THE CURRENT JAPANESE ECONOMIC SLOWDOWN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020095-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: March 2, 2010
• Sequence Number: 95
• Publication Date: December 1, 1971
• Content Type: IM

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C M10,6P- , /J' 1 7I-o7c1 /
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Current Japanere Economic Slowdown
Confidential
ER IM 71-242
December 1971
copy N2 84
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
December 1971
INTELLIGENCE MEMORANDUM
The Current Japanese Economic Slowdown
Introduction
1. Japan is currently experiencing an economic
slowdown after five years of unparalleled growth.
Persisting for more than a year, the slowdown has
reduced economic growth from a whopping 12% average
to about half that rate. The slower growth of domestic
demand has reduced import growth markedly, while
producers have pushed exports to maintain output.
The resulting increased Japanese trade surplus with
the United States contributed greatly to the mush-
rooming US balance-of -payments deficit, which re-
sulted in suspension of the dollar's convertibility
and imposition of the import surcharge on 15 August
1971. Many Japanese now blame the US measures for
the failure of an expected summer economic recovery
to materialize. This memorandum examines the causes
of Japa..'s economic slowdown and assesses the eco-
nomic outlook for 1972.
Back rg ound
2. Japan's extraordinary economic progress
since 1955 has followed a pattern of rapid growth
in two- to five-year spurts interrupted by a slow-
down of a year or so. During the slowdowns the
growth rate usually fell to about half of the annual
average during the preceding boom period (see
Figure 1). The factor mainly responsible for the
downturns in 1958, 1962, and 1965 was mi_.netary re-
straint prompted by balance of payments difficulties.
In each case import growth exceeded export growth
during the boom period, and Japan recorded a large
balance-of-payments deficit. With only small foreign
Note: This memorandum was prepared by the Office of
Economic Research and coordinated within the Direc-
torate of Intelligence.
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exchange reserves available, Tokyo invoked restric-
tive monetary measures to cool down the economy.
Over the long run, however, exports have been grow-
ing more rapidly than imports, and by the late 1960s
this balance-of-payments constraint was no longer
operative.
Figure J. Real GNP Growth in .Japan, 1955 to 1971 (Percent Increase)
10 1971'
*Estimated
3. The 1966-70 economic boom was postwar Japan's
longest. With the transition to a balance-of-pay-
ments surplus and a high level of domestic and foreign
demand for Japanese products, investor confidence in
the country's economic future grew and investment
.rose to an extraordinarily high level. Gross invest-
ment increased an average of 22% annually during
1966-70 reaching 39% of gross national product during
that period's last three years. This ratio compares
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with about 25% for the European Community countries
as a group and 18% for the United States. Moreover,
relative to other industrial countries, especially
the United States, an unprecedentely large share of
Japanese investment was in plant and equipment. For
example, 1910 private Japanese plant and equipment
investment accounted for 21% of GNP compared with 10%
in the United States. The high and growing propor-
tion of GNP devoted to investment unquestionably was
a major factor in the economy's rapid growth.
4. There were two relatively distinct stages in
the economy's most recent boom. The first was 1966-68,
when expansion occurred partly as the result of
increased capacity utilization. This was possible
because of the slowdown the year before, v; hen produc-
tion fell short of capacity. By the end of 1968,
however, the slack was completely taken up, and in-
vestment in inventories and fixed capital began to
increase more rapidly than GNP in anticipation of a
sustained rapid growth in demand (see Figure 2).
Although large gains in output continued in 1969-70,
wage increases began to outpace productivity growth
and, as wholesale and export prices began to rise,
Tukyo became concerned about the economy overheating.
Consequently, as early as September 1969 the Bank of
Japan increased the discount rate, indicating a shift
to restrictive monetary policies.
Causes of Japan's Economic slowdown
5. Monetary restraint thus has been partly
responsible for slowing down economic growth. High
interest rates induced producers to restrict inven-
tory buildup and probably played a role in the re-
assessment of planned fixed investment. But at the
same time, more fundamental factors were affecting
economic expansion. The extremely high investment
rate had created some overcapacity by early 1970,
and inventories of finished goods relative to GNP
were becoming very high. Under these conditions the
growth rate of both inventories and fixed investment
tapered off. The government's policy of monetary
restraint probably cut back investment growth further
than desired. In any case, the rise in aggregate
demand slackened appreciably. Producers' inventories
grew as they tried to maintain full production, but
firms :goon were forced to cut back, compounding the
depressing %ffcect.
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Figure 2a. Growth Rates of Gross Fixed Investment,
Private Consumption, and Gross National Product
Quarterly 1965 to 1971
30%
-- Gross Fixed Investment Growth Rate
Private Consumption Growth Rate
GNP Growth Rate (Nominal)
I t I i 1 1
Figure 2b. Index of Capacity Uti!lzation in Manufacturing (1965=100)
L I I I I I I i l 1 I I I i 11 J V I I I
1905 66 67 66 69 70 1971
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6. Real GNP growth fell to about a 5% to 6%
annual rate in the last quarter of 1970 and during
most of 1971, compared with 12% annually during the
previous boom. Hardest hit were the basic indus-
tries -?- notably steel and aluminum -- and the capi-
tal goods producers. Steel outs At during the first
nine months of 1971, for example, was some 6% below
the same 1970 period.
7. The Japanese also have indicated that their
economic slump has been due to lower than expected
domestic demand for automobiles and television sets,
but there is little justification for these asser-
tions. Domestic autombile purchases have slowed
since 1970, but this was widely expected as the
market approached saturation. Moreover, the 80%
increase in automobile exports in the first nine
months of 1971, compared with the same period in
1970, largely offset the slowdown in domestic pur-
chases. Japanese consumers did reduce their tele-
vision purchases in late 1970, when the US Tariff
Commission revealed that Japanese color television
sets were being sold in the United States at much
lower prices than in Japan. But the drop in sales
was only temporary.
8. Altogether, private consumption demand has
fared quite well throughout the economic slowdown.
Underlying this trend was the fact that unemploy-
ment has remained at less than 1.5% of the work
force. Moreover, wages increased by some 15% in
nominal terms and 10% in real terms in 1971, or only
slightly below the rapid pace of recent years.
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10. Although confidence about future export
growth may have been adversely affected recently,
Japanese export performance has remained a bright
spot in the economic picture. Exports during the
first 11 months of 1971 were up some 25% over the
corresponding 1970 period. Recent export growth
thus has considerably exceeded the average 18% rate
of 1965-70. Because weakening domestic demand has
at the same time caused imports to stagnate, the
trade surplus will nearly reach an extraordinary $8
billion in 1971 -- the largest recorded by any coun-
try in the past two decades. Japan's surplus with
the United States alone probably will approximate
$3.3 billion.
Government Efforts to St_.mulate the Economy
11. Tokyo's efforts to stimulate the economy
were focused on monetary policy until recently. From
28 October 1970 to 28 July 1971 the Bank of japan cut
the discount rate in four steps from 6.25% to 5.25%,
a postwar low. These moves had little effect, how-
ever, because by the time the government acted, the
problem was no longer a shortage of funds but over-
capacity and reduced investor confidence.
12. By mid-summer 1971, Tokyo decided to pursue
an expansionary fiscal policy. The Diet passed the
government's supplementary budget bill in early
November. Unlike the legislation adopted during the
'1965 recession, which simply allowed borrowing to
offset lower-than-expected revenues, this bill calls
for increased expenditures and reduced income taxes.
Much of the increased spending is earmarked for
education, public welfare facilities, highways,
drainage systems, and housing. The bill will nearly
double the planned government deficit in fiscal
year (FY) 1971 (ending 31 March 1972). This deficit
is to be financed by selling $2.5 billion worth of
national bonds.
13. In early December the government was planning
to offset the deflationary impact of an assumed 15%
revaluation of the yen by increasing current and
capital outlays in FY 1972 by 18% and 30% respec-
tively, compared with FY 1971. Moreover, Tokyo
announced its intention to consult with the Bank of
Japan concerning another cut in the discount rate
to as low as 4.75%. Although the yen has now ben
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revalued in dollar terms by nearly 17%, Tokyo thus
far has indicated it does not intend to change its
budget plans.
Short-Term Prospects
14. Most Japanese forecasters have been predict-
ing that the economy will continue in the doldrums
through the first quarter of 1972 and rebound there-
after. For example, the respected Japanese Economic
Research Center (JERC) recently predicted annual rates
of real GNP growth of 2.7% in the first quarter and
5.7%, 7.7%, and 13.2% in the remaining three quarters,
for an overall 1972 gain of 7.4%. Since the JERC
assumed only a 14.3% revaluation in terms of the
dollar, it probably would project a somewhat slower
recovery now. The actual revaluation of nearly 17?
in terms of the dollar and 11% overall should slow
the growth of exports and affect the growth of GNP
by more than the JERC estimated.
15. Many Japanese economists believe that economic
growth will accelerate mainly because of rapidly
increasing housing investment and government capital
outlays. According to the JERC, expansion in housing
investment will rise from the 1971 rate of 12% to a
little more than the 21% rate of 1966-70. The greatest
spur, however, is expected to come from government
capital outlays. These expenditures are projected
to grow 32% in 1972, compared with the 15% average
of 1966-70. Inventory rebuilding is also slated
to boost investment, but spending on new plant and
equipment will grow very little because of over-
capacity. Both consumer and government consumption
are forecast to continue their steady upward pace.
16. All of the JERC's estimates, except that
for government investment, lie within what we con-
sider to be a reasonable range,* although several
are near the range's extreme (see the table). The
JERC's estimated 7.4% rise in real GNP, for example,
seems optimistic -- although possible. We judge
ThTheJERC employs an econometic model, while our
estimates are extrapolations of past trends, adjusted
to take into consideration the present economic sit-
uation and the economy ?s behavior during past recovery
cycles.
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that real GNP will increase between 5% and 8% in
1972, with 6-1/2% being the best estimate.
17. Even though the government is intent on in-
creasing public investment and opportunities abound,
it probably cannot boost such outlays by anything
near the 32% foreseen by the JERC. There is a con-
siderable leadtime between the planning and actual
construction phase of road, railroad, housing, and
school projects. Indeed, the government will have
difficulty getting large infrastructure projects
under way because the construction industry is
already working near full capacity and housing con-
struction is expected to rise.
18. Whatever its economic growth. rate during
1972, Japan is likely to maintain a highly favorable
balance-of-payments position. The Japanese will
have a trade surplus of some $6 billion even if
imports grow by 25% in dollar terms (compared with
7% in 1971) and exports by only 10% (compared with
25% in 1971). With such a trade surplus, the
Japanese could be expected to have a current account
surplus of more than $4 billion and a basic balance
of at least $2.0 billion. A substantial net outflow
of short-term capital is likely as the $5 billion or
more borrowed abroad during 1971, mainly as a hedge
aga4_nst the yen's revaluation, is repaid. But with
Japanese foreign exchange reserves now amounting to
$15 billion, this outflow will not present any dif-
ficulty for Tokyo.
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Estimated Japanese Growth Rates in 1972
Private consumption
Government consumption
Fixed investment
Private housing
22.5
12.5 to
22.7
Plant and equipment
1.9
-2.0 to
5.0
Covernment
32.1
15.0 to
25.0
Inventory investment
16.6
16.6 to 10.0
Exports a/
0.3
0.3 to 6.8
Imports a/
7.5
5.0 to 10.0
Nominal GNP
12.8
9.3 to 13.6
Inflation
5.4
4.5 to 5.5
Real GNF
7.4
4.8 to 8.1
a. Because of yen rava nation, grates of
growth of imports and exports calculated in yen
for purposes of estimating GNP do not correspond
to the rates of growth of exports and imports
calculated in dollars for purposes of the balance
of payments. For information on ,Tapan Is balance
of payments outlook, see paragraph 18.
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