00-4728 MOREPRESS RELEASE
EMBARGO:  NOT FOR PUBLICATION UNTIL
1400 GMT 16 NOVEMBER 2000
PRESS/TPRB/142
6 November 2000
STRUCTURAL REFORMS : THE KEY TO JAPAN'S ECONOMIC RECOVERY
Japan appears to be extricating itself slowly from a severe economic situation, and the current
nascent recovery could lead to real GDP growth of around 1% in 2000, says a new WTO report on the
trade policies of Japan. Following negative growth of 2.5% in 1998, when Japan was the only
industrialized economy in recession, Government outlay s turned into a positive growth factor as were
net exports, due in part to the openness of the multilateral trading system.   Having recovered by 0.2%
in 1999, real GDP growth is projected by the Government to be around 1% in 2000. It reached an
annual rate of 4.2 % in the second quarter of 2.000.
The report says that the Government has sought to revive the economy through expansionary
macroeconomic policies together with structural reform s.  But the view is taking hold that a sustained
economic recovery can be achieved only through more aggressive structural reform that enhances
competition.
The WTO report, along with a policy statement by the Government of Japan, will serve as the
basis for the trade policy review of Japan which will take place on 14 and 16 of November in the
Trade Policy Review Body of the WTO.
The report notes that a key element in structural reform is deregulation, which has the
potential to reduce costs and prices to world levels, thereby stimulating demand and growth.Economic intervention has been reduced in several sectors, especially financial services,
telecommunications and retailing, says the report.  Steps have also been taken by the Japan Fair Trade
Commission (JFTC) to increase competition.  These elements are in addition to the stimulus to
competition provided by Japan's further liberalization of its trade and investment regime, partly in
accordance with WTO commitments.PRESS/TPRB/142
Page 2
MOREThe WTO report stresses that since its previous Trade Policy Review in 1998, Japan has made
no major changes to its trade policy regime except t hose pertaining to its regulatory framework for
financial services, the so called "Big Bang".  Ja pan's trade policy priorities include strengthening the
multilateral trading system. It also remains committed to the promotion of deregulation and improved
transparency.  Japan's commitment to the former is demonstrated by the Cabinet's adoption in
April 2000 of a revised Three-Year Program fo r Promoting Deregulation (TYPPD) in sectors
including financial services, telecommunications, energy, transportation and distribution.  A July 1999
cabinet decision on "Ideal Socio-economy and Policies for Economic Rebirth" calls for the
establishment of fair markets and consumer sovereignty in a transparent manner.
During the period under review, Japan has been an active participant in WTO activities.  It
has used extensively the WTO dispute settlement m echanism, having been a party to four disputes,
three as plaintiff and one as defendant.
The report also notes that in a break with the past, regional free-trade agreements now seem to
be attracting greater interest in Japan;  more specifically, an agreement with Singapore is being
studied jointly by the two Governments, and government-affiliated institutes in Japan and Korea are
exploring the possibility of a free-trade agreement between the two countries. According to theauthorities, these regional and bilateral initiati ves will not undermine Japan's commitment to the
multilateral trading system.
Japan has continued to liberalize its trade and investment regimes, mainly as part of its broad
regulatory
 reforms.  However, measures constituting potentially important distortions to competition
are still evident in some sectors, notably agriculture and certain services.
The tariff is Japan's principal trade policy instrument.  Most imports to Japan are either duty
free or are subject to low tariff rates.  In fiscal year (FY) 2000, the simple average applied MFN tariff
rate was 6.5%;  the rate is expected to fall to 6.3% once the Uruguay Round tariff cuts are fully
implemented, by 2009.  Nearly 99% of tariff lines are bound and most applied tariff rates coincide
with bound rates, thereby imparting a high degree of pr edictability to Japan's tariff schedule.  At the
same time, non-ad valorem duties are an important fe ature of the tariff, particularly in agriculture;
they accounted for 6.9% of all lines in FY2000.  While such duties are indicated clearly in Japan's
tariff schedule, they can conceal high ad valorem equivalent (AVE) rates.  In the interests of
transparency, the Japanese authorities have provided the Secretariat with AVE estimates for more
than two thirds of these duties;  AVEs for the re maining such duties are not available due to the
absence of imports, which might suggest that the rates are prohibitive, and that the applied MFN tariff
average is underestimated.  Available AVE estimates show that 90 of the top 100 tariffs entailed non-
ad valorem duties whose ad valorem equivalents (AVEs) ranged from 40.1% to 983.7%.  Japan
applies tariff quotas on about 200 agricultural items;  the allocation of these quotas varies by product
and can be complex.
Japan is moving from price to income support for agriculture.  However, the sector remains
relatively well protected from foreign competition.  The average tariff on imports of agriculturalproducts remains high, tariff quotas can be intricate, and a number of these products receive domestic
support.  As a consequence, the overall level of government assistance for agriculture (as measured by
producer and consumer support estimates) is well above the OECD average.
Japan enacted a new Basic Law for Food, Agriculture and Rural Areas in July 1999, in order
to cope with major economic and social changes facing agriculture and to lay out the future direction
of agricultural policy.  The new Law is based on four basic principles:  a stable food supply,
fulfilment of agriculture's multifunctional role, sustainable development of agriculture, and the
development of rural areas.PRESS/TPRB/142
Page 3
MOREThe report notes that Japanese manufacturing has traditionally been much more exposed to
international competition than other sectors. Tariffs on manufactured goods are usually low, non-tariffbarriers are few, and the sector receives relatively little financial or other assistance from the State.
The share of services in Japan's GDP has grown to roughly 65%.  Protection for Japanese
suppliers from foreign competition has been provided not so much through border measures, but more
through internal regulations, notes the WTO report, which stresses also that Japan's attention has
focused increasingly on deregulation and that Financial services liberalization is one of thecentrepieces of recent structural reform efforts. In the meantime, Japan has also introduced various
measures to promote further deregulation in the telecommunications sector.
With economic prospects seemingly brighter, there is perhaps the danger that Japan may
waver in its resolve to continue to pursue stru ctural reforms, thereby jeopardizing a sustained
recovery.  Indeed, there have been some recent signs of "reform fatigue". Nonetheless, the
Government seems firm in its intention to intensify regulatory and other reforms aimed at removing
distortions to competition.
Notes to Editors
Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member
countries’ trade and related policies are examined and evaluated at regular intervals. Significant
developments which may have an impact on the global trading system are also monitored. For eachreview, two documents are prepared: a policy stat ement by the government of the member under
review, and a detailed report written independently by the WTO Secretariat. These two documents are
then discussed by the WTO’s full membership in the Trade Policy Review Body (TPRB). These
documents and the proceedings of the TPRB’s meet ings are published shortly afterwards. Since 1995,
when the WTO came into force, services and trade- related aspects of intellectual property rights have
also been covered.
For this review, the WTO’s Secretariat report, together with the policy statement prepared by
the Government of Japan , will be discussed by the Trade Policy Review Body on 14 and 16 of
November 2000. The Secretariat report covers the development of all aspects of Japan's trade policies,including domestic laws and regulations, the institutional framework, trade policies by measure and
by sector.
Attached to this press release is a summary of the observations in the Secretariat report and
parts of the government's policy statement. The Secretariat report and the government’s policystatement are available for the press in the newsroom of the WTO internet site (www.wto.org). These
two documents and the minutes of the TPRB’s disc ussion and the Chairman’s summing up, will be
published in hardback in due course and will be available from the Secretariat, Centre William
Rappard, 154 rue de Lausanne, 1211 Geneva 21.PRESS/TPRB/142
Page 4
MORESince December 1989, the following reports have been completed: Argentina (1992 and
1999), Australia (1989, 1994 and 1998), Austria (19 92), Bahrain (2000) Bangladesh (1992 and 2000),
Benin (1997), Bolivia (1993 and 1999), Botswana  (1998), Brazil (1992, 1996 and 2000), Burkina
Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994, 1996 and 1998), Chile (1991 and 1997),
Colombia (1990 and 1996), Costa Rica (1995), Cô te d’Ivoire (1995), Cyprus (1997), the Czech
Republic (1996), the Dominican Republic (1996), E gypt (1992 and 1999), El Salvador (1996), the
European Communities (1991, 1993, 1995, 1997 and 2000), Fiji (1997), Finland (1992), Ghana
(1992), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994
and 2000), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica
(1998), Japan (1990, 1992, 1995 and 1998), Kenya (1993 and 2000), Korea, Rep. of (1992, 1996 and
2000), Lesotho (1998), Macau (1994), Malaysia (1993 and 1997), Mali (1998), Mauritius (1995),
Mexico (1993 and 1997), Morocco (1989 and 1996) , New Zealand (1990 a nd 1996), Namibia (1998),
Nicaragua (1999), Nigeria (1991 and 1998), Norw ay (1991, 1996 and 2000), Pakistan (1995), Papua
New Guinea (1999), Paraguay (1997), Peru (1994 and 2000), the Philippines (1993), Poland (1993),
Romania (1992 and 1999), Senegal (1994), Si ngapore (1992, 1996 and 2000), Slovak Republic
(1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka(1995), Swaziland
(1998), Sweden (1990 and 1994), Switzerland (1 991 and 1996), Tanzania (2000), Thailand (1991,
1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998),the United States (1989, 1992, 1994, 1996 and 1999) , Uganda (1995), Uruguay (1992 and 1998),
Venezuela (1996), Zambia (1996) and Zimbabwe (1994).PRESS/TPRB/142
Page 5
MORETRADE POLICY REVIEW BODY
JAPAN
Report by the Secretariat – Summary Observations
Economic Environment
Japan appears to be extricating itself slowly from a severe economic situation;  real GDP was
up by 0.2% in 1999 and showed signs of further strength in the first half of 2000.  This nascent
recovery follows negative growth of 2.5% in 1998, when Japan was the only industrialized economy
in recession.  The main factors behind this shrinkage were the sharp drops in business investment and
private consumption, both reflecting dampened expectations.  The fall-off in business investment also
reflected excess capital, financed largely by debt, prompting firms to restrain investment as part oftheir restructuring efforts.  The drop in private consumption was also due, inter alia, to households'
almost static disposable income and uncertainty surrounding the sustainability of pensions and the
social security system.  Government outlays were a positive growth factor in 1998 as were net
exports, due in part to the openness of the multilate ral trading system.  Growth was stimulated later in
1998 by a rebound in public investment, reflecting public works projects implemented as a result ofthe April 1998 fiscal package;  public works then surged in 1999 as a consequence of an additional
fiscal package in November 1998.  Having recovered by 0.2% in 1999, real GDP growth is projected
by the Government to be around 1% in 2000.  Consumer price inflation has been practically non-
existent, at 0.6% in 1998 and -0.3% in 1999.  The unemployment rate has continued to rise, reaching
4.7% in 1999, the highest level for four decades, although there are signs of improvement.
The Government has sought to revive the economy through expansionary macroeconomic
policies together with structural reforms.  But in this regard financial policies may be reaching their
limits:  the Bank of Japan, in moving away from a zero-interest-rate policy, recently raised one of its
short-term rate by 0.25%;  the fiscal deficit is approaching 10% of GDP and government debt is
around 130% of GDP.  Concurrently the view is taking hold that a sustained economic recovery canbe achieved only through more aggressive structural reform that enhances competition.
A key element in structural reform is deregulation, which has the potential to reduce costs and
prices to world levels, thereby stimulating demand and growth.  Economic intervention has been
reduced in several sectors, especially financial services, telecommunications and retailing.  At the
same time, Japan has had to counter the threat to economic recovery posed by the fragility of thefinancial system.  Another element of structural reform entails corporate restructuring aimed at
redressing several imbalances that have eroded corporate profits; these imbalances involve excess
capital and labour, high levels of long-term debt, and inadequate funding of company pensions.  Steps
have also been taken by the Japan Fair Trade Co mmission (JFTC) to increase competition.  These
elements are in addition to the stimulus to competition provided by Japan's further liberalization of its
trade and investment regime, partly in accordance with WTO commitments.
Trade Policy Regime:  Framework and Objectives
Since its previous Trade Policy Review in 1998, Japan has made no major changes to its trade
policy regime except those pertaining to its regulatory framework for financial services.  Japan's trade
policy priorities include strengthening the multilateral trading system.PRESS/TPRB/142
Page 6
MOREJapan remains committed to the promotion of deregulation and improved transparency.  Its
commitment to the former is demonstrated by the Cabinet's adoption in April 2000 of a revised Three-
Year Program for Promoting Deregulation (TYPPD ) in sectors including financial services,
telecommunications, energy, transportation and distribution.  A July 1999 cabinet decision on "Ideal
Socio-economy and Policies for Economic Rebirth" calls for the establishment of fair markets and
consumer sovereignty in a transparent manner.  Recently, steps have also been taken by a fewministries, notably the Ministry of Industry and Trade (MITI), to evaluate the costs and benefits of
trade and trade-related measures, including regulations;  these evaluations could contribute to more
informed policy-making and, if published, would improve public accountability.
Japan grants at least MFN treatment to all WTO Members.  During the period under review,
Japan has been an active participant in WTO activities.  It has used extensively the WTO dispute
settlement mechanism, having been a party to four disputes, three as plaintiff and one as defendant.
Japan participates in the Working Groups on Competition Policy and Investment, as well as those onElectronic Commerce and Government Procurement.
In a break with the past, regional free-trade agreements now seem to be attracting greater
interest in Japan;  more specifically, an agreement with Singapore is being studied jointly by the two
Governments, and government-affiliated institutes in Japan and Korea are exploring the possibility of
a free-trade agreement between the two countries. According to the authorities, these regional and
bilateral initiatives will not undermine Japan's commitment to the multilateral trading system.  Japan
has, of course, long had a strong bilateral relationship with the United States;  arrangements between
the two countries currently cover several trade and trade-related areas.  Japan also has bilateral treaties
with several countries on investment, taxation, and social security, six of which were concluded
between 1998 and first half of 2000.
Japan continues to grant unilateral preferential market access to products from certain
developing countries under its Generalized System of Preference (GSP) scheme.
Trade Policies and Practices by Measure
Japan has continued to liberalize its trade and investment regimes, mainly as part of its broad
regulatory
 reforms.  However, measures constituting potentially important distortions to competition
are still evident in some sectors, notably agriculture and certain services.  Recognizing the need to
further promote competition, the authorities attach high priority to sound competition policy.
The tariff is Japan's principal trade policy instrument.  Most imports to Japan are either duty
free or are subject to low tariff rates.  In fiscal year (FY) 2000, the simple average applied MFN tariffrate was 6.5%;  the rate is expected to fall to 6.3% once the Uruguay Round tariff cuts are fully
implemented, by 2009.  Nearly 99% of tariff lines are bound and most applied tariff rates coincide
with bound rates, thereby imparting a high degree of pr edictability to Japan's tariff schedule.  At the
same time, non-ad valorem duties are an important fe ature of the tariff, particularly in agriculture;
they accounted for 6.9% of all lines in FY2000.  While such duties are indicated clearly in Japan's
tariff schedule, they can conceal high ad valorem equivalent (AVE) rates.  In the interests of
transparency, the Japanese authorities have provided the Secretariat with AVE estimates for morethan two thirds of these duties;  AVEs for the re maining such duties are not available due to the
absence of imports, which might suggest that the rates are prohibitive, and that the applied MFN tariff
average is underestimated.  Available AVE estimates show that 90 of the top 100 tariffs entailed non-
ad valorem duties whose ad valorem equivalents (AVEs) ranged from 40.1% to 983.7%.  Japan
applies tariff quotas on about 200 agricultural items;  the allocation of these quotas varies by productand can be complex.PRESS/TPRB/142
Page 7
MOREJapan has few non-tariff border measures; those currently applied involve some import
prohibitions, import licensing, and quantitative import restrictions (on fish and silk, for example).Imports of certain goods are subject to licensing requirements in order to ensure national security,
safeguard consumer health and well-being, or to preserve domestic plant and animal life and the
environment.  Like tariff quotas, certain aspects of the import quota system can be complex.
Japan has rarely used contingency measures, such as countervailing and anti-dumping duties
and emergency safeguards, although there has been resort to special safeguards in agriculture.
Japan maintains certain export controls on grounds of national security and public safety and
to ensure adequate domestic supplies of certain agricultural and other primary products.  Indicating
their absence, Japan has not notified any export subsidies to the WTO.  Export finance, insurance,
guarantees, and duty drawback schemes are available.
Various forms of assistance are provided by central and local governments to some sectors,
notably agriculture.  An interesting anomaly involves assistance, in the form of tax breaks and low
interest loans, provided for certain types of imports (and investment).
Japan has made several major changes in its foreign direct investment (FDI) regime since its
previous review.  These include:  the introduction of ex-post facto notification for mining (instead of
prior notification) and the elimination of reporting requirements when foreign corporations change
their activities to sectors that do not require prior notification;  the elimination of limits on foreign
capital participation in certain types of telecomm unications carriers, except for the Nippon Telegraph
and Telephone Corporation (NTT);  and the abolition in June 1999 of the regulations on foreign
investment, and employment of non-Japanese officers, in the cable television industry.  Although a
notified inward FDI project may be rejected by the Government, the authorities state that this has not
been the case since 1997.  Inflows of FDI into Japa n have risen considerably during the past two years
but are still low by OECD standards;  whereas Japan is the OECD's second largest economy, it is 19
th
with respect to FDI inflows.  This contrasts with Japan's position as one of the main sources of FDI.
As regards government procurement covered by the Agreement on Government Procurement,
no preferences are granted to domestic suppliers.  The share of foreign suppliers in the total value of
government procurement was 5.7% in 1998 (up from 4.6% in 1997);  there are indications that this
share is considerably lower in the case of public-works procurement, which has been a key feature ofrecent fiscal stimulus packages.
Japan continues to bring its standards into line wi th international standards;  it has also taken
further steps to ensure acceptance of foreign test data and conformity assessments.
Japan has continued to participate in multilateral and regional discussions for agreements to
promote international harmonization of regimes protecting intellectual property rights (IPRs).
The Three-Year Program for Promoting Deregula tion (TYPPD), as revised in April 2000, is
aimed, inter alia, at creating a "free and fair" Japanese economy fully open to the international
community.  Furthermore, with a view to increasing transparency of government policy and related
measures, in March 1999, Japan introduced a notice and comment ("public comment") system for use
prior to introducing or revising regulations. The TYPPD also contains measures to increase
competition.  These include the abolition of a number of exemptions from the Anti-Monopoly Act
(AMA), Japan's principal competition law;  as a result, the number of exemptions under the AMA
(and other laws) dropped from 89 in 1996 to 22 in 2000.  At the same time, following the modest
increase in its budget and staff, the role of the Japan Fair Trade Commission (JFTC) has been
strengthened.  Moreover, judging from the increased number of cases and actions taken, the JFTC
also seems to have become somewhat more aggressive in addressing private anti-competitive
practices;  a majority of these cases involve bid-rigging in connection with tenders for governmentPRESS/TPRB/142
Page 8
MOREprocurement contracts.  However, the operation of the JFTC is perhaps hampered by its lack of
resources and expertise in pursuing complex cases.
Trade Policies by Sector
Japan is moving from price to income support for agriculture.  However, the sector remains
relatively well protected from foreign competition.  The average tariff on imports of agricultural
products remains high, tariff quotas can be intricate, and a number of these products receive domesticsupport.  As a consequence, the overall level of government assistance for agriculture (as measured by
producer and consumer support estimates) is well above the OECD average, and appears to have risen
since 1997.  The average annual amount of transfers to agriculture during the 1990s has exceeded
agriculture's contribution to GDP, which has averaged roughly 1.5%.  Productivity in Japanese
agriculture remains low by national standards.
Japan enacted a new Basic Law for Food, Agriculture and Rural Areas in July 1999, in order
to cope with major economic and social changes facing agriculture and to lay out the future directionof agricultural policy.  The new Law is based on four basic principles:  a stable food supply,
fulfilment of agriculture's multifunctional role, sustainable development of agriculture, and the
development of rural areas.  With a view to implementing the policy direction stipulated in the new
Law, a Plan was decided by Cabinet in March 2000.  It contains various measures, some of which
have already been implemented; these include th e reform of the price policy for wheat and the
introduction of direct payments to farmers in hilly and mountain regions.  The Plan also includes a
guideline for reaching a 45% food self-sufficiency  ratio (on a calorie basis) by 2010 (compared with
40% in 1998).
Japanese manufacturing has traditionally been much more exposed to international
competition than other sectors (except in the cases of prepared food products, tobacco, alcoholicbeverages, textiles, footwear and headgear, and leather and leather products).  Tariffs on
manufactured goods are usually low, non-tariff barriers are few, and the sector receives relatively
little financial or other assistance from the State.  Nonetheless, manufacturing, unlike agriculture, has
been the driving force behind Japan's rapid export-led development during the past 50 years.  This is
especially true for automobiles, robotics, video recorders, cameras and video games, where thegovernment has played a very minor role other th an to participate actively in multilateral trade
liberalization.  As in most other industrialized countries, however, manufacturing's contribution to
Japan's GDP has declined steadily;  in 1998, it accounted for 23.5% of GDP compared with 24.4%
in 1997.
The share of services in Japan's GDP has grown to roughly 65%.  Protection for Japanese
suppliers from foreign competition has been provided not so much through border measures, but more
through internal regulations (including licensing and restrictions on foreign investment), state-
ownership in some instances, and anti-competitive private practices.  In recognition of the growing
importance of services, both to consumers and as a determinant of international competitiveness,
Japan's attention has focused increasingly on deregulation combined with the strengthening of
competition laws and their enforcement.  The high cost of services and other inputs can be a factor
encouraging Japanese businesses to relocate abroad.
Financial services liberalization is one of the centrepieces of recent structural reform efforts;
Japan has continued to make progress in implementing the liberalization agenda that was established
in 1997.  Popularly known as the "Big Bang", the purpos e of these reforms is to create a "free, fair and
global" financial system by, inter alia, allowing firms to provide various types of financial services
beyond existing borders of financial institutions (that is, banks, insurance companies, or securitiescompanies), and opening the door to foreign institutions wishing to operate in Japan. Entry of foreign
institutions may well have provided a further impetus to financial and corporate restructuring.
Financial liberalization is also creating new opport unities for household savings, such as fast-growingPRESS/TPRB/142
Page 9
MOREmutual funds, which are more inclined to invest  in new, fast growing enterprises.  Financial
liberalization is thus likely to contribute to a more efficient allocation of savings.
At the same time, Japan has had to grapple with the threat to economic recovery posed by the
fragility of the financial system.  Accordingly, it has taken steps to re-capitalize the banking system.
More specifically, 1998 legislation provided up to ¥60 trillion (12% of GDP) to address the problem
of non-performing loans:  some insolvent instit utions have been closed, two large banks were
temporarily nationalized (one of which was subsequently sold to a foreign bank), and many othershave received large injections of public capital. Regulatory and supervisory responsibilities for banks
have been transferred from the Ministry of Finance to a new agency, the Financial Services Agency
(FSA) and its parent body, the Financial Reconstr uction Commission (FRC).  Provisioning standards
have also been tightened.  Whereas Japan appears to have successfully addressed the banking sector's
problems, some life insurance companies still face the threat of bankruptcy and are therefore
attracting increased regulatory attention from the FSA.
Japan has also introduced various measures to promote further deregulation in the
telecommunications sector, including:  elimination of  foreign ownership restrictions for certain types
of telecommunications services and cable TV service providers;  the elimination of the authorization
requirement for end-user charges;  the introduction of a price-cap regulation for certain end-user
charges; and an amendment in May 2000 to the Telecommunications Business Law setting up a
framework to introduce a long-run incremental costin g (LRIC) system.  Nonetheless, as indicated by
the JFTC, the Japanese telecommunications market remains monopolistic, and the prices of some
services are still high by developed-country standards.  For example, Japan's internet-access charges
for 40 off-peak hours in March 2000 were higher than in most other OECD member countries;  such
high charges tend to discourage the use of the internet and the spread of information technology,
thereby hampering the development of electronic commerce.
Concerns have been raised about the adequacy and effectiveness of competition policy in relation to
other service sectors as deregulation proceeds, notwithstanding the recent strengthening of
competition laws and their enforcement.  In particular, several sectors, notably maritime and air
transport, are exempt from the Anti-Monopoly Act.
Outlook
There are signs of recovery in the Japanese economy.  Led by public investment, real GDP
was up at an annual rate of 4.2% in the second quarter of 2000.  But after increasing strongly in the
first quarter of 2000, partly as a result of a rise in corporate profitability, corporate investmentdropped somewhat in the second quarter despite increasing profitability.  The recent mixed trends in
private consumption and investment, together with  the present high level of unemployment (which
has contributed to Japanese consumers' reluctance to spend), persistent downward pressure on prices,
and declining net exports, provide a rather unclear picture concerning the strength of the recovery and
its durability.  The strengthening of the yen, which has appreciated considerably against the
U.S. dollar and the Euro since the middle of 1998, could cause net exports to fall further, possibly
weakening the recovery.  The decision by the Bank of Japan, in August 2000, to end its "zero-interest-rate" policy has probably taken into account the likely impact of that decision, not just on the
exchange rate but also on the financial system and on consumer spending and investment.
Nevertheless, as a result of continuing doubts about the strength of the economic recovery, the
Government is reportedly considering yet another fiscal stimulus package, albeit much smaller than
the two previous ¥18 trillion packages (in November 1998 and 1999).
With economic prospects seemingly brighter, there is perhaps the danger that Japan may
waver in its resolve to continue to pursue stru ctural reforms, thereby jeopardizing a sustained
recovery.  Indeed, there have been some recent signs of "reform fatigue" (e.g. postponement of the
introduction of consolidated taxation;  delays in pe nsion reform;  the two-year delay in the plannedPRESS/TPRB/142
Page 10
MOREabolition  of  bank deposit  safety-net  scheme; and the fact that, as yet, no licences have been granted
to non-financial groups wishing to engage in bankin g).  Nonetheless, the Government seems firm in
its intention to intensify regulatory and other reforms aimed at removing distortions to competition.
In this respect, the Government's recent decision to abandon plans to bail out a heavily indebted major
retailer constitutes a positive sign.  By and large, the private sector has urged the Government to press
ahead with reform.
While continuing to open its market at the multilateral level, Japan appears to be becoming
increasingly involved in regional arrangements, notable the APEC forum, and is developing links with
the grouping consisting of ASEAN, China and Korea (ASEAN+3 (including Japan)).  Japan is also
exploring bilateral free-trade agreements, having eschewed such arrangements in the past.  It is
important that such regional and bilateral arrangements do not erode Japan's long-standing attachment
to the multilateral trading system.PRESS/TPRB/142
Page 11
MORETRADE POLICY REVIEW BODY
JAPAN
Report by the Japanese Government (Part II)
THE TRADE AND ECONOMIC POLICY ENVIRONMENT
JAPAN 'S ECONOMIC ENVIRONMENT
The Japanese economy had been in recession since the spring of 1997, but the recession came
to an end around the spring of 1999, owing to the implementation of various policy measures such as
additional public investment, income tax reduction, accommodative monetary policy, and measuresfor stability of the financial system.  Since then, economic activities have continued to improve
moderately.  The Asian economic recovery has also  contributed to the improvement after the second
half of 1999.  In the process of recovery, as the inventory adjustment progressed, industrial production
and corporate profits increased.  These developments provided a good background for the recovery in
investment in plant and equipment since the end of 1999.  Exports continue to increase due to thegood economic condition of Asia, Europe, and the Un ited States.  Imports, especially those from Asia,
are increasing.
Although the employment situation remains seve re with the unemployment rate staying at a
high level, overtime hours worked and job offers have been increasing.  The business perception of
excessive employment is decreasing although the level is still high.  On the other hand, with respect tothe household sector, private consumption has not yet shown a clear trend of improvement despite the
fact that decrease in income is coming to the end.  In short, although the Japanese economy is
improving moderately, it is still not on an autonomous path of recovery.
The Government of Japan will continuousl y carry out economic and fiscal management
measures focusing on economic recovery, and will operate appropriately in order to attainautonomous economic recovery, carefully taking into account the trend of the economy.  The
government of Japan will compile a new set of policies to implement the Plan for the Rebirth of
Japan.
With regard to the financial situation, overall the accommodative monetary condition has
been maintained.  A zero interest rate policy had been in place since February 1999, but on11 August 2000 the targeted overnight call rate was raised to an average of around 0.25%.  Long-term
interest rates have been lower than 2% except in February 1999.  Short-term interest rates had
remained stable except for the temporary rise because of Y2K problems.  However, since
August 2000, they have increased somewhat.  The m oney supply (M2+CDs) has been increased at the
year-on-year change of about 2.0-3.0% from February to July in 2000.  The accommodative monetary
policy has contributed to the economic recovery by stimulating investment in housing and equipment,
while money demand by private sector still remains weak.  On the other hand, stock prices had showna rising trend due to the removal of uneasiness in the financial system and continuing economic
improvement.  However, partly due to the influen ce of stock price adjustments in the United States,
they fell in mid-April of 2000, and have remained weak.
With regard to the dollar-yen exchange rate from 1998 to August 2000, the dollar depreciated
from ¥147.64 in August 1998 to ¥101.25 in November 1999.  The dollar has traded in a tighter rangesince the turn of 2000, mainly between ¥104 and ¥110.PRESS/TPRB/142
Page 12
MORETREND IN FOREIGN TRADE
Trade statistics indicate that Japan's trade surplus expanded in 1997, after four straight years
of decline, and rose to its highest level of ¥1 3.99 trillion in 1998.  In 1999, both exports and imports,
but especially exports decreased, and as a result, the trade surplus decreased to ¥12.28 trillion.  In the
first half of 2000, the imports largely increased reflecting the recovery of the Japanese economy, and
the trade surplus declined by 4.6%.
The total value of exports decreased two straig ht years from 1998 onwards, due mainly to the
economic crisis in East Asian countries.  In the first half of 2000, the total value of exports has been
recovering.
- The total value of exports in 1999 amounted to ¥47.55 trillion (a decrease of 6.1% as
against 1998).
- A year-to-year increase in the first half of 2000 up by 8.9% (as against the first half
of 1999).
- Increase or decrease of the total value of exports in 1999 on a regional basis (as
against 1998).
NIEs (incl. Korea, Singapore, Hong Kong and Taiwan) up by 0.2%
China up by 1.4%
The Association of Southeast Asian Nations (ASEAN) up by 1.3%
The United States down by 5.6%The European Union (EU) down by 9.2%
The Middle East down by 31.3%
The total value of imports likewise decreased for two straight years from 1998 onwards, due
mainly to the slump of the Japanese economy and the yen’s appreciation.  In the first half of 2000, the
total value of imports has been recovering.
- The total value of imports in 1999 amounted to ¥35.27 trillion (a decrease of 3.8% as
against 1998).
- A year-to-year increase in the first half of 2000 up by 13.7% (as against the first half
of 1999).
- Increase or decrease of the total value of imports in 1999 on a regional basis (as
against 1998).
NIEs up by 9.2%
The Middle East up by 3.6%
ASEAN up by 1.3%
China up by 0.6%The United States down by 13.0%
EU down by 4.6%
The share of manufactured goods in total imports has also been increasing steadily, reaching
in 1999 a record level of 62.5% (a 12.3% point increase as against 1990).PRESS/TPRB/142
Page 13
ENDTREND IN FOREIGN INVESTMENT
Japan’s outward foreign direct investment (FDI) on an MOF reported basis amounted to
¥7,439.0 billion in FY1999, which represents an increase of 42.6% as against FY1998.  The FDI
largely increased after the decrease (21.2%) in FY1998.  The major characteristics of outward FDI in
FY1999 were:
(i) FDI in the manufacturing industry in FY1999 swelled to ¥4, 719.3 billion three times
the amount for FY1998 (¥1,568.6 billion) mainly because of several large FDIs suchas in the food sector.  FDI in FY1999 in the non-manufacturing industry decreased by
¥900 billion to ¥2,698.8 billion, mainly due to the decline of FDI in the finance and
insurance sector.
(ii) On the whole FDI in developed countries sharply increased due to several big M&As
in these countries.  About 76% of all FDI therefore was concentrated in FDI in North
America and Europe.  The tendencies in Asia vary among the countries.  FDI in
Korea was boosted to ¥109.3 billion from ¥38.7 billion in FY1998, which was thelargest FDI in Asia in FY1999, while FDI in Thailand shrank to ¥91.0 billion, a half
of the amount in FY1998.
FDI flows into Japan in FY1999 almost double d for two consecutive years to ¥2,399.3 billion
from ¥1,340.4 billion in FY1998.  The growth rate of infl ow (+79.0%) was larger than that of outflow
(+42.6%).  Therefore, the gap between outward a nd inward FDI flows was reduced from a 4:1 in
FY1998 ratio to a 3:1 ratio in FY1999.  The major characteristics of inward FDI in FY1999 were:
(i) FDI in the manufacturing industry increased to ¥979.7billion (+213.4%) mainly
because of a rapid increase of FDI in the machinery sector.  FDI in the
non-manufacturing industry also increased to ¥1,491.6 billion (+38.1%) with
increases of FDI in the telecommunications sector and the trading sector.
(ii) The amount of inward FDI from every ot her region except North America and Japan
increased.
1  There were particularly dramatic increases of FDI from France
(+4,341.1%), Canada (+9,648.8%), Netherlands (+268.2%) and Cayman
(+1,058.6%).
                                                     
1 Investments from Japan are those by foreign owned companies in Japan.