AS. 18-a 01~. FI0 LX IY.. 1.Ir- .Ij T his report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT JAPAN REPORT OF 1953 MISSION May, 1954 Department of Operations 1Asia allu LiYdILe East CLECY CONVERSICK 51.00 : 360 1 : $W.00277778 t1,00,0 =M *2,177.7A TABLE OF CONTENTS Page I. INTRODUCTION .............................. 1 Effectivenes, of Thermal Power Loans. ...... 1 II. SUMARY AND RECOEJDATIONS ................. 2 - 7 General Economic Situation .......... 2 Governmen,t Policy ......................... 3 Investment Needs ........................ 3 Agriculture .......,................ 3 Industry ...................... ............. 4 Steel ............................. 4 Power ......................... 5 achJie Manufacturing ................... , Ammonium Sulfate ................ Recommendations f or Bank Action . incial Policy ........................ 6 Agriculture ........................... 6 Steel and Coal .............. 6 Mlachine Industry ... ........... 7 Armmonium Sulfate ........................ 7 III. POLITICAL SITUATION .......................... 7 - 8 IV. ECONOMIC SITUATION ......... ..... 8 -13 Long Tenn ..... . ...g...a........... 8 Recent Develoments ........................ 8 Production and National Incane ............... 9 Private Consumption .......... ............ 9 Inflationary Pressure ........... 10 Foreign Trade and Balance of Payments ...... 10 Imports ...................... 10 Exports ..................... 1 Payments Deficit ........................ 11 U.K. Agreement ........................... 12 raro n Sett'Lement.. s ............. 2 Industrial Modernisation .... V. PROSPECTIVE JAPANFSE ECONOMIC POLI1Y ........ 13 -16 Counter-Inflationary Measures ............. 13 CrecdItt Control ................p*...... lå Direction of Credit ......... .......... 15 Enlistment of Public Support for Self- Sufficiency Drive ....................... 16 TABLE OF CONTENTS (ContId) Page VI. .IC........iUTURE . ....... - I - 1U Increasing Imporit Require t 17 Agriculture Improvement Program Stalenate. 17 Suggested Action ........................... 18 VII. INDUSTRIAL MODERNIZATION ................... 19 - 29 Introduction ................ ...... 19 Steel : Significance ........... 19 Raw Materials Supply ............ 19 Modernization Plans ........... 21 Coal : Significance. ... 22 Durrent i.ua.o. .......... 22,3 Iodernization Program .......... 23 Poqihl BRnk Action . ...... 2 Power : Hydro ...................... 25 Thermal ..................... 25 Subterranean Steam .............. 26 Power ?riority ......,....... 26 Loan Considerations ............. 26 Machine E=ufacturing Industry............ 27 Significance ............. .... 27 Campetitive Position ............ 27 rModernization Program .......... 28 Amonium Sulfate ......................... 29 I. INTRODUCTION 1. At the request of the Government of Japan the Bank despatched a Mission to Japan in the fall of 1953. The Mission, headed by Russell H. Dorr, Chief of Divisiort Department of Operations, Asia and Middle East, included Mr. John C. de Vilde, Economic Adviser to the lepartment or Operations, Mr. R.B.J. Richards of the Office of the General Counsel and L1.: e 'IML L -J. --QU) .L VLLU .LI1.. VV 1j.JLMV.LVjI, ~NLL California, who served as industrial consultant. 2. The purposes of the Mission were - a. to survey economic development and bring up to date the information on the Japanese economy secured by the 1952 Bank Mission; b. to discuss with the JaDanese Goverment its economic problems and policies with a view to familiarizing the Bank with the measures which the UUverUnent haS taKen or proposes to take to meet these problems; c. to uake a preliminary reconnaissance of certain important JznanP indu-tres w-ith a vipw to mnraisinrr norerni7ation pro grams and investment needs; d. to expedite effectiveness of the three thermal electric power loan agreements which had been concluded on October 15, 1953. 3. The Mission arrived in Japan on 12 November 1953, and departed on 18 December. During its stay members of the Mission visited cities and industrial installations in the Kansai area, in Hokkaido and L Kyuahu. na gventisnn, nuur-a' and banking leaders and securei information from government bureaus, trade - SSYdC4 n+jA nn The -i~ a~ )-rnoitnA -t%1Q+ 1p 4-:!' cooperation in every quarter. Lffectiveness of Thermal Power Loans 4. Mr. Richards devoted himself exclusively to working out with the Bank's local counsel and with governnent officials, the Japan Develop- ment dank and the three power companies the steps necessary to making the three thermal power loans effective. As a result of this work, measures were taken 1ich resulted in 1e lo-anS becomag116 eff ive U1 U 1Uer C, 1953. It was apparent from the nature of the problems encountered that no,r Sne4AaVla Aol xa 4n 2nrmnn14shing the effof4tiena o +heo ins would have occurred had not YFr. Richards worked in Japan directly with the interested narties. 2. II. SUM2ARY .AND ZCOMMNDATIONS General Economic Situation 5. Nothing occurred during 1953 to change the long run appraisal of the Japanese economy set forth in "A.S. 10 Japan's Economic Situation and Prospects". industrial production, wages and consumption were attained. Unfavorable weather, howevr , a6sd ah=-n drw ina nrn-jnrilf,=1 ucitioAn" 7. A considerable de7ree of inflation. nartlv due to "overnment expenditures and rising wages, but principally the result of a 29 p,r cent increase in bank credit, occurred. 8. The effects of inflation on domestic prices were partially counteracted by a massive import surplus. The wholesale price index increased, however, by 5 per cent. 9. The year was marked by severe deterioration of Japan's balance may well exceed 3300 million. ioreign exchange holdings at the calGndar v cml and had fnllpn tn .117 rno4nn =nd will rl-nn firt.hp.r rillrinm- tho Nrqt quarter of 1954. 10. The balance of payments deficit followed from a 200 increase in the value of imports while receipts remained virtually steady. Increased food imports necessitated by the unusually poor crop year equalled nearly half the deficit. 11. Domestic inflation contributed largely to the payments problem by sweling the demand for irports while increasing prices and reducing availability of export goods. 12. In the face of a combination of adverse circumstances at home and abroad- many of thm hi-nd JAnants control. the total of Janan's ernorts held steady. Gains of 28 per cent and 3h per cent were achieved in exports to the dollar and open account areas respectively. Sterling exports, however, declined 4l% to counter-balance these gains. 13. A new trade agree-ent concluded with the United Kingdom in January 1954 affords Japan an opportunity to restore her sterling area trade. 14. A measure of disinflation is urgently needed to bring the and bank credit is therefore essential. 15. Gooi progress has been made during the past year in the re- equipment ana technological irrovement of important industries. Much more, however, needs to be done. Savings s.oulid be fostcrcd, consuipticn linited and investment funds ccnccntrritcd on hirh priority projects. Government Policy 16. The Government appears to be adhering to its declared intention to reduce 1954 government expenditures. It has insisted, even at the cost of a cabinet crisis and the resignation of three ministers, on a budget for 1954 reducing expenditures by Y 25 billion (2.7 per cent) which has recently passed the Diet by a substantial majority. At the same time it, has res.iz564ed rcam-aend-ionsJUi~ o.k a. ';j_ L.dax refomJI for tax law changes which would have made large reductions in Government 17a r_ategorical pwhlic rien1nrnt.ionn +.1int. hnn,k n'rrit wnl,ld hP reduced gradually have been repeatedly made during the last three months by the Minister of Finance and the Governor of the Bank of Japan. Re- discount charges and the cost of import financing have been adjusted upward gradually but significantly during January and February. These measures have not sufficed to check a rush to secure additional credit from the Bank of Japan and the total of its loans increased by about 30% during the first two months of l>. .LU . I IITZ U VVU L11WL U.L toLIU L .LA A U .k VCLJJCLL .~ J .n ~ ~ ment with the Mission that rediscount charge increases alone might not other restrictions if necessary. 19. In regard to government capital investment, even those officials sympathetic to the idea did not believe it would be feasible to direct funds exclusively to high priority projects. 20. The Hission found general awareness of the need of establish- ing conditions favorable to expcrt trade and of actively promotin an export campaign. During the last two months the government has begun at the highest levels to exert more affirmative leadership in this field. Investment Needs 21. The ission's stud, of Japanese investment priorities indicated the following: Agriculture 22. Increased agricultural production is imerative if Japan is to achieve a self-sustaining econory. Although this is widely recognized, the inistry of Agriculture's program does not appear to be receiving unqualified support and Cie amount of funus avaliaole to carry it out has been reduced in the 195L- budget. 23. Despite the high efficiency of Japanese agriculture, there is reason to believe that more could be done to increase agricultural pro- duction, particularly in the fields of land reclamation, irrigation, animal husbandry and better cultivation practices, but considerable work by qualified personnel to identify the areas toward which resources should be directed appears necessary. 14. '. A number of government officials whom the Y-ission sounded of International Trade and Industry (since resigned) and leading Ministry of Arinlturp officerq anneoarad retn va + he Jn ^f M !:-y agricultural mission. Industry 25. Steel. The Japanese steel industry, both as a direct exporter and as a sunlier of baqin raw matprinls te P)rnnrt iniiqf.rio is of vital importance to the attainment of a viable economy. 26. It appears that in the near future the availability, quality and price of iron ore in South East Asia will be such that Japanese steel industry will not be crucially handicapped by having to import about 50% of its ore requirements. 27. The greatest raw material difficulty faced by the Japanese .nuuusry is tne igi price of Uomesic coking coal uhich exceeus the price, delivered in Japan, of better quality U.S. coal. 28. The present nodernization program of the steel industry which affects principally open hearth and rolling mill equinment annears well conceived, and is being effectively carried out. It needs, however, to be supplemented by further m-)dernization along generally similar lines. 29. Tentative Japanese estimates of further foreign exchange requirements for such a complete program are in the neighborhood of $58 million but this figure may well be too high. 30. Reduction of coking coal costs would greatly strengthen the ;-er -l nl co n 4.44 eU~J~ r 44-UL~1 - I -- JAU' L 31. Coal. High cost of nnal nraoctivon in Japan sernousiv handicaps all Japanese industry. 32. Fhile geological conditions in Japanese coal fields are far from optimum it is doubtful whether they are substantially more difficult than those in 'estern European mines which produce coal at much lower costs. 33. There appears to be considerable scope for modernization of 1=4U.LJ1UM&LU CUILA LLL" Ut:& j1~z )JLZU1Z LIJy~tLL 11U, .LL CUJ.~LI U U .apable of producing cos' savings of perhaps 25% in the mines affected. it is not c-lear. that they concentrate -,,4Sficitent-11- on increasing pouto in the most easily worked beds or that they give sufficient attention to the uraencv of reducing coking coal costs- 34. In view of the g.eat importance of making maximum use c indigenous energy resources, and the relation of high coal costs to Japanese industrial costs generally, the improv9ment of the coal industry 5. is entitled to very high priority. 35. Power. The Mission's observation further confirmed the Bank's earlier conclusions as to the inadequacy of the Dresent power sumly in Japan. Active planning for further thermal and hydro-electric generating capacity is under way. The attention being given the development of possible supply of subterranean steam for power generation may, however, be inadequate and it is not clear that the ratio of thermal to hydro generation in the expansion program is the best, given the shortage of capital in Japan and the larger capital cost of hydro projects. 36. Execution of majoi hydro-electric projects could be expedited LJ UlL ofL.L. Axjw toe IVLV VVJ U.AA . U%L,llU 4.U-LI.JJ;11UU AAs muchI as 310 million might be requed. 37. Machine Manufacturing. The machinery manufacturing industry in its various branches is already a major foreign exchanze earner. In 1953 it contributed about 1b) per cent of exports and promises to be of increasing importance. 38.. While the industry is fully comnetitive internationally in soie fields, particularly light consumer goods and textile machinery, it can barely hold its own in railroad rolling stock and shipbuilding, and itUL is at u a dadan Otu in thle fabri.LLcation. of Pu.ri mversZ, eetia and heavy capital equipment and the like. 39. While improvement of quality and lowering of prices of steel would aid the industry. its orincinal needs appear to be better production techniques and facilities. 4O. The industry is already receiving excellert technical advice bot-. as to production and equipment, and it is benefiting from special depreciation allowances and remission of custom duties. 41. Armonium Sulfate. The ammonium sulfate industry suppLies material vital to the domestic food supply and could significantly increase it - uy n" -~ ~ei echa-ge eanig if it wer able to reduce present high costs and employ fully existing unused pro- 42. The industry was reluctant to supoly data from which a judgment of its modernization program could be formed but it appears that carrying out the coal modernization program and increasing supplies of electric poi,er would be of more assistance to the industry than direct investment in additional plant facilities. Recomiendations for Bank Action 43. In June 1953 it was indicated to the Japanese that if all went :ll the Bank m --+ hA 113ng dring the next few veas to consider loans up to a limit of around 100 million. Last Fall it signed loans for $40 million. Japanese officials have informallv /indicated 6. indicated their Government's desire for an additional credit of $6o million. The Japanese Government would clearly prefer a local currency loan for its hydro-electric projects. Having been given to understand that the Bank is not usposed to make Loans of this type, Japan has infurmally suggested that the Bank inform it of its ideas as to investment priorities in order to frame other specific proposals*. hh. It is unlikely that the japanese have projects outside the hydro-electric field ready for immediate presentation though no very extended period would probably be required for preparation of the thermal generation project of Tokyo Electric Company or for a construction equipment project for the government-owned Ele,ric Power Development Company. The Bank would presumably wish to despatc-, technical experts to study any particular projects vroposed. No immediate decision on a loan project is therefore now involved. 45~ .. At best, considUeraletim rl" L±L be required fo l remedia financial measures to be taken and to nroduce their effects. Zith the bank credit, despite the Finance inister's recognition of the vital importance of control, considerable further expansion of Bank of Japan credits to commercial banks has occurred. 46. In the light of this situation and of its report, the Mission makes these recommendations: 47. A. Financial Policy - The Bank should continue to emphasize the advantages particularly as to commercial bank credit, and might well indicate that the hnefit of firther lhans can only be fully realized if inflation is successfully controlled, 48. B. Agriculture - The Bank should declare its willingness to despatch an agricultural assistance mission to Japan at an early date. The basic purpose of the mission should thought as to the necessity and means of increasing agricultural and live tnck ontnut and fc.r securing an adequate allocation of resources for an effective program. It should. as an incident to this. prepare recomendations to the 3ank concerning specific projects wbich might be suitable for Bank financing. h9. C. Steel and Coal - The Bank should advise Japan that - 1. it believes very high priority should be attached in the in,striLaOl Ol field toJ -,dn-J & zin steel wan ca, partiularl 7. cokine coal. oroduction: ii. it is willing subject to its being satisfied on the financial policy side, to begin study on a technical basis of loan projects proposed for these industries; iii. determination of possible amounts for financing in this field would depend not only upon te.Thnical findings of needs in the field but upon possibly competing requiremen-.s of agriculture. cAn r. Pnowr .. The Unk nhniult inicat.e to the Jannn-s thnt - i. the Bank w-- -efer to diversify its investment in Japan and there: -.* d rather not undertake a further major canitmtit in tt,. power field until it has fully appraised opp imities for useful investment in other top priority indusity; ii. in any case, a local currency loan would not seem iJ- _ +ho njnibe ,,,4h+._ 'h%wuar , '.rl1 to stucz.iiyx nnwan loan of a noderate anount for the inport of heavy construction equipment to exoedite bvdro-electric construction; iv. assuming technical justification, it might also lend limited support to the development of subterranean steam if there were requirements for foreign exchange in this field. 51. E. Machine Industry - The Bank should inform the Japanese --atile it recognizes the importance of the machinery of its productive facilities and is willing to study any urthAr rinta which may hA snhiitted. it wnld h rluctant to become involved in the administrative difficulty attendant upon such a prozram if other desirable proJects could be found. 52. F. AnmoiAum Sulfate - Nc^hing nec' be said in regard to the ammonium sulfate indust Y excent. n the unlikely event of the Japanes,7 authorities raising. Use question. In Tnat case, a negati-vC: answer should be given. i7.. POT.TTTrAT. STTATTON 53. Since the general elections in the Spring of 1953, no Japanese party has.hdd a majority of the 466 seats in .the lower house of the Japanese Diet. However, the Liberal Party, headed by Premisr Yoshida (who has held. this post for five years) has had by far the strongest represent- ation (199 seats)., With the tacit acquiescence of the Hatoyama Liberals, and the Progressive Party, splinter parties of the right, and a group or independents, the Liberals have bleen able to govern despite active opposition AT-UMi L. f dZi.gHU IiUIIU %2ZIIUUI.UUe 8. SNPgotiations durine November and December. 19ql. resulted in a reconciliation of Mr. Hatoyama with the Premier and the return of 22 of the so-called Hatoyama Liberals to the Libr ral Party fold. This raised the Liberal Party total to 221, 12 votes short of an absolute majority in the Diet. During this same period some sort of very informal modus vivendi, the nature of which has never been publicly revealed, was apparently worked out with Mr. Shigemitsu of the Progressive Paity. As a result of these moves, marked progress towards the restoration of political stability was achieved, and at the year's end, the Premier found himself with a consider- auly strengteneu nd,U. Toward the end of January, Ocl +%hia aliutary irend +twarA political stability was checked by two sensational political scandals, one involving the bankruptcy of a mutual finance comoany. the Hozen Keizaikai, the other the allocation of governmental shipbuilding subsidies. In both cases charges of official corruption, involving two cabinet ministers, a number of members of the Diet and leaders of the Liberal Progressive and Right Socialist Parties, have been aired on the floor of the Diet and elsewhere. Two Liberal Fait.y Diet members have been arrested. The public prosecutor is conducting investigations into both cLses. None of the charges has been proved or disproved at this stage. Wes.L e d eve"opm.ents, PH ~U ~LL~~~ not only weathered the storm, but secured the passage of an 'austerity' budge+ bv a handsome ani. A* L-ONG TERMI Cf* J-pan's !og te,rm c--j, -j+jin-a e~ 4 cs~da length in a report 'JAPAN'S ECOONIC SITUATION AND FROSPECTS' dated June 18. 1953 (A.S.10). The '-ission's investigations disclosed nothing at variance with the conclusion of that report that over the period of the next five years Japan could make significant progress toward a self- sustaining economy. 5. The Mission did find that developments during the past year have further underlined the necessity of accomplishing at an early date many re-adjustments to maximise progress toward this goal. These include halting inflation by appropriate budgetary, fiscal and monetary measures, reflecting lowered costs in lowezs" selling prices, concentrating upon expnrt. in nrofaronne tn rnmntitn irrket.q- t.k1rn vicyrrotin measures to increase crop and livestock production and substitution in domestic markets of articles which can be oroduced from indiaenous resources for those produced from imported materials. B. RECE1T DEVELO?M11TS 59. Outstanding features of the Japanese economy durina the past year have been (a) a very high level of activity including all time highs in peacetime industrial production, in wages, consumption and national inco:.. ; (b) a considerable degree of inflation, accompanied by a heavy increase in imports, which has resulted in a marked deterioration of the balance of payments, but only a relatively minor increase in the price level; (c) maintenance of the overall level of exports in the face of many severely adverse factors; (d) significant progress toward the re-equipment of industry. Production and National Income - 60. During 1953 Japanese industrial production continued to increase sharply, reaching in September 1953 a point 51.1 Per cent higher than prewar and 13.4 per cent above the level in the corresponding month of the previous year. This increase was registered in the face of a rir. of only 8 per cent in the volume of exports and reflected growing domestic demand, 61. Agricultural production, which had reached a new high in 1952, fell sharply owing to an unuually wet and old mumer followed by t devastating series of typhoons and floods in the early fall. The -ice crop fell 1. W. belo -e1~, ~ f~1OO9,', 4~ in food prices and throwing heavy disaster relief burdens upon the national budret. Haduced arons comnOKlled an increa.t of aboutt ATT million in food imports in the fiscal year 1953 and will result in furthf.er extraordinary imports during the coming year. 62. It is estimated that for the fiscal year 1953, national income will reach :5,820 billion as cormpared with :5,282 o'.llion and Y-h,535 billion for the yearE 1952 an 1951 respectively. 63. The sharp upward trend of wages since 1951 continued and reached in the irtnine monts of 1953 an average of aout 32% above the 1951 level in money terms, and just under 20% . al terms. 64. Privat. investment, which during 1951 and !952 constituted something more than 12% of cross national product, apparently continued to increase during 1953. 65. By virtue of increases in United States troop exp,nditures which.have so far more than balanced reductions in .p:cial prcurement contracts, the total of special dollar payments by the Unite.j states maintained, despite the ending of Korean hostilities, its high level of around $810 minlion or avu ] ayU.01 T-oal receiplb. Ine volume 01 new procurement contracts decreased sharply in the fall of 1953, 1ut may be for the equtpment of expanding Japanese defence forces. Private Consumption - 66. Private consumption in Japan reached a new high in 1953. Not only was the available volume of goods and serices :arger, but the proportion of national product going into personal consumption, which had increased from 56.5% to 61.3% between 1951 and 1952, was augmented by such factors as continued reductions in lower bracket income taxes and 10. in excise taxes. Departme... store sales in the first seven months of the 1953 fiscal year were more than 23- higher in real terms than in the corresponding period in 1952, and the Economic Counsel Board estimate that per capita consumpt.4ion ranL JJQ ab.ve prwarL lvels in 1753 is probab1ly too low. Inflationary Pressures - 67. Public expenditure in excess of receipts, rapidly expanding bank credit and wage increases created a stm.ngly inflationary situation during 1953. Uith the adoption of a supplementary budget in December, 1952, public financial policy depArted from the surplus budgets of 1949 to 1952. This trend continued throughout most of 1953, both in the regular budget and in the adoption of supplemental budgets early in December 1953. A deficit an the order of Y150 billion ("o416 million) is anticipated for the year. The Z86 billion received from the public as a result of sales of yen outgo, however, and if plans to withdraw designated deposits of FA8o hillion frcm commercial banks are also carried orut nch exess will be virtually eliminated. However, the projection of excess government expenditures appears to have created considerable public apprehension as to the possibility of serious future inflation and some popular doubt as to the government's ability to reverse the inflationary trend. 68. The continued expansion of bank credit has been a far more serious inflationary factor. During the twelve months ended October 31, 1953, this amounted to Y562.6 billion or 29%. The Bank of Japan was itself responsible for about one fifth of this. expansion were generally ineffective. Voluntary restrictions by commercial banks of eoinment lo;n to high nriority industries reduced loans directly for this purpose, but were lar;ely nullified by lack of adequate restraint upon working capital loans. The Bank of Japan's effort in the fall of 1953 to check the increase of its loans and discounts by modifying upward the pattern of its multiple re-discount rates accomplished little. 70. Tn the face of the mounting consumption, public expenditures and bank credit, prices maintained a large measure of stability. Between November 1952 and November 1953, the Tokyo wholesale price index rose from 402 to 423, an increase u not quite five per cent. Increasing domestic production contributed to this stability, bu :...: heavy prices. Foreign Trade ad Balance of Payments - 71. Imports - During 1953 Japan's imports, at an annual rate of about $2.3 billion, attained record postwar levels. The increases w.ere registered mainly in the sterling and open account areas. Imports were about 20% higher in value and 40% higher in volume during this period than during that the running of an import surplus was to some extent a deliberate co,wnter-ifionary messure 11. 72. Exports - Japar.'s export trade during 1953 suffered from a number of strongly adverse factors. With the slackening of world demand for steel and other metals, a buyer's market developed in these commodities and Japan's foreign sales of metal products declined by about 45'p to around 200 million in 1953 fram $361 million in 19>4 During tne sane period, textile exports dropped by more than 8% from $478 million to around $Lb.1 power of a number of Japan's traditional customers and reacted against Japan' e-portso Sales diuring the first Q, months of the year to Pakdistan =A Singapore-Malaya, for exapple, dropped from .155 million in 1952 to $38 million in 1953. Continued discrimination against Japanese gcods was also a factor in certain areas. Japanese exports to British East Africa which had amounted to 123 million in 1951 and $13 million in 1952, fell to $0.5 million in the fi:st three quarters of 1953. 73. In addition to these factors beyond Japan's control, exports were handicapped by two internal factors. The first of these was the attractiveness of the comestic market as a result of inflationary conditions in Japan. Buoyant local demand and maintenance of a high not only unnecessary, but unattr-ctive for Japanese industrialists viorouslv to seek foreign markets even for their much reducer surnlis beyond domestic market demand. A second important factor was the relative inefficiency of most of Japanese production as a result of out- moded production equipment and techniques and, as to certain industriess higher raw material costs than those of foreign competitors. 7. In the face of these conditions, Japanese exports to the sterling area during calendar 1953 fell 41 to a total of ;3l million (from ;578 million in 1952). Increases of 28% in dollar exports (from 5379 million in 19'2 to '89 million in 19") and of 34% in the open account area (from 3295 to $395 million) were not sufficient to com- pnae+f -- +he seing ----. decline. Al+hough +o+al A.port inreaed about 8% in volume they fell slightly less than 2% in value. 75. While disappointing from the immediate point of view, in the light of all the circumstances, this record is not too discouraging for the long ten. Some of the factors which restricted exports in 1953 are within Japanese control. Others are temporary. Still others are being significantly mitigated. Assuming reasonable economic stability over- seas, if proper internal measures are taken,Japan's hopes of considerably increased exports in future years appear defensible. '74. - fJPA-;tA A C 4+t,L The net effect of the larA inneaSA in imnorts antd smll decline in the value of exports has been to produce a balance of pay- ments deficit despite special procurement receipts of around $810 million. For the fiscal year 1953 the deficit may exceed o300 million of which over $135 million will be attributable to extraordinary food imports. Gold and foreign exchange holdings fell to ,. 1017 million at the end of December 1953, a decline of about $190 million from the September 1952 p ex.k. 12. 77. The most serious deterioration occurred in regard to sterling, as V.A lLV1 U U 4-4 44. U .'-- ...~AL G .'lof' ---~ %'-I4U et'IneJ W.L..J.L,I -- the same period a deficit of about $98 million developed in the open account aea. Thanel f4 +., were only nar+l rnvavPA hFr n *,urpl.s o -0 m4114i with the dollar area. resulting in a net deficit for the calendar year of A1Qi millinn. rurthpr deficitn tntalline in exesa of 480 million are anticipated for the first three months of 1954. 78. U.K. Agreement - On January 30, 1954 a new trade and payments agreement was signed between the United Kingdan on behalf of itself and its colonies and Japan. This removes certain discriminations against Japanese goods and pledges both sides to use their best efforts to balance Japan-sterling area trade at around -f-u millonp a figure close to the level of Japan's 1953 sterling area imports. While this agreement is not binding upon tbnlw-h aMUMA 9Sm6ep A-4u steArling o area S n VAntries, 4., -413 presumably be not without influence upon.their policy. The improvement of .apants hanna of payments whinh would rnl+. from vnnhino the agreed targets would nearly equal the calendar 1953 deficit. However, while there are already evidences of a stimulation of exports to Hong Kong, it remains to be demonstrated whether Japanese industry can meet competition in sterling markets on a significantly wider scale before inflation is curbed and industry modernized. 79. Reparations Settlements - Japanese trade withoutheast Asia continued to be restricted by the absence of final reparations settlements. Negotiations were under- and the Philippines. As might have been expected, widely divergent views wprA disnlnnwi nnd no nver-all rti.tt1PTnnt iwith qnv nountrv wa AecomnlishAd. Certain interim arrangements have been arrived at with Indonesia, the Philippines and Indo-China, in regard to the salvage on reparation account of sunken vessels in the waters of these countries, which the Japanxies hope will be considered an earnest of their desire to arrive at early settlements. ldustrial Lodernization - 8v. variug the past year important sectors Of paneseinustry have made considerable strides in modernizing production equipment and hn ak4qne ss h +a^+? f nm.t at +anhn4-l ate4d+nnfo ann+ad wi4nth foreign concerns increased during the year by 130 to a total of 344. Under mqnv of these contracta Jananese industry not only received instruction in the most modern production techniques, but secured advice as to plant modernization and re-equipment. Investments for the latter purpose, particularly in basic industries such as oteel, continued at high levels and large imports of foreign equipment occurred over the year. in particular, the steel industry made excellent progress toward com- pletion of its first modernization program and is now beginning to bring into operation facilities or producing a variety of finiUhed and .er- finished steel products at substantially lower cost. V. PROSPECTIVE JAPANESE ECONOMIC POLICY 81. The Mission discussed with various Japanese officials and leaders, including the Ministers of Finance, Foreign Affairs and International Trade a-d Industry, and with the Governor of the Bank of Japan, various aspects of Japan's economic problems and the kind of action which the Japanese Government proposed to take concerning them. .Dis- cussions were concentrated particularly upon the problem of inflation and its relation to public finance and credit control, dir,ction of invest- ment and encouragement of savings, export promotion ax.d increase of agricultural production. Tne UecirauniLITy of securirg popular support for governmental measures in these fields was noted. Counter-Inflationary Measures - 82. The Mission found wide agreement among bankers, industrial- ists and government leaders that inflationary pressures were interfering seriously with Japan's efforts to achieve a self-sustaining economy. It seemed to be generally accepted that the short term effect on the balance of payments was strongly unfavorable through raising the deuand for imports, increasing the relative attractiveness of the home market and raising costs of production of export goods. For the longer term it was considered that increased competition for scarce investment funds needed for m0dLulzwattlion Of e.xport~ .inuus WW Wd& equally UYU1-Wic-coL~t of public finance was of primary importance. The Ministers of Finance and International Trade and Indiitrv. the Governor of the Bank of Jnnan and the Director of the Policy Board of the Liberal Party, a close adviser to the Premier, all stated categorically that it was the intention of the government to present and adhere to a reduced and balanced budget for fiscal 1954. They noted that in view of the necessity of making provision for increased defence expenditures and possibly reparations, this would involve a reduction in current government expenditures, in- cluding government investments, and would precluAe the over-all reduction in tax revenues recently proposed by a Diet committee on -&-- rcve- suue lr.& was 4.a e uJ- aw view An. -A. uuu ouvuAu v. 3 VCLJL I V.L J.L1 L V V11 LL' UW%;.LGL1ZU V.iew 1jhXU WdIC UUU6eU Vhuld. be~ balanced without resort to borrowings or to accumulated reserves, and that no reqnrt PhniA he had r.n sunplmntal budgets. 8. Since the return of the Mission from Japan the government has prepared and submitted to the Diet an "austerity" budget for 1954 mall4ma ~ ~ ~ O fe van4nsen hrr+ 2000 l,4114on. T"o woul1-h 1 'level of expenditure 28 billion (2.7%) below the combined general and sup- nlpm.ntal budPRts of 190- 85. On the face of it. balance is achieved only by drawing 40 billion of excess revenues of prior years. However, it seems fair to note that during the last two years spending authority has not been fully exercised. 8;It Formulation of the budget involved a Cabinet crisis resulting in the resignation of three Ministers. This did not sway the Premier ..Um IIs appaitulu uU:Ei1L.LJL1u UU pursue a more conservative Iu11anCal policy. The submission of the budget to the Diet was accompanied by a Speechfrom * Th.-One and ad.Lresses I- th Pr- -d.~ lii" a emphasizing in the strongest terms the necessity for oursuit of a national onlinv of iiinflation and austeritv. The Finance kinister further declared to the Diet and has since reiterated to that body, the govern- ment's det'ermination that no supplemental budget will be requested later in the year. 87. The "austerityn budget was passed by the Lofwer House of the Diet on 4th Earch 1954 by a vote of 303 to 13. Credit Control - 88. It has been noted above that the principal inflationary factor in the Japanese economy during 1953 was the 29% expansion of bank credit. The Mission found general agreement in Japanese financIal and governmental circles that bank credit had reached an undesirable level. Ihere as. no.&alw m4mslne61b4hv mLV+n .hL= +..-Vo aAto todal wi+h the problem and widespread concern that any sharp restriction might bring aout a sevre re in- %irAt+.- r%f Pinant_ nffiMq1.q qnd thA Gnvprnor of the Bank of Japan however asserted their strong conviction that credit expansion must be brought to a halt and some gradual reduction achieved. 39. The Bank of Japan in Octo3er had taken a tentative step in this direction by adjusting the pattern of applicability of its graduated rediscount rates so as to produce an increase in the interest paid by its borrowers. The Governor of the Bank of Japan described to the Mission additional measures which would be taken to restrain credit. 15. 90. Since the beginning of 195i4 the Bank of Japan has raised the -AIVUX Q A .V W4 auc tn *FJ UJ V V GIMmtIJ,. UIJ,l. LUw VVI W C'Qj LJ S C U IU tA=O t, Ar.c9 other measures to tighten up import credits. It has also announced that t.hp fritiA nn f horrlrinrw nn whi rh t.hr, lanpc+. nf t.hi- -ori-i cnni+ rates applies will be reduced from 40% to 30%. These measuris have, however. failed to produce a contraction of Bank of Japan 1hans. On the contrary, after declining in December their total has mounted to new high levels. ( 386 billion as of February 28, as against I 299 at the end of December, 1953.) 91. It is now reported that the policy board of the Bank of Japan has decided as of March 1 to raise interest rates ftrther. The rate on camercial bills is to be advanced fran 7.66 to 8.4%, on stamped bills from 8.4% to 9.1%, and on ordinary bills from 9.1% to 9.5. Direction of Credit 92. Inadequate savings and continuing scarcity of investment capital continued to be a feature of the Japanese economy during 1953. Large requirements for modernization of Japanese industrial equipment therefore put a serious strain on the economy. The Mission found sane -ecognition that this called for very careful direction of investment funds toward the highest priority requirements, but considerable un- certainty as to the creation of effective machinery to accomplish this. 93. Substantial amounts of public funds have been going into low priority investments both through designated deposits in commercial governments. 94. While the Commercial Banks Voluntary Credit Control Committee had not been entirely ineffective in channelling the relatively small amount of direct camiercial bank equipment loans into high priority industry and while the Japan Development Bank has recently been acting to direct a portion of government investment funds toward the most pressing needs, no overall priority system for controlling scarce investment funds has been created or is in contemplation. The ission encountered, even in those government circles iwnich strongly believe in the direction of investment-to high priority needs, a belief that creation connection with discussion of the problem of restraining er1cess cam- marnial hank wnrkinsy arnnitnl l=nq th- M i nistr nf .Finnm -A ur that he was planning to take an active part in the deliberations of the Voluntary Credit Control Committee with a view to making its action more effective both in directing and limiting this type of credit. It should also be noted that since the 11ission's return the Liberal Party has adopted a declaration of policy against the continued outpouring of national funds for low priority local investment projects. The national government's natural desire to control the expenditure or its own funds may work toward reducing at least this type of dissipation of scarce .LnrstuenI . UILUUO Enlistment of Public Support for Self-Sufficiency Drive 95. It is of interest to obsev thatPremier Yoshida has since the firrt of the year undertaken in addresses both to the Diet and to popular gatherings outside of To-kyo, to stress the need for nationwide support of a drive for more exports and for financial stability even at the cost of a temporarily reduced standard of living, and that the same ideas appear in the recent Speech from the Throne. 17. TTT A f TT TTTr 96, In the curse of its ctaly&te of tho prcblen facing tho Japancao econcy and the steps :.niCh on te b tda A. sove them+ , the 1iUssicn was deEply Impressed with the necessity fcr vigcrous action Tnereasing Tmnmrt Rannirmtznt. - 97. In recent years Japan has been forced to purchase abroad even when crop yields were good, about twenty per cent of her food supplies, and to spend over 6500 million of foreign exchange annually for this purpose. Owing to last year's partial crop failure her expenditure ior this purpose for the fiscal year 1953 will rise to around ,o5u million and there must also be extraordinary purchar3s abroad in 1954. Within a few years, if production is not augmented, ner rapiuy growiug population w-3L requLc - nporIs 0J aroWu uU million. In addition, Japanese imports of wool, hides and beef tallow are a major foreign -ethan-e 1inI414+wchk t 102 .A to !11 million. The urgency of doing everything possible to increase domestic crop and livestock production could hardly be more obvious. Agriculture Improvement Program- 98. As noted in AS-10 -sJapan: Economic Situation and Pro- spects,tJune 18, 1953, the Japanese Ministry of Agriculture has formulated a five-year agricultural program designed to bring about an increase in the production of rice and wheat of 1.8 million metric tons brown rice equivalent. Success of such a program would reduce .UIuJJ.Lk 1 qu au vy tvUW cJ,U%%J tuus krouguly .,pi0 miu.Ln.L av current rice prices) annually. The program includes irrigation and Ayninnce land 4mnvemn+ nnA reclamafA^n nnioete and 4m1-oement in cultivation practices, all at a total estimated cost of Y530 billion ($3147 million) of which the government would bear around 350 billion yen ($97 million). Official government projections of the balance of payments assume that this program will be eighty per cent executed and successful. 99. I-)hile the hission was in Japan a number of irrigation and land reclamation projects constituting parts of this program were sub- mitteL to it. .Lascussion indicated that these projects were still in a highly tentative stage. On only one of them, the Aichi project, a ~S~S~%A J~ 1~L1I,~ O1J.Ua1.LIJI, OL; DUJJkJ.Ly cUIU UVlWWI- F4_JVI)J .3 detailed engineering work under way. 100. Same Ministry of Finance officials appeared sceptical of the merit of the hinistry of A2riculture's program and indicated the inter- tion, since carried out in the 1954 budget, of sharply cutting requested appropriations for the program's execution. n . 101. In its travels the Vission observed instances of unused land areas iihich appeared suitable for pasturage. Vnhile the -inistrv of Agriculture has a progrin for aiding the raising of livestock, it was the Mission's impression that further attention and resources could -ell be devoted to it. 102. The ission discussed the agricultural situation with the highly qualified Agricultural Attache of the United States Embassy who has spent a number of years in Japan at various times since 1945. He fully agreed with the Japanese Ministry of Agriculture that more co1A U~r 4m-.,r -41-l4-- 103. On the strenzth of these observations and discussions. the Hission undertook to sound out Japanese officials as to whether, if the Bank were willing to consider such a proposal, Japan would desire to have the benefit of a visit of a team of agricultural experts. The suggestion was warmly received by Tinistry of Agriculture officials and since the Hission's return advice has been received of the strong and continuing personal interest of the Hinister of Agriculture in such a team. development is given low priority in some Japanese official and financial circles. It also seemed that the "Inistry of Agricultur2. and perhaps the prefectural governments which w.l. have to concern themselves with many of the specific irrigation and reclamation projects, would be happy to have additional expert engineering and economic advice in formulating ard carrying out the program. 19. VII, INDUSTRIAL MODERNIZATION INTRODUCTION 106, The 1iission sought information concerning the current situation and future prospects of certain industries which seem of particular Importance in the achievement of a self-sustaining economy in Japan, In view of the limitations of time md personnel t>e Mission's fields for possible future investment which seemed on their face to be nnrftinlarly connnted with Tanants fnrpipn excharnge erning eai-nity. It focussed its attention upon the steel, coal, ammonium sulfate and machine manufacturing industries. It did not seek to pass u=on any specific projects. STEEL Significance 107. The basic importance to the entire economy of the Jananese steel inaustry needs no extended discussion. Its primary significance is of course as a supplier of a basic raw material whose costs and quality affect the price and quality of export goods gener- ally. Secondarily, it is itself a direct export industry which in 1952 accounted for 20.7%, add in 1953 of 11.5c of Japan export earnings. In 1953, the indutry produced 4.5 million tons of pig iron, 7.6 million tons of raw steel and 5.1 million tons of rolled iroducts. Total exports amounted to o43.ou> tons with a value of about ..140 million. 1V8* in. view of t,e t". tua bU1U6L11i. 1hich hae a Un place in world trade since tie 1930s, the ability of the Japanese steel industry tot funish~ Jne%rnnc quntjr4 ^f -7te- lnt m+~podcsa lower prices will be of crucial importance to Japan's ability to earn her own way. One goal of Japan must be to increase exports of iron and steel products and of-various types of capital goods, particularly in connection with the developmint of the econom.iies of South Eabt Asian countries. While Japanese industry enjoys the advantages over Eurooean and American suppliers of relative proximity to these markets and or lower wage scales, t ese are now often insufficient to counter- balance unfavorable factors such as inferior .roduction equipment and techLques, higher raw rnverlaU co5s ana In the case ol macine manu- facturi.g, the lower quality of material available for processing. Raw Material Supply 109. The Japanese steel industry contends with certain natural disadvantages. While it is not, as is sometimes loosely stated. entirely dependent upon imported iron ore and coal, it is true that the domestic deposits of both these materials are limited in quantity and that to secure optimum operating procedures, a certain amount of high- grade imported material must be blended with the dome.,tic product. While from a technical point of view only 15' of coking coal requirements needs to be imported, in recent years 30 to 45% of requirements have 12S 13Q 132 134 136 136 140 142 144 146 4 J A P A N i UTC- M IRON ORE DEPOSITS * 42 -- STEEL MILLS 40r- 38r 34O 2 ~ -I 128 130 132 134 138 138' 140 142 20. been supplied from abroad owing to the lower price of such coal. Mative iron re, iron and ---- r,ite qin.P.r npp+. nnlv gbnht <0 nf Anniinl ore requirements. 110. Since the end of World War II Japan has relied upon irou ore from the Philippines, Malaya, Goa, Hong Kong, India, U.S.A. and Canada. With the improvement of facilities and increase of output in the Philippines, Halaya, Goa and Hong Kong, it will no longer be necessary to rely on North American sources for any important part of the 5 million tons imported annually even if it does not become possible in the future to secure substantial amounts from the large Indian deposits and from mainland China. Installations in the Philippines, Hong Kong, -.a and assistance of Japanese capital. While the representatives of the mining C mmn nj a c ji ri+, oynH owe~t A 1= +4h - - i~r r%,n ~ w r~ r i imAI nc +_ n m n Ir -~fiv j . estimates, they anticipated that better mining and beneficiation equip- ment ill result in production of higher and more even erades of ore at lower costs. Ill. In any event, the Japanese industry now appears to be confident that the present ore cost differential in favor of its foreign competitors can be reducnd to bearable proportions. Since the Uhited States steel industry is installing large new capacity designed to operate on ore imported from Venezuela and Labrador and the Briiusn inaustry is using ore from points as distant as Conakry, ti,e Japanese view does not appear .U~ JL L Z) U.L%; 19 Thepp c oYn% k%- rling coal npo~n Q a r;f +.r~iniA-1,rn p-n.rom_ It would be technically possible for Japan to supply from domestic sources and to use as much as 855 of her annual coldn coal requirements for the steel industry of around 6 million tons. At present, however, only 55% comes from domestic mines. The high cost of domestic production is the basic difficulty here. 113. It appears unlikely that relaxation of restrictions on trade with mainland China would greatly change the situation. Production aUL U,LLU AUL.L4LU LLUZi VULLLL jUPPJ-LtU VJU(RLLL W.LULL '.V.L6uaJ4L cu t.L-Y LOW prices prior to 'World lr II is now being stepped up by 25% merely to meet increased local de=-'ds.. T'he M4sion wa ln,,nfr,or-e_ -i, T-~ne~ source, who had personal knowledge of the mines in pre-war days) that only a limited nortion of thp dAnnqoiie thrA are of +.n PrAde roking quality. The small shipments of mainland coal which have been received in Japan since the war have apparently been inferior. Prices, of course, have and presumably would continue to take into account the delivered cost in Japan from alternative sources of supply. 21. 114. Easily mineable deposits of a good grade of coking coal reportedly exist in the Collinsville area in Queensland, Australia. It has been estiAated that if proper handling facilities -5ere provided and regular shipping made available, coking coal in the required amounts, could be landed in Japan at a cost of $12 to $13 per ton. The availa- bility of good coking coal at this price would, if combined with the expected improvements in ore supplies, place the Japanese iron and steel industry on a basis not Loo different from that of continental Euop -e, fa as rw elftal conts are conered e 1f4ission was unable, however, to discover any enthusiasm in Japanese steel circles for a CollinsvillA APvP.lnmPnt. nrtly nrhan honanva of the qtprlinv shortage and partly perhaps because it seems unlikely that the political conditions necessary for the establishment of this trade are likely to be established in the near future. It would appear therefore that any solution to the coal problem of the Japanese steel industry will have to be found in a reduction in domestic cokiag coal mining costs. Modernization Plans 115. The Japanese steel industry is carrying forward to early vrMD .j AnT 0 V'al ..a_1-concived -rotua fo-yr mndnAn,,4 ,,+ ,-f4 about tro th1-ird's of its facilities which should result in substantial reductions in cost. In order to nut the entire industry on a lower cost basis and thus establish conditions for a drastic lowering of prices without forcing necessary marginal producers out of business, a second supplemental modernization program seems necessary. The execution of such a program, coupled with the prompt car2ying forward oi measures to reduce the cost of coking coal, would offer a real prospect that the Japanese industry would be put :nto a position to export at competitive delivered prices and to supply domeFsc manufacturers with good quality material at lower prices. 116. The second modernization program is still in a formative stave. Indications are that in certain resnects the oresent uroposals call for excessive investment. A thorough technical and economic review of the industry would be an e!!sential preliminary to any final decision on a program. 117. The cost of completing the modernization program is undeniably substantial. It does, however, seem to be a charge whict cannot be avoided if an expansion of exports is to play any important part in the achievement of a self-sustaining economy in Japan. 22. .L.Ue.LLi~ h paste 1i1va LACUe.4Lez1U.y failed to reflect major c-qt reducti,)nss Recent steel price Cuts suc-pz~t. thrit some u'inav%fe%. t.r%~ rP-%--(A rif d rice policies which have prevailed in the past may be developing. Modernization of the steel industry is desirable not on1y to enable Japanese eteel products to compete in foreign markts, but to increase the competitiveness abroad of Japanese manufactured products made from steel* In establishing the pattern of any modernization loan, the Bank should therefore consider what might be done to encoLrage the passing on to imp;:ant domestic steel users of part of the savings in steel proddcAton costs which the loan might make possible. fln(A T 119. Coal in Janan is of al.ost exclusively industrial significance. Household use accounts for but 'I of total consumption. In 1950 about 50% of the energy used in Japan was p--)duced by coal and desp..te increasing use of heavy fuel oil md further hydro-electric development, it seems certain that this material will continue to be a principal source of energy in Japan for many -aars to come. Coal is of corrse a major element of cost in the production of steel, the generail -n 01 eLecurc pwer ana Ue operatWIV 0U the r ways and in the metallurgical, gas, chemical, cement and ceramics industries. Current situation 120. Except for high grade heavy coking coal as to which, as noted, Japan is partially deDendent upon imports, the country is self-sufficient in coal supplies, and indeed has s,-e of the major deposits in the Far East. Production in the calendar year 1952 amounted to over 43 million tons, of which about 151 was coking coal. Proved reserves amount to 5 billion tons, with another 2.7 billion tons in semi-proved reserves and 0.9 billion tons of further probable reserves, Of the total reserves about one third is of coking coal. 121. The best grades of coal are found in the northern i n zl . kkdano whose anniin1 nitnilt J. hent 0% of the itfnt. Alnnr whose reserves are about 37op and in Kyushu, the southern island, whose output constitutes about 53% of the total and whose reserves total about 51%. Coal of lower grades is found in eastern and western Honshu. Calorific values range from 8000 to 4000 with 60% of output falling in the 6000-8000 bracket. 122, Japanese coal prices have risen far more than the overall price evel and in terms of pre-war relationships are now 30% above the general indexe They are also very much higher than coal prices in other major ..roducir areas. J A PA N REFERENTIAL CHART, MAJOR COAL FIELDS 4 LEGEND 4 g COAL FIELD TEMPOKU FIELD 0L IGNr.T E FiEi., RUMOE FIELD 4[ S H IK A R I F E LI RESERVES HOKKAIDO 1I1 LIGNITEjIK MI'u 'K I L EANTHRACITE S o 4 4,3 2uIrf nnf S ITUMINOUS / TOTAL: 14,833,317000Tons HONSHU CH 91KUHO FIELD OMNE FIELD SÅGA FIlEL ÖsI952/en rar -~ 3i