Section 2. Contribution to Stable World Economic Growth
1. The World Economy in 1985
(1) The Economies of Industrialized Countries
The United States economy saw a decrease in real GNP growth in 1985, which stood at 2.2 percent per annum compared with 6.5 percent in 1984. However inflation rate continued to abate as in 1984, and there was some improvement in employment.
On the other hand, the United States' budget deficit reached a record high in fiscal 1985. The United States was concerned about its impact on economic growth and stepped up efforts to reduce the deficit. The current account deficit in fiscal 1985 is expected to surpass the all-time high recorded in 1984. However, progress in rectifying the overvalue of the dollar since September 1985 has served to create a climate conducive to the reduction of the deficit.
In Europe business began picking up, although gradually, led mainly by the expansion of domestic demands, while the unemployment rate still remained high.
(2) The Economies of Developing Countries
In developing countries, both trade balances and economic growth rates deteriorated in 1985 compared with the previous year and there was no improvement in the problem of accumulated external debts amid worsening external circumstances such as the economic slow-down of the United States and other industrialized nations and sluggish trade conditions caused by depressed primary commodity prices.
As for regional circumstances, economic growth rates declined in newly industrializing countries and regions of Asia anal the ASEAN countries, the problem of cumulative external debts worsened in parts of Latin America, and economic crisis remained unsolved in Africa.
OPEC decided to "ensure themselves a fair share of the world oil market" at a general meeting in December 1985. Crude oil prices eased since then and have shown substantial decrease since late January 1986. This has served to improve the current account balance of payments of non-oil producing developing countries, spur economic growth of industrialized countries, bring down the rate of inflation and therefore improve the world economic climate. Overall, the decrease in oil prices is believed to exert a favorable influence on the economies of developing countries. However, it raised concern that oil-producing debtor countries would face more difficulties in the management of funds.
2. Efforts for Sustained Non-inflationary Growth
(1) Progress in International Cooperation
Against such developments in the world economy, OECD held its 24th Meeting of the Council at Ministerial Level in April 1985 and agreed that the member nations would take concerted action to achieve sustained non-inflationary growth anal expand employment. The agreement was reached out of concern about the budget deficit of the United States, high interest rates, overvalue of the dollar, imbalance in current account and other respects as well as the sluggish employment situation in European countries, in spite of the economic recovery seen in the OECD member nations.
The council also agreed to "launch the New Round of multilateral trade negotiations at the earliest possible date." Some member nations indicated in a communique that they desired to launch the negotiations in 1986.
At the subsequent Bonn Summit in May, implementation of prudent financial and monetary policies and revitalization of the market function was agreed for the purpose of achieving non-inflationary growth and expanding employment. Specific efforts to be made by each country on the basis of these common principles was also stipulated.
The issue of the New Round of multilateral trade negotiations was discussed at the afore-mentioned Bonn Summit, the Informal Ministerial Meeting on International Trade in Stockholm in June, a GATT Council meeting in July, and a GATT special general meeting in September. A positive prospect toward the start of the negotiations finally emerged at the 41st GATT general meeting which decided to set up the Preparatory Committee for the New Round and also to hold a ministerial meeting in September 1986.
In the meantime, progress was also made in international policy coordination. At the meeting of the Group of Five Finance Ministers and Central Bankers (G-5) in September 1985, the participant countries expressed their determination to take measures to enhance sustained growth.
It was also indicated that the fundamental economic conditions of each country were not fully reflected in the foreign exchange market.
After the meeting, rapid progress was seen in correcting the overvalue of the dollar against the yen and European currencies. Subsequently, major industrialized democracies took concerted action to lower high interest rates.
At the IMF Interim Committee meeting in April 1986, the necessity of international policy coordination to realize even more appropriate foreign exchange rates was pointed out. It was also confirmed that surveillance by the IMF plays an important role in the function of the currency system.
On the problem of cumulative external debts, the U.S. Secretary of Treasury, James Baker, proposed "the Program for Sustained Growth" for major middle-income debtor nations at the Annual Meetings of the IBRD and the IMF in October 1985. The program was focused on macroeconomic adjustment and structural adjustment policies by the debtor nations themselves, the expanded financing for structural adjustment by the World Bank and other international development and financial institutions, and the expanded financing by private banks. The program was basically supported by those concerned.
Following these developments, the OECD Ministerial Council agreed at its 25th meeting in April 1986, that a bright prospect for the world economy had emerged since the latter half of 1985 because of such positive factors as an inflation curb, the correction of imbalance in foreign exchange rates, the reduction of interest rates and the rise in growth rate caused by the fall in oil prices.
However, it was also agreed that such problems as budget deficits, unemployment and imbalance in the current account were yet to be solved, and therefore, medium and long-term sustained growth should be, and can be, achieved by analyzing the problems carefully and further promoting international macroeconomic policy coordination. It was stressed at the meeting that structural problems existed regardless of North or South, that even among the industrialized countries, the problems were not limited to European countries, but were shared by all countries and that the problems were closely linked. Each country became more aware of the need for global structural adjustment.
(2) Tokyo Summit
The 12th summit of seven industrialized countries and EC was held in Tokyo from May 4 to 6, 1986. As developments in both the world economy itself and international coordination of economic policy were seen since the Bonn Summit, the participants adopted "the Tokyo economic declaration" which expressed the need for promotion of policy coordination among the Summit countries as well as implementation of global structural adjustment policies. The participants also issued the Tokyo declaration entitled "looking forward to a better future," "the statement on international terrorism" which expressed the summit countries' firm determination to fight state-sponsored and other international terrorism, and "the statement on the implications of the Chernobyl nuclear power plant accident" which called for international cooperation to ensure safety in the field of nuclear energy in the wake of the accident in the Soviet Union.
Through the summit, the spirit of cooperation among the participating countries was further strengthened.
3. Japan's Policy Efforts
(1) The Improvement in Market Access and Expansion of Domestic Demands
The period between April 1985 and the Tokyo Summit in May 1986 saw a major progress in Japan's external economic policy.
Japan's current account surplus, totalizing 35-billion dollars (accounting for 2.8 percent of GNP) in 1984, rose to a record high of 49.2-billion dollars in 1985 (accounting for 3.6 percent of GNP). In connection with this, there was growing criticism, demands and expectations by foreign countries concerning Japan's economy and roles. These developments lay behind the major progress in the field of external economic policy.
Under these circumstances, Japan has made steady efforts to (a) further improve its market access, (b) expand domestic demand and (c) sustain the high value of the yen, realizing that it is Japan's important duty to make active contributions to the maintenance and reinforcement of the free trading system and steady development of the world economy.
Major steps in this direction are as follows (concerning above (c), refer to the afore-mentioned 2. (1)).
(a) On April 9, 1985, the government decided to formulate "the Action Program for Improved Market Access" in line with recommendations by the Advisory Committee for External Economic Issues (headed by Saburo Okita). The government singled out six areas, (i) tariffs, (ii) import restrictions, (iii) the standards and certification systems, and import procedures, (iv) government procurement, (v) monetary and capital market and (vi) the promotion of service and import to be covered by the action program. The government conducted a wholesale review of systems concerned on the basis of an idea, "freedom in principle, restrictions only as exceptions," that is, "to reduce government intervention to a minimum and leave the choice and responsibility to consumers. "As a result, the government worked out "the Outlines of the Action Program" on July 30, 1985. Since then, the program has been put into practice step by step along with decisions of details.
(b) On the issue of expanding domestic demand, the government formulated measures twice, on October 15 and December 28, 1985, toward the compilation of the fiscal 1986 budget. The measures were focused on the use of private sector's vitality (the relaxation of restrictions on housing and urban development, the use of national and public land, and the application of private-sector's vitality to the field of public works) coupled with the expansion of public works and promotion of housing and equipment investment. Furthermore, the government decided on "Comprehensive Economic Measures" on April 8, 1986.These measures were designed to urge reduction in charges and prices along with the early implementation of public works projects so that the benefits of the yen's appreciation and the fall in crude oil prices would be promptly reflected throughout the entire economy, which in turn, would alleviate the negative impact of the yen's sharp appreciation on the export industry.
(2) The Promotion of Economic Structural Adjustment
In addition to the above-mentioned efforts, the government decided to begin working on the adjustment of the economic structure itself.
On April 7, 1986, "the Advisory Group on Economic Structural Adjustment for International Harmony" (headed by Haruo Maekawa) presented its recommendations to Prime Minister Nakasone.
In response to these recommendations, the government decided to set a "national policy goal" to steadily reduce Japan's current account imbalance for international harmony. To this end, the government decided to continue making efforts from a medium to long-term perspective to promote measures for economic structural adjustment. The decision was based on the idea that it is essential to achieve economic growth led by domestic demand and promote drastic transformation of trade and industrial structure while efforts should be made to realize the expanding equilibrium of the Japanese economy and also to increase imports.