JAPANESE IMPORTS: SLUGGISH RESPONSE TO YEN APPRECIATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP93T00643R000200780001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: December 8, 2011
• Sequence Number: 1
• Publication Date: February 10, 1987
• Content Type: MEMO

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Central Intelligence Agency
ezAl.~A_ _ . _..-I
DIRECTORATE OF INTELLIGENCE
10 February 1987
Japanese Imports: Sluggish Response to Yen Appreciation
Summary
The 60-percent appreciation of the yen relative to the US dollar
over the past two years is generating only a modest increase in Japanese
imports. We believe that a more significant increase requires an upturn in
Japan's economic growth. Although Japan's complex distribution system
and the role of oil and gold imports complicate analysis of the import
picture, a comparison of the last period of yen appreciation in 1977-78
with the present one buttresses this judgment. Even if the economy
rebounds later this year--and without further yen appreciation we believe
it will--the outlook for US exporters is not bright. Rather, the changing
economic relationship between Japan and other East Asian countries will
probably make them the primary beneficiaries of any increase in Japanese
imports.
This memorandum was prepared by Office of East Asian Analysis.
Information available as of 10 February 1987 was used in its preparation. Comments
and queries are welcome and may be directed to the Chief, Japan Branch, Northeast
Asia Division, OEA,
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The Import Response to Date
Although total Japanese imports fell 2.3 percent--or $2 billion--last year, we
believe this is not an accurate indicator of the response of imports to the yen
appreciation. On the one hand, we estimate that Japanese oil imports plummeted by
$17 billion last year because of falling prices--suggesting that the value of total imports
understates the response of imports to the yen appreciation. On the other hand, the
import total reflects an $8 billion purchase of gold--$6 billion higher than usual--that
was used to mint coins to commemorate the 60th anniversary of the emperor's reign.
Without these items, the dollar value of imports increased 13 percent during the first 10
months of 1986--a slightly brisker pace than the concurrent rise in import volume (see
figures 1 and 2).
In addition, analyzing only the total value of imports masks the variation in the
response among different products. In contrast to the lackluster increase in industrial
raw materials, consumer imports--such as fish, fruit, leather goods, knitted goods, and
furniture--rose sharply. Moreover, according to a variety of press reports, Japanese
consumers are responding to the advantages of a strong yen by purchasing imports by
mail order from overseas manufacturers, a small but promising trend.
The strong showing of consumer products probably accounts for most of the
huge increase in imports from the Asian NICs--particularly Hong Kong, Taiwan, and
South Korea--as well as from the European Community. During the first 10 months of
1986, imports from these countries increased an average of 45 percent. Besides being
the source of inexpensive consumer products, the NICs have benefited because their
currencies are tied to the US dollar and thus have weakened against the yen. In
contrast, nonfuel, nongold Japanese imports from the United States--long concentrated
in raw materials and capital goods--were virtually unchanged during the first 10 months
The Japanese Distribution System: Flies in the Ointment
Imports have not been more responsive to the yen appreciation partially because
the stronger yen has not automatically translated into lower retail prices for foreign
goods. Prices paid by Japanese importers have fallen by 25 percent over the last year,
but a recent study by the Economic Planning Agency concluded that only half of the
price decline had been passed to consumers by the end of 1986 (see figure 3). Our
survey of nine consumer items shows that drops at the retail level ranged from only
zero to 16 percent (see table 1), and other surveys, including two by the Japanese
Government, show a similar reluctance by wholesalers to pass on exchange rate -
related savings.
We believe that much of the blame for the slowness of retail prices to adjust to
the drop in import prices rests with Japan's highly inefficient distribution system (see
table 2). Although there are differences among individual products, the Japanese
distribution system for imported consumer goods is essentially a five-tiered
arrangement: a product must pass through an importer, major distributor, regional
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distributor, wholesaler, and retailer before it reaches the customer. This suggests that
several decisions to reduce prices must be made before consumers see the positive
effects of the high yen. In addition, because each level of the distribution chain--which
ordinarily marks up foreign products by 2 to 5 percent--probably saw the yen
appreciation as an opportunity to raise profits, the final price cut to the consumer is
much less than the original appreciation.
Sluggish Growth as the Main Culprit
Despite the effects of the distribution system, we believe that slow growth in
Japan is primarily responsible for holding down the increase in imports--a judgment
that we think is made clear by comparing the current yen appreciation with the last one
in 1977-78.* Japanese Government statistics indicate that import volume increased
approximately the same amount in the two periods. But this result is surprising because
the 1985-86 appreciation was much larger than the 1977-78 appreciation; the yen has
appreciated 60 percent since mid-1985, compared with only a 40-percent appreciation
during the 1977-78.1
The contrast is even more striking because of structural changes in the Japanese
economy that should have made import demand more responsive to
appreciation-induced changes in prices. Among Japanese imports, the share accounted
for by raw materials and fuels--commodities that are basically insensitive to changes in
price--has declined, while the share of intermediate goods--items that are more 'price
sensitive"--has increased. A 1984 Bank of Japan study also asserted that manufactured
imports have become increasingly responsive to changes in price in recent years. We
have not been able to verify the BOJ's claim, but it is plausible in light of the numerous
trade packages negotiated with other governments over the last several years that have
opened the Japanese market somewhat--a circumstance that in theory should lead to
additional price competition.
As such, we believe differences in economic growth between the two periods is
the only factor to explain the dissimilar response of imports to the two appreciations.
Real GNP growth during the recent appreciation is nearly 2.5 times slower than during
the 1977-78 round of yen strengthening, which in turn has held down imports. In our
judgment, this divergence in growth rates can be traced to two factors:
1 The length of the periods of yen appreciation is nearly identical--five
quarters--making a comparison relatively easy.
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? Tokyo's tight fiscal policy. Government spending is contributing virtually nothing
to Japan's growth this year. This contrasts with the stimulative fiscal policy
pursued by Prime Minister Fukuda's government during the 1977-78 appreciation.
? An export-dependent economy. Exports account for nearly 20 percent of Japan's
GNP, compared with only 14 percent in 1977. As a result, the recent yen
appreciation--by reducing exports--has had a stronger negative effect on
economic growth.
To gauge the impact of slow growth on imports, we ran several econometric
simulations using our model of the Japanese economy. We assumed that economic
growth during the recent appreciation followed the same pattern as in the 1977-78
period--when growth continued at 5 percent a year--rather than the sharp decline that
has occurred over the past several quarters. We raised GNP growth by alternately
increasing the components of domestic demand--government spending, private
consumption, government investment, or private investment. Our simulations show that
import volume would now be 5 to 10 percent higher--$6-14 billion in value--if growth
had not slowed, with the trade impact greatest when private investment provided the
stimulus.
Looking Ahead
The importance of growth suggests that nonfuel imports will increase further if
the economy rebounds later this year--a likely prospect unless the yen continues to
appreciate. We estimate that with an expanding economy total imports this year could
be $15-20 billion higher than in 1986, leading to a significant reduction in last year's
record $86 billion current account surplus. US exporters, however, probably will be able
to garner only about $2 billion of this increase. If we are correct in assuming that
economic growth will be led by consumer spending, then the NICs will continue to be
the major beneficiaries of Japan's increased imports. This suggests that Japan s overall
2
trade surplus will shrink much faster than the bilateral surplus with the United States.
Moreover, changes occurring in the economic relationship between Japan and
other East Asian countries will probably make it even more difficult for US
manufacturing firms to compete in the Japanese market. We expect that Japanese firms
will increasingly invest in production facilities in the Asian NICs as well as other East
Asian countries, including China. In contrast to Japanese production in the United
States--which is geared almost entirely to sales in the US market--production in other
East Asian countries will increasingly come back to Japan as imports for either sale in
the Japanese domestic market or assembly prior to export.
2 The dollar value of Japanese exports will probably decline slowly this year, with the
fall likely spread fairly evenly over Japan s export markets.
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Japan. Retail Prices of Selected Imports
(percent change August 1985-August 1986)
Shrimp
Chocolate
Biscuits
Mutton
Whiskey
Cheese
Jam
Fountain Pens
Watches
Price Change
-15.7
-14.1
-12.5
-6.7
-6.0
-5.9
-4.0
0
0
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Figure 1
Japan: Imports
Billion US Dollars
960
Total
s ~r,T_,fUe
Non--geld
40
1980 1981 1982 1983 1984 1985 1986*
*Est?ated
1 -1
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Figure 2
Japan: Import Vo ume*
L
25-
0
L
C
=
20-
L)
0
>
C
N
m
d
m
a-
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
*Includes aold and oil. 1986
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Figure 3
Japan.- Yen Import Frices*
June 1985=100
ery
;:krr~r~t
and
M sc consumer
goods
Food
June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct
85 86
*Yen prices paid by
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SUBJECT: Japanese Imports: Sluggish Response to Yen Appreciation
1 - Joseph Massey, USTR
- Donald Gregg, Office of the Vice President
- Thomas Hubbard, Department of State
- William Brooks, Department of State
- Chuck Kartman, Department of State
- Marshall Casse, Department of State
- Robert Reis, Department of State
- Nicholas Riegg, Department of State
- Allen Wallis, Department of State
- James Kelly, Special Assistant to the President, NSC
- Cdr. (Ret.) James Auer, DOD/ISA/EAP
1 - Richard Woodworth, Department of Treasury
1 - Louis Pugliariesi, National Security Council
1 - Bruce Smart, Department of Commerce
1 - H.P. Goldfield, Department of Commerce
1 - Byron Jackson, Department of Commerce
1 - Allen Lenz, Department of Commerce
1 - Mel Searles, Department of Commerce
1 - Maureen Smith, Department of Commerce
1 - David Mulford, Department of Treasury
1 - Robert Cornell, Department of Treasury
1 - Doug Mulholland, Department of Treasury
1 - Robert Fauver, Department of Treasury
1 - Stephen Danzansky, National Security Council
1 - David Germany, Council of Economic Advisers
Central Intelligence Agency
1 - Director, DCI/DDCI Executive Staff
1 - NIO/EA
1 - NIO/Economics
1 - C/EA~
1 - OGI/IIC/PI
1 - OEA/NEA/Korea Branch
1 - OEA/NEA/STI Branch
1 - OEA/NEA Division
1 - OEA/China Division
1 - OEA/SEA Division
1 - D/OEA
1 - FBIS/NEAD
1 - DDI
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1-
1-
1 - Senior Review Panel
1 - PDB Staff
1 - C/PES
1 - CPAS/ILS
5 - CPAS/IMC,'CB
1 - Branch
1 - LDA
1 - NIC/AG
1 - DDO/EA Division
2 - Author
1 - Chrono
DDI/OEA/NEA/Japan
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