself, and more particularly for Britain. So far, the up-surge in the demand for consumer goods iu Japan generated by the steep rise in the living standards of the mass of the Japanese people has bad generally beneficial effects for other trading countries. This is not only because it has provoked a steep rise.in the inflow of imported goods into the country—last year Japanese imports were running some 40 per cent higher than two years before. It is also because it has tended to divert into the home market Japanese goods that would otherwise have been competing for outlets abroad. Devaluation Path

But it is only to be expected that, having been brought face to face with the fact that this change of patterns is giving rise to a disequilibrium in the balance of payments that could take years to correct with the strategy employed on the occasion of earlier payments crises, the Japanese authorities will be putting in some vigorous new thinking. For the use of a procedure that would subject tbe economy to a “stop” of indefinite duration is hardly going to appeal to a country that has been accustomed to clocking up growth rates of the order of 7 to 10 per cent year after year for so long. It is, of course, impossible to predict what the reaction to the onset of the new payments problem will be. But one thing that must be recognised is that the possibility of the yen following the £ down the devaluation path now looks distinctly larger than it did earlier on. For a change in the exchange parity would go a long way to correcting the basic deterioration the country’s balance of payments has suffered as a result of the sudden rise in the demand for imported goods. Thus by raising the prices of foreign products on the Japanese market it would at one stroke both curb the population’s new enthusiasm for imported goods and make it easier to achieve the larger exports needed to sustain the permanently enlarged import bill. Significance For U.K. It hardly needs be said that such a turn in Japanese policy would be far from helpful from the British point of view. Since Japan has had more difficulty than many of the other advanced countries in keeping inflationary pressures in check in recent years, the devaluation of the £ seemed likely to be particularly effective in helping British exporters to combat competition from this source —and such competition has, of course, played an important part in holding British exports in check in recent years. A decision by the Japanese to treat the recent basic change in their trade patterns as the last straw for the yen’s present parity would accordingly make it significantly more difficult for Britain to show a big profit from devaluation on the export side.