Postwar Japanese Diplomacy and Major Diplomatic Efforts by Japan in 1984



Chapter 3.   Postwar Japanese Diplomacy and Major Diplomatic Efforts by Japan in 1984


Section 1.  External Economic Relations: From Recovery to Prosperity to Making a Positive Contribution


1.  Review of the Past Forty Years


A.  Up from the Rubble (1945-55)

The date was August 15, 1945, and the Japanese economy was a shambles. Figures for 1946 show industrial production down to 30% and agricultural production down to about 60% of prewar (1924-26) levels. This was clearly inadequate to sustain the approximately seven million Japanese nationals repatriated from overseas, and the future looked bleak for the Japanese economy.

 Although a centrally controlled economy was needed to cope with the serious food shortages, depressed industrial output, and virulent inflation in the immediate postwar years, the yen's exchange rate was set at 360 yen to the dollar in December 1949 and an austerity program imposed to maintain the yen's value, with the result that both the currency and prices were stablized and it became possible to shift to a free-market economy.

Lacking natural resources of its own, Japan had no choice but to import the natural resources it needed for its recovery and economic development, and this in turn necessitated exporting manufactured goods in order to earn the hard currency needed to pay for these imports. Even before then, the foundations for the international community's free and open trading structure had been laid as with the 1945 ratification of the conventions for the Internationald Monetary Fund (IMF) and International Bank for Reconstruction and Development (World Bank) in 1945 and the 1948 establishment of the General Agreement on Tariffs and Trade (GATT), and Japanese foreign policy efforts were predicated upon Japan's being a member of this international community and maintaining a free-market economy. Realizing that postwar Japan could grow stronger only through economic recovery and development, Japan quickly set economic goals as one of the three main concerns of its foreign policy, as stated in the 1957 Diplomatic Bluebook.

The Korean War which started in June 1950 provided a wealth of procurement and repair orders to spark Japan's first postwar boom. Even though this procurement-induced boom soon waned, it was quickly followed by an investment boom and a consumer boom as Japan was restored to good standing in the international community with the signing of the San Francisco Peace Treaty in September 1951.

In 1952, Japan joined the IMF, in 1953 it concluded the Treaty of Commerce and Navigation with the United States, and in 1955 it joined GATT after overcoming its first postwar currency crisis.


B. Rapid Growth and the Shift to a Free-market Economy (1956-65)

Yet Japan's restoration to the international community did not always go smoothly at first. Even after Japan joined GATT, the United Kingdom, France, Belgium, Australia, and a number of other countries invoked the special provisions of Article XXXV of GATT to refuse to enter into relations with Japan under GATT (i.e., to extend Japan most-favored-nation treatment) and continued to maintain discriminatory measures against Japan. Gaining international acceptance for Japanese products and establishing the foundations for stable trade and economic relations were thus priority issues for Japanese foreign policy, and efforts to achieve abolition of the application of GATT Article XXXV against Japan and to negotiate commerce and navigation treaties or trade agreements were stepped up after 1955. Building upon the momentum generated by the signing of the Japan-U.S. Treaty of Commerce and Navigation, treaties of commerce and navigation and trade agreements were concluded with most of Japan's trading partners, culminating in the 1963 signing of the Treaty of Commerce and Navigation and the Trade Agreement with France. Tenacious efforts were also made in GATT and in bilateral forums to negotiate the abolition of the application of GATT Article XXXV against Japan.


Japanese GNP

Japanese Per-capita GNP


These were also the years of the so-called Japanese economic miracle. With strong plant and equipment investment to keep pace with technological innovation, and with the emergence of a strong consumer class, Japan enjoyed economic expansions dubbed the Jimmu Boom and the Iwato Boom.

Although postwar Japan had sought to revitalize its industry within a framework of tightly controlled trade and foreign currency exchange regulations, the economic development described above and Japan's growing importance in the world economy generated calls beginning in 1958 or so for Japan to liberalize its trade and currency exchange regulations. In late 1958, the nations of Western Europe restored convertibility between their own currencies and the U.S. dollar, and Japan was faced with the need to quickly make the necessary arrangements for trade and currency liberalization if it was not to be left behind in the international liberalization and miss the chance to participate in the global marketplace.

The Outline of Trade Liberalization drawn up in June 1960 was promptly implemented, and in February 1963 Japan shifted from being a country under GATT Article XII entitled to restrict its imports for international balance of payments reasons to being a country under GATT Article XI encouraged not have import restrictions. At the same time, steady progress was being made on currency and capital liberalization, and by April 1964 currency exchange was liberalized and Japan moved from being an IMF Article XIV country restricting currency exchange to being an Article VIII country without currency exchange restrictions. Against the background of this liberalization, Japan joined the Organization for Economic Cooperation and Development (OECD) in 1964 to take its place as an industrialized country both in name and in fact.


C.  Years of Prosperity and International Economic Turmoil (1965-75)

After a brief recession in 1965, the Japanese economy enjoyed a record 57 months of prosperity lasting until the summer of 1970. During these good times, the Japanese economy grew stronger, becoming the second-largest free-market economy in the world in 1968. In that same year 1968, Japan's international balance of payments on the current account went into the black for the first time since the war. During the same period, the United States experienced sharp increases in its trade deficits in 1971 and 1972, and serious economic friction erupted between the two countries.

It was under these circumstances that Japan, after intense consultations with the United States, announced its Comprehensive External Economic Policies in January 1971 designed to promote import liberalization, and this was later followed by a series of decisions on the yen exchange rate in an effort to deal with the growing surplus in Japan's current account.

Seeking to check the forces of protectionism and to promote the development of free trade, the GATT Ministerial Meeting was convened in Tokyo in September 1973 to initiate the Tokyo Round of multilateral trade negotiations.

The international economic turmoil of the 1970s began with a currency crisis. In August 1971, President Nixon announced a set of emergency economic policies including the suspension of dollar-gold convertibility and a tariff surcharge on imports. Although time was bought with the Smithsonian Agreement four months later, this Agreement proved short-lived as the yen and all other major currencies were set adrift on floating exchange rates in February 1973.

In October 1973, the fourth Arab-Israeli War broke out and the six Gulf members of the Organization of Petroleum Exporting Countries (OPEC) announced sharp increases in the posted price of oil. The first oil crisis had begun. This fourfold increase in oil prices threw the industrialized countries' economies into the trilemma of rampant inflation, deteriorating international balance of payments current accounts, and recession. In fiscal 1974, Japan recorded its first negative growth since the end of the war, and this recession of unprecedented severity lasted well into fiscal 1975.

This was a major crisis for Japan, a nation which had grown and prospered as a processing and trading nation operating on the assumption of abundant supplies of inexpensive oil and other resources, and it brought home anew the need to strengthen relations with the resource-supplying nations. As such, it mandated a fundamental change in Japanese policy.

Into the breech stepped President Giscard d'Estaing of France, who proposed that a summit meeting of the industrialized countries be held to enable the leaders of all of the world's leading countries to join together in frank discussion of their common problems, a suggestion which resulted in the holding of the first Economic Summit in November 1975 at Rambouillet. The fact that Japan was included among the participants at this Summit was symbolic of the importance which Japan had gained in the international community.


D.  The Changing International Economic Climate (1975-84)

The two international economic crises of the early 1970s signified the bankruptcy of the two pillars which had sustained the international economy's development for nearly three decades -- America's economic strength and the abundant availability of cheap oil -- and made a mockery of the IMF and GATT regimes, yet they also brought about a new awareness of the world's economic interdependence. With these crises, the world economy entered an era of confusion and uncertainty.

Achieving a modicum of real growth in 1975, Japan was among the first to recover somewhat from the ravages of the first oil crisis, with the world economy as a whole soon following suit in 1976 and beyond.

However, the Iranian revolution in 1979 sharply reduced Iran's oil exports and sparked a second oil crisis. When the OPEC countries took advantage of this situation to again institute sharp increases in oil prices, the world economy was again thrown into a protracted recession. Drawing upon the lessons learned in the first oil crisis, however, the Japanese economy proved itself highly adaptable. Along with continuing the efforts begun during the first oil crisis to conserve energy, develop alternative energy resources, diversify sources of supply, and otherwise stabilize Japan's energy supply situation, Japan also restructured its economy to adjust to an era of higher energy costs. As a result, Japan managed to achieve a somewhat higher rate of growth than the other industrialized countries and its international balance of payments current account went back into the black in 1981.

This combination of lower imports as Japan conserved on energy consumption and stronger exports as Japan provided the automobiles, electronics products, industrial machinery, and other specific products that the world wanted led to bilateral trade imbalances with the United States and Europe and renewed economic friction with these countries.

Working in a storm of harsh demands from other countries, Japan made prodigious foreign policy efforts beginning in the late 1970s, including the bilateral Ushiba-Strauss Joint Communique of January 1978 and the Ushiba-Haferkamp Agreement of March 1978 and the strong effort to contribute to the conclusion of the Tokyo Round of multilateral trade negotiations in April 1979.

Since weathering the second oil crisis in the early 1980s (until late1984), Japan has drawn up and implemented six separate packages of external economic measures designed to preserve and strengthen the free trading system, to establish harmonious external economic relations, and to revitalize the world economy.

In reviewing the history of Japan's economic development in the four decades since the war, it is impossible to overlook Japan's close ties with the developing countries. As expressed in the truism that there can be no prosperity for the North without prosperity for the South, Japan has forged very close ties of interdependence with the developing countries. Likewise, Japan's prosperity is possible only with economic growth in the developing countries and the peace and stability which such growth engenders. It is imperative that Japan continue to make a major contribution to the developing countries' industrialization, not only through economic and technical cooperation but also through improved market access, expanded direct overseas investment, and other means.

Having risen from the ashes of war to become one of the leading participants in the world economy, Japan is now at the point where it is necessary to ask itself what it can and must do in the cause of stable development for the world economy. If Japan and the world at large are to bequeath this present prosperity to posterity, it is imperative that the international community as a whole continue along the path of free and expanded exchange and cooperation, and Japan has a vital role to play in this process.


2.  The World Economy in 1984


A.  The Industrialized Economies

Briefly summarizing the industrialized economies' situation in 1984, there was steady economic expansion in a climate of lessening inflation. A major factor in the international economy, the Unite States economy saw real GNP growth of 6.8% per annum, the strongest recovery the United States had enjoyed since 1951. The economies of Western Europe were also generally expansionary.

While there was some improvement in employment in the United States, the unemployment situation continued difficult in Western Europe. Reflecting among other factors the dollar's strength on currency exchange markets, the United States chalked up a record $101.5 billion deficit in its international balance of payments on the current account.


B.  The Developing Economies

After recording the slowest economic growth in the postwar period with figures of between 1 and 2% in 1982 and 1983, the developing economies benefited from the strong recoveries in the industrialized economies to mark sharp improvements in their real growth rates and international balances of payments in 1984.


1983 1984
Real growth rate 1.5% 3.7%
International balance of payments current account minus $70.5 billion minus $43.9 billion


At the same time, however, the developing economies continued to face a number of very serious difficulties, including the slump in commodity prices, the burden of their cumulative external debts, and the famine in Africa, and there were major disparities among the different countries' growth rates.

While it proved possible to avert the worst on the debt problem with an appropriate response including multiyear rescheduling as called for in the economic declaration of the London Summit and with the self-help efforts of the debtor countries themselves as they worked to restructure their economies within a climate of recovery, there are still many difficulties remaining, including the fact that most of the developing countries' export earnings have to be used for debt repayment and cannot be channeled to development, and any fundamental solution to this problem will require many years and great efforts.


C.  World Trade

Beginning its recovery in 1983, world trade expanded 9% on a volume basis in 1984 to $1.995 trillion. This expansion in world trade was indicative of the recovery in the world economy after the recession in the early 1980s.

Yet despite this rapid recovery in world trade, trade problems were a persistent source of tension and it became even more necessary to have cooperative international efforts on the trade front. There is an especially urgent need to enter into a new round of multilateral trade negotiations in order to reestablish the framework for the free and multilateral trading system.


D.  Efforts for Non-inflationary Sustainable Growth

It was in this context that there was broad agreement both at the May 1984 OECD Ministerial Council meeting and at the June 1984 Tenth Economic Summit Meeting (in London) on the means for achieving non-inflationary sustainable growth in the industrialized economies and ensuring that the developing countries also share in the benefits of this growth.

Looking at subsequent developments in the world economy, the United States economy, which had until then served as the primary engine of world growth, began to see its own economic growth flag in late 1984 and there was increasing concern about the many factors which might act as restraints on sustained growth, including its massive fiscal deficit, the dollar's overvaluation, unemployment and the structural rigidities which cause it, burgeoning balance of payments imbalances, and mounting protectionist pressures. Feverish consultations took place within the OECD, IMF, World Bank, and other forums to eliminate these uncertainties. Especially noteworthy was the decision taken at the May 1985 Bonn Summit that each country will make vigorous efforts to deal with its problems in the spirit of cooperation and solidarity and building upon the various agreements to date for sustained and inflation-free growth.


E.  The Japanese Economy and the Japanese Role

After bottoming out in the spring of 1983, the Japanese economy enjoyed continued recovery with stable prices into 1984. There was also some improvement in employment figures, but the international balance of payments saw major surpluses in the current account and major deficits in the long-term capital account.

Given this situation, the basic issues confronting Japanese economic management were those of achieving sustained growth without inflation and stabilizing employment while at the same time making steady progress on administrative and fiscal reforms, preserving and strengthening the free trading system, establishing harmonious external economic relations, and contributing vigorously to the revitalization of the world economy.

Realizing this, the government announced its External Economic Measures in December 1984 including major tariff reductions (e.g., one-year advance implementation for Tokyo Round tariff reductions on agricultural goods, two-year advance implementation for those on industrial goods, and improvements in the Generalized System of Preferences). Also in December 1984, the government established the Ministerial Conference on External Economic Relations as well as the blue-ribbon Advisory Committee for External Economic Issues of leading private-sector individuals to draw up medium-term policy recommendations for the further internationalization of the Japanese economy. This Advisory Committee for External Economic Issues submitted its report on April 9, 1985, and the government promptly announced its External Economic Policy outlining recent decisions made on external economic issues and setting forth future directions for study.

In this External Economic Policy, the government committed itself to fully respecting the report of the Advisory Committee for External Economic Issues (including the policies toward the developing countries) and initiated study of ways to implement the Committee's recommendations. On the specific issue of improving market access, the recommendation that market access be free in principle with restrictions only in special circumstances was accepted and it was stated that the exceptions should be as narrowly circumscribed as possible, that an Action Program for improving market access should be drawn up as soon as possible, and that these measures should be unflinchingly implemented.

All of these measures are being taken with the intention of assuming Japan's rightful responsibilities and bearing the necessary costs to preserve and strengthen the free trading system which is the very foundation to Japan's survival, and they are consistent with the Japanese position of wanting to generate enhanced momentum for the new round of multilateral trade negotiations under GATT.


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