Japan WT/TPR/S/107
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I. ECONOMIC ENVIRONMENT
(1) MAIN ECONOMIC DEVELOPMENTS
1. After a slight recovery in 1999 and 2000 following a decade of stagnation, Japan's real GDP
shrank (by 0.6%) in 2001, notwithstanding a monetary policy of virtually zero interest rate and
recurring fiscal deficits that have raised government debt to unprecedented levels (Table I.1).  The
economy also continues to be beset by persistent downward pressure on prices, which have beenmildly declining since 1998, the present high level of unemployment (5.2%)
1, and uncertainty about
the prospects for the Japanese economy.  One of the main structural problems is the weakness of the
banking system;  according to the Government's estimates, non-performing loans amounted to
¥35.7 trillion (7% of GDP) at the end of September 2001.
2. The scope for Japan to use expansionary monetary and/or fiscal policies to extricate itself
from this downward spiral is greatly constrained by the fact that interest rates are close to zero while
public debt is now around 140% of GDP.  Hence, a sustained recovery would appear to hinge on
structural reforms (including those of the bankin g system).  The Government has begun to place
greater emphasis on structural reforms than on expansionary fiscal measures.  Recent measures
include:  limiting new issuance of bonds by the Central Government to ¥30 trillion for the FY2002general account budget; reform of the financial system; disposal of non-performing loans;
privatization; and reforms of the corporate sector and regulatory framework.
2
3. The Bank of Japan has relaxed monetary policy by reducing the official discount rate, which
reached 0.1% on 19 September 2001;  it has also lowered the short-term call rates and provided more
liquidity to the market, by raising the target for the outstanding balance of the current accounts of
financial institutions at the BOJ.  However, with negative rates of inflation in recent years, real
interest rates have tended to be somewhat higher than nominal rates.  This seeming "liquidity trap" in
combination with a fragile banking system has thwarted monetary policy.
4. Trade plays an important role in the economy.  Although the shares of exports and imports are
each around 10% of GDP, with sluggish domestic demand, external demand has been the main source
of growth during the past few years.  For exampl e, the authorities attribute the economic downturn in
2001 mainly to weak foreign demand (particularly in the United States and in east Asia).
5. As regards the external sector, Japan's current account surplus increased (by 3.3%) to
¥12.9 trillion (2.5% of GDP) in 2000, but declined to ¥10.6 trillion (2.1% of GDP) in 2001.3  Th e
surplus reflects the still substantial gap between national saving and domestic investment, partly due
to stagnant private investment.  The decrease in the current account surplus in 2001 is attributed
mainly to a large decline in the merchandise trade surplus reflecting a decline in exports (by 5.9%)and increase in imports (by 3.0%), this is in contrast to a strong growth of exports and imports in
2000.
6. The share of services in GDP has continued to grow since 1997, largely at the expense of
manufacturing (Table I.2);  much of the growth has occurred in financial services and real estate.
Services' share of employment increased in 1999, but decreased in 2000.  Agriculture accounts for a
                                                     
1 The unemployment rate reached a record high of 5.5% in December 2001.
2 These include the April 2001 Emergency Economic Package, the October 2001 Advanced Reform
Program, and the Three-year Program for Promoting Regulatory Reform (TPPRR), announced in March 2001
and revised in March 2002.
3 The 2001 data are provisional estimates.WT/TPR/S/107 Trade Policy Review
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small share of GDP and employment;  OECD estimates suggest that total government assistance was
greater than the sector's value-added in 2000 (Chapter IV(2)(i)).
Table I.1
Selected macroeconomic indicators, 1998-01
(¥ trillion and per cent)
1998 1999 2000 2001
Real economy (% change)
Real GDP -1.1 0.7 2.4 -0.6
Real domestic demand -1.5 0.8 1.9 0.1
Private consumption 0.1 1.2 0.6 0.3
Gross fixed investment -4.0 -0.8 3.2 -1.9
Government consumption 1.9 4.5 4.6 3.1
Real exports of goods and services -2.3 1.4 12.4 -6.6
Real imports of goods and services -6.8 3.0 9.6 -0.6
Household disposable income
(% change)1.2 -0.4 -0.6 ..
Prices (% change)
Consumer prices (CPI) 0.6 -0.3 -0.7 -0.7
GDP deflator -0.1 -1.4 -2.0 -1.4
Employment/unemployment
Employment (% change) -0.4 -0.7 0.5 0.2
Unemployment rate (annual average) 4.1 4.7 4.7 5.0
Money stock (end of year, % change)
M2 + CD s4.0 3.6 2.1 2.8
Interest rates (%)
Official discount rate 0.5 0.5 0.5 0.1
Exchange rate (¥ per US$) 130.9 113.9 107.8 121.5
Fiscal balance (% of GDP)
Revenue 29.3 29.1 29.4 29.8
Expenditure 34.8 36.1 36.8 36.9
Balance -5.5 -7.1 -7.4 -7.1
Balance excluding social security -6.7 -8.1 -7.9 -7.6
Government debta103.0 115.8 123.5 132.8
Saving and investment (% of GDP)
National saving (gross) 28.8 27.2 27.5 ..
Domestic investment (gross) 26.9 25.8 25.9 ..
Balance of payments
Current account (¥ trillions) 15.5 13.1 12.9 10.7
Current account (% of GDP) 3.0 2.6 2.5 2.1
Exports of goods and services (% of GDP) 11.1 10.3 11.1 10.8
Imports of goods and services (% of GDP) 9.2 8.8 9.7 10.2
.. Not available.
a General government gross financial liabilities, including the debt of the Japan Railway Settlement Corporation and the Inherit ed
Debt Fund from 1995 onwards.
Source: Information provided by the Japanese authorities and OECD (2002), Economic Outlook, June.Japan WT/TPR/S/107
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Table I.2
Shares of GDP and employment by sector, 1995-00
1995 1996 1997 1998 1999 2000
Share of GDP (per cent)
Agriculture, forestry and fishing 1.9 1.8 1.6 1.6 1.5 1.4
Mining 0.2 0.2 0.2 0.1 0.1 0.1
Manufacturing 23.0 22.9 22.9 22.0 21.7 21.6
Services 68.8 70.4 69.2 69.7 70.0 70.1
Construction 8.2 8.0 7.9 7.7 7.5 7.3
Electricity, gas and water 2.7 2.7 2.7 2.8 2.8 2.8
Wholesale and retail trade 15.2 15.2 15.5 15.0 14.3 13.9
Financial services and insurance 5.9 5.7 5.8 5.7 6.5 6.4
Real estate 12.0 12.0 12.1 12.4 12.7 12.9
Transport and communications 7.1 6.9 6.8 6.7 6.4 6.4
Other services 17.7 18.1 18.4 19.4 19.7 20.3
Government 8.3 8.4 8.4 8.8 9.0 9.0
Non-profit services for households 1.8 1.8 1.8 2.0 2.0 2.0
Import tax and other -4.7 -4.4 -4.9 -4.9 -4.9 -4.7
Statistical discrepancy 0.7 0.7 0.8 0.8 0.8 0.7
Total (¥ trillion) 497.7 510.8 521.9 511.8 511.8 513.5
Share of employment (per cent)
Agriculture and forestry 5.3 5.1 4.9 4.9 4.7 4.1
Fishing 0.4 0.4 0.4 0.4 0.4 0.5
Mining 0.1 0.1 0.1 0.1 0.1 0.1
Manufacturing 22.5 22.3 22.0 21.2 20.8 22.0
Services 67.9 68.4 68.8 69.5 70.0 68.6
Construction 10.3 10.3 10.4 10.2 10.2 11.1
Electricity, gas and water 0.7 0.6 0.5 0.6 0.6 0.5
Transport and communications 6.2 6.3 6.3 6.2 6.3 7.5
Wholesale and retail trade 22.4 22.6 22.5 22.8 22.9 25.2
Financial services, insurance and real estate 4.1 3.9 3.9 3.9 3.9 4.2
Other services 24.3 24.6 25.1 25.9 26.1 20.1
Government 3.4 3.3 3.3 3.3 3.3 3.6
Total (million) 64.6 64.9 65.6 65.1 64.6 64.5
.. Not available.
Source: Information provided by the Japanese authorities.
(2) MACROECONOMIC POLICIES
(i) Monetary and exchange rate policy
7. During the period under review, the Bank of Japan (BOJ) has eased monetary policy, thereby
effectively reversing a BOJ decision in 2000 to end its zero-interest-rate policy.  Call rates in the
short-term money markets have been kept around zero.  The official discount rate was lowered (from
0.5%) to 0.35% on 13 February 2001, to 0.25% on 1 March 2001, and to 0.10% on19 September 2001.  In March 2001, the BOJ decided that its main operating target for money market
operations would be the outstanding balance of the current accounts of financial institutions at the
BOJ;  the current target is to maintain the balance at around ¥10-15 trillion (compared with aroundWT/TPR/S/107 Trade Policy Review
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¥5 trillion in March 2001).  The BOJ has made a commitment that the current procedures for money
market operations resulting in zero call rate is to remain in place until the CPI registers a stable
zero percent or an increase year on year.  The BOJ is of the view that Japan's fundamental problems
are due to structural factors, notably those concerning the problem of non-performing loans, which
have negatively affected domestic demand.4
8. During the past two years or so, the nominal exchange rate of the yen has fallen against the
U.S. dollar.  The yen was valued at around ¥102 to the U.S. dollar at the end of 1999.  Subsequently,
it depreciated further against the dollar, and at the end of March 2002, its value was around ¥133.
This weakening of the yen might curtail imports while helping exports to grow.
9. As regards the external sector, Japan's current account surplus decreased from 2.5% of GDP
in 2000 to 2.1% in 2001;  this reflected a closing of the gap between national saving and domesticinvestment, partly owing to stagnating business in vestment.  There has been a substantial decrease in
the merchandise trade surplus as a result of a decline in merchandise exports and an increase in
merchandise imports (Table I.3).
Table I.3
Current and capital accounts, 1997-01
(¥ trillion)
1997 1998 1999 2000 2001
Current account balance 11.7 15.5 13.0 12.8 10.6
Goods balance 12.3 16.0 14.0 12.6 8.5
Services balance -6.5 -6.5 -6.2 -5.1 -5.3
Goods and services balance 5.8 9.5 7.9 7.4 3.2
Income balance 7.0 7.1 6.6 6.5 8.4
Exports of goods, services and income 71.4 70.2 63.2 67.5 66.9
Imports of goods, services and income 58.6 53.5 48.8 53.5 55.3
Net transfer balance -1.1 -1.1 -1.4 -1.1 -1.0
Capital and financial account balance -15.1 -17.1 -6.3 -9.4 -6.6
Financial account -14.6 -15.2 -4.4 -8.4 -6.2
Capital account -0.5 -1.9 -1.9 -1.0 -0.3
Changes in Reserve Assets -0.8 1.0 -8.8 -5.3 -4.9
Statistical discrepancy 4.2 0.6 2.0 1.8 0.9
Source: Bank of Japan.
10. A major development in Japan's capital account involves the volatility of net inflows related
to financial derivatives and other investments.  These increased in 2000 but recorded a net outflow of
¥3.3 trillion, an increase in portfolio capital inflows, and a substantial increase in inflows of foreign
direct investment, which reac hed about ¥3.1 trillion in FY20005, a 30% increase compared with the
previous fiscal year;  inward FDI amounted to about three fifths (compared with one tenth in FY1997)
                                                     
4 See, for example, summaries of BOJ Governor 's press conferences [Online].  Available at:
http://www.boj.or.jp/press/press-f.htm (in Japanese).
5 The figure for the inward FDI is based upon MOF online information.  Available at:
http://www.mof.go.jp/1c008.htm.Japan WT/TPR/S/107
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of Japan's outward foreign direct investment (FDI).    Nonetheless, inward FDI remains relatively low
by developed-country standards (Chapter III(3)(ii)).6
(ii) Fiscal policy
11. The Koizumi Cabinet focused strongly on structural reform.  Accordingly, the Government
formulated two economic policy packages in 2001; the Front-Loaded Reform Program in October
2001 and the Immediate Action Program for Structural Reform in December 20017, both of which
emphasized structural reform rather than expansionary fiscal measures, such as spending on public
works, which accounts for a large part of government expenditure.  The Government also decided that
it would limit new government borrowing to ¥30 tr illion in its FY2002 general Budget.  The Budget
reallocated public expenditures to what the authorit ies regard as priority areas.  Furthermore, the
Government adopted as a Cabinet Decision, on 25 June 2002, Basic Policies for Economic and FiscalPolicy Management and Structural Reform 2002, which calls, inter alia , for reforms of taxes and
government expenditures.
8
12. The General Government's fiscal deficit incr eased from about 6.4% in 2001 to 6.7% in 2002.
Partly as a result of a series of fiscal stimulus packages up to 2000, Japan's public debt is expected to
reach almost 140% of GDP by the end of Marc h 2002 (the highest level among OECD members),
compared with 105% in 1999.9  These figures exclude the debts of public entities (outside general
government), whose financial situation tends to be opaque, as well as a variety of contingent liabilities
in the pension, banking, and credit guarantee systems.
13. Japan's FY2002 tax reform measures include a reduction in the scope for tax exemption of
interest income on certain small deposits owned by the elderly, reduction in the taxable value of non-
quoted stocks in calculating inheritance tax and a consolidated taxation system, which allows
companies to pay corporate tax on a consolidated basis.   The Government is also to review the Special
Taxation Measures, with a view to streamlining some of them.
14. The process of formulating the central government budget involves the Council on Economic
and Fiscal Policies, the Ministry of Finance, and other ministries and agencies (Chart I.1).  With a
view to increasing fiscal transparency, a balance sheet of the Japanese Government was created in
October 2000 by a MOF Study Group.10
                                                     
6 According to UNCTAD (2001), FDI inflows into  Japan in 2000 amounted to US$8.2 billion, while
those into the United States and the European Unio n were US$281.1 billion and US$617.3 billion, respectively.
7 The former, which emphasized job creation through regulatory reform, was supported by a
supplementary budget of ¥1.1 trillion mainly allocated for urgent measures directly linked to structural reform,
and the latter, which emphasized initiatives conducive to stimulating private investment and job-creation, was
supported by another supplemen tary budget of ¥2.5 trillion.
8 Available [Online] at:  http://www.kantei.go.jp/foreign/policy/2002/0621kouzoukaikaku_e.html.
9 Against the background of the accumulated government debt and alleged delay in structural reform,
Standard and Poor's downgraded Japan's sovereign debt  to AA- (from AA) on 15 April 2002, and  Moody's to
A2 (from Aa3) on 31 May 2002.
10 The complexity of Japan's fiscal accounts has, for example, made it difficult to evaluate the
implications of the Government's bond issue target for the structural deficit.WT/TPR/S/107 Trade Policy Review
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Chart I.1
Formulation process of the FY2002 Budget
Cabinet decision on "Structural Reform of the Japanese Economy:  Basic Policies for Macroeconomic Management"
(Original draft was prepared by the Council on Economic and Fiscal Policy)
Cabinet decision on "Guidelines for Formulation of the FY2002 Budget"
(Original draft was prepared by the Council on Economic and Fiscal Policy)Inquiries and discussions on 
the key areas of the budgetPreparation of budget request 
documentsCabinet approval of guidelines for budget request
(10 August)
Submission of budget request 
documents
(31 August)
Examination and adjustment of budget requests
(October-December)Explanation of budget requests Hearings of budget requests
(September-October)Submission of budget request documents for "Special Requests 
for Structural Reforms"
(30 September)           (26 June)
                (4 December)
Presentation of the MOF 
Budget Proposal to the cabinet
(19 December)
Preparation of budget documentsMinister level negotiationsRevival negotiations
• Cabinet meeting on the presentation of the budget• Presentation of the budget to the Diet
(25 January)Cabinet decision on the government draft budget
(24 December)• Consideration of MOF's budget proposal
• Preparation for revival negotiations
Preparation of budget documents
Source :   Information provided by the Japanese authorities.Ministries and A gencies          Council on Economic and 
Fiscal Policies            Ministr y of Finance      Japan WT/TPR/S/107
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(iii) Structural policies
(a) Financial system and corporate reform
15. More than ten years after the bursting of the "bubble economy" during the latter half of the
1980s and the beginning of the 1990s, non-performing loans (NPLs) and overhanging debts still
remain a burden on the Japanese economy.  The Government has had to grapple with the threat to
economic recovery posed by the fragility of the fina ncial system.  Accordingly, it has taken steps to
dispose of NPLs and promote corporate restructuring.  Regulatory and supervisory responsibilities for
banks have been transferred to the Financial Services Agency (FSA).  Provisioning practices have
also been tightened.
16. Although the officially announced figures for the outstanding NPLs were at ¥35.7 trillion at
the end of September 2001, it has been suggested in some quarters that these may be much higher.  InOctober 2001, the FSA began to conduct special inspections of 13 major banks' lending to major
corporations
11;  the result announced on 12 April 2002, was that out of total lending of ¥12.9 trillion
to 149 companies, loans of ¥3.7 trillion to 34 companies were re-classified as "in danger of
bankruptcy" or below (i.e. "in de facto bankruptcy" or "in legal bankruptcy").12  The Financial
Reconstruction Law was amended in December 2001 to strengthen the functioning of the Resolutionand Collection Corporation (RCC) to enable it to purchase NPLs at "fair value";  the amendment
allowed the RCC to diversify its methods of disposing of the NPLs it had purchased (including sales,
securitization and debt-for-equity swap of NPLs , in addition to their collection).  The RCC is
encouraged to liquidate its NPLs purchases quickly.
17. Japan discontinued its full protection of all bank-deposits at the end of March 2002;  since
1 April 2002, the insured amount for each individual depositor has been the principal of up to
¥10 million (and its interest) per depositor for each financial institution.
13  Deposits in postal money
transfer accounts in the Postal Savings, however, remain fully protected, seeming to provide postal
savings with an advantage.
18. The recent postal reform bills that passed the Lower House of the Diet in July 2001 focused
on the liberalization of mail delivery, allowing competitors to the post office to enter the market
provided they set up a minimum of 100,000 post boxes.  Absent from the bills were significantmeasures to reform the postal savings system, which maintains full protection (as noted) of deposits.
With ¥240 trillion (US$2 trillion) in assets
14, the system hinders competition from the private sector
and constitutes an important source of off-budget financing for various public projects, thereby
possibly undermining the efficient allocation of savings among various investments.
                                                     
11 The 13 banks are Dai-ichi Kangyo Bank, Fuji Bank, Bank of Tokyo-Mitsubishi, Asahi Bank, UFJ
Bank, Sumitomo Mitsui Banking Corporation, Daiwa Bank, Mitsubishi Trust Bank, Yasuda Trust Bank, UFJTrust Bank, Sumitomo Trust Bank, Chuo Mitsui Trust Bank, and Industrial Bank of Japan.
12 See MOF press release of 12 April 2002 [Online].  Available at:  http://www.fsa.go.jp/news/
newse.html.
13 Current deposits, ordinary deposits, and other miscellaneous liquid deposits continue to be fully
protected at least until the end of March 2003;  the Financ ial Services Agency recently proposed to continue full
protection on zero-interest accounts thereafter.  The auth orities' apparent hesitation over removing the unlimited
guarantee for all types of deposits, and thereby subjecting banks to greater market discipline, is perhaps areflection of the continued fragility of Japan's banking system and the consequent need to protect weak banksfrom a run on deposits;  such a run could have potentially serious implications for the entire banking system.
Financial Times,  6 September 2002.
14 There is reportedly an additional ¥120 trillion in its life insurance system.WT/TPR/S/107 Trade Policy Review
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19. A growing awareness that ineffective corporate governance has contributed to excessive use
of capital and labour in the corporate sector has prompted the Government to implement a number of
policy measures to reduce excess capacity under the Law on Special Measures for Industrial
Revitalization.  There have also been some sign ificant changes in the re gulatory framework and
business practices that are conducive to the establishment of more effective corporate governance,
such as the revisions to the Commercial Code to enable the holding company structure, stock-options,stock swaps, and consolidated accounting (Chapter III(5)(viii)).
(b) Regulatory reform and employment
20. The authorities continue to attach great importance to regulatory reform, which has the
potential to reduce costs and prices towards world levels, thereby stimulating private domestic
demand, growth, and thus employment.  The Fr ont-Loaded Reform Program of October 2001
emphasized job creation through regulatory reform and the strengthening of safety nets relating to
employment and small and medium-sized businesses.  The Intermediate Action Program for
Structural Reform of December 2001 focused on initiatives to stimulate investment and create jobs in
selected projects that could be implemented promptly.
21. Sustained efforts have also been made to reduce gradually economic intervention in various
sectors, including financial services, telecommunications, legal, medical, and education services
(Chapter IV(4)).
22. In the Three-year Program for Promoting Regulatory Reform, introduced in March 2001,
emphasis remains on the removal of barriers to the entry of foreign companies and their products into
the Japanese market.
15  As in the case of the its predecessor, the Three-Year Program for Promoting
Deregulation, the TPPRR also contains measures related to information technology, employment and
labour, environment, competition policy, and standards and certification.
(c) Pension reform
23. With a view to encouraging private pensions and their portability, defined contribution
pension schemes have been allowed in Japan since October 2001;  companies subject to the
Employees' Pension Law may seek ministerial appr oval to establish defined contribution pension
plans.16  The paid-in funds for an individual are managed separately and can be invested in savings
plans, bonds, investment trusts, stocks, and trusts.
(3) DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT
24. During the period under review (2000-02), Japan's merchandise trade surplus contracted, from
¥14.0 trillion in 1999 to ¥8.5 trillion in 2001;  this contrasts with a decrease of the deficit in services,
from ¥6.2 trillion in 1999 to ¥5.3 trillion in 2001.  The ratio of exports of goods and services to GDPincreased from 10.2% in 1999 to 11.1% in 2001;  the corresponding ratios for imports were 8.1% and
8.6%.  Merchandise exports and imports increased by 14.8% and 22.5% in 2000, respectively, but
decreased by 16.0% and 8.2% in 2001.  The decrease of exports in 2001 can be attributed to a
                                                     
15 A recent study (based on such data as the shar es of exports, imports, outward and inward FDI in
GDP, and inward and outward movement of natural persons) indicated that Japan ranked 28th out of 31 countries
(OECD members and eight other Asian WTO Members) as regards the degree of globalization.  (Japan Centerfor Economic Research, 2001).
16 For the self-employed and employees of corporations that do not establish corporate pension plans,
personal types of defined contribution pension plans have been allowed since January 2002.Japan WT/TPR/S/107
Page 9
decrease in world demand for information and communications technology (ICT) products.  A larger
increase in imports compared with exports in 2000 and a larger decline in exports compared with
imports in 2001 contributed to a fall in the current account surplus in 2000 and 2001.
(i) Composition of merchandise trade
25. Manufactures accounted for about 93% of Japan's exports in 2001;  the share declined slightly
from 1999 (Chart I.2).  During the period 1999-01, machinery and transport equipment continued tobe Japan's most important merchandise export, accounting for 67.3% of total exports of goods in
2001.  Within machinery and transport equipment, the value of exports of automotive products
increased in 2001, after a one-year decline in 2000.  Other major exports such as office machines and
telecommunications equipment and other non-electrical machinery increased in 2000 but declined in
2001.
26. The share of manufactures in Japan's merchandise imports declined in 2000, but increased in
2001.  There was an increase in the share of primary imports in 2000, followed by a decline in 2001.
Machinery and transport equipment continue to be Japan's most important merchandise imports, with
a share of 27.3% in 2001, down slightly from 1999.
(ii) Direction of merchandise trade
27. The main single destination of Japanese exports is the United States, attracting 30.4% of total
Japanese exports in 2001 (Chart I.3).  The share of Asia, increased during 1999-01, amounting to 43%
in 2001.  The relative shares of Europe and the United States decreased by about two percentage
points and 0.7 percentage point, respectively, between 1999 and 2001.
28. The main suppliers of imports is the United States, with a share of 18.3% of Japan's total
imports in 2001.  The share of East Asia as a source of imports increased by 1.1 and 0.8 percentage
points in 2000 and 2001.
29. APEC's share of Japan's exports increased in 2000, but decreased slightly in 2001, to 74.7%;
its share of Japan's imports declined by 1.1 percentage points to 69.3% in 2000 and remained
unchanged in 2001.
(iii) Composition of trade in services
30. During 1999-01, Japanese cross-border sales (exports) of services increased, while its
purchases (imports) declined in 2000, followed by an increase in 2001. (Table AI.1).  Deficits in
transportation increased in 2000 but decreased in 2001, while those in travel decreased in both 2000
and 2001.
(iv) Foreign direct investment (FDI)
31. According to data provided by the Ministry of Finance, FDI inflows into Japan increased
rapidly in FY2000 but decreased in FY2001 to a lower level than in FY1999.  Total FDI inflow
reached about ¥3.1 trillion in FY2000 (up from ¥2.4 trillion in FY1999), but declined to about
¥2.2 trillion in FY2001.  Investments from the United States and by foreign-owned companies in
Japan were the main source of growth in inwa rd FDI in FY2000.  Outflows of FDI from Japan
declined in FY2000, reflecting a decline in Japan's FDI into North America (Table AI.2).WT/TPR/S/107 Trade Policy Review
Page 10
Chart I.2
Merchandise trade by product, 1999 and 2001
1999 2001
(a)    Exports (f.o.b.)
Total: US$417.6 billion
(b)    Imports (c.i.f.)
Total: US$310.0 b illion Total: US$348.6 billion
Source:   UNSD, Comtrade database (SITC Rev.3).Per cent
Chemicals
7.4
Agriculture
19.3
Other mining
5.5
Non-electrical
 machinery
4.4Other semi-manuf.
5.4Other consumer
 goods 
 10.3Fuels
16.1
Chemicals
7.3Total: US$402.6 billionIron & steel
   3.2Agriculture & mining  
                         2.5
Other consumer
 goods
10.3Agriculture & mining
                          3.0
Other electrical
machines
7.3Non-electrical 
machinery
13.7
Other transport 
equipment
 5.8
Automotive
 products
19.9
Agriculture 
16.3
Other consumer goods  
      10.3Fuels
20.1
Mining
25.2Other 
mining
5.1
Other semi-manuf.
5.0Chemicals
7.2Iron & steel
   3.4
Mining
21.6Other semi-manufactures
4.4
Non-electrical
machinery
13.3
Other 
transport 
equipment
 5.9Other  3.3
Automotive 
products
19.8
Other electrical 
machines
7.7Office machines &
 telecom. equipment
21.9Other consumer
 goods         
10.5Chemicals
7.6 Other semi-manuf. 
4.3
Office machines &
telecom. equipment
20.5Other  4.2
Transport 
equip.   5.2
Non-electrical 
machinery
4.6Other electrical 
machines
3.7Textiles & 
clothing
6.8Other
1.9
Other electrical
machines
3.9Transport equip.
 3.7Textiles &
 clothing 
6.9Other  
1.9Manufactures
92.8Manufactures
94.1
Manufactures
57.3Manufactures
56.7
Office machines &
 telecom. equipment
  14.2Office machines & 
telecom. equipment
15.1Japan WT/TPR/S/107
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Chart I.3
Merchandise trade by country, 1999 and 2001
1999 2001
(a)    Exports (f.o.b.)
(b)    Imports (c.i.f.)
Total: US$310.0 billion Total: US$348.6 billion
Source:   UNSD, Comtrade database (SITC Rev.3).Per cent
Other East Asia
9.1
Other Europe
3.1
Korea, Rep. of
4.3South Asia 0.9
Other East Asia
13.1Middle East
9.8
China
13.8Total: US$417.6 billion Total: US$402.6 billionMiddle East  2.4Other Europe  1.6
Africa 1.3Other America
5.7
Singapore
3.6Africa  1.1
Other East Asia
10.1China
7.7
Oceania  2.3
South Asia 0.8
Other Europe
2.8 Other America
4.8 Middle East
12.7
Oceania  4.9
Korea, Rep. of
4.9
Other East Asia
11.7China
16.6Other Europe 
1.6
East Asia
38.7Chinese Taipei
6.9China
5.6United States
31.1
Oceania 2.5
South Asia 0.9
Hong Kong, 
China
5.3EU15
17.9Other America
5.9
East Asia
36.3East Asia
39.5Middle East
2.7
Chinese Taipei 
6.0 Hong Kong, 
China  
5.8United States
30.4EU15
16.0
United States
21.8Other America
5.6
South Asia   0.8United States
18.3
Oceania  5.0EU15
13.8
Africa 1.3
Africa 1.3EU15
12.8
East Asia
41.6Singapore
3.9Korea, Rep. of
5.5Korea, Rep. of
6.3
Chinese 
Taipei
3.6Indonesia
3.9Indonesia
4.3Chinese 
Taipei
4.1WT/TPR/S/107 Trade Policy Review
Page 12
32. Sectorally, a large increase of inward FDI was observed in financial services and
communications in FY2000 (Table AI.3).  Outward FDI growth was prominent in food manufacturing
and electrical machinery in 1999.
33. FDI into Japan has traditionally been lower th an its outward FDI;  as noted by the Japan
Investment Council in 1995, the low level of FDI into Japan may be attributed to macroeconomic
factors such as the appreciating trend of the yen, as well as the high costs of business and regulatorybarriers.
(v) Prospects
34. There are tentative signs of moderate recovery in the Japanese economy, although its strength
is not altogether clear owing to structural problems;  if these are not resolved they could jeopardize a
sustainable recovery.  According to the latest offi cial figures, real GDP increased by 2.6% in the
second quarter of 2002 (on an annualized basis), driven in large part by exports, which began to
recover in early 2002.  The present high level of unemployment has contributed to Japanese
consumers' reluctance to spend and thus the fragility of consumption demand and persistent
downward pressure on prices.  There are indica tions that structural reforms, supported by
macroeconomic measures, are under way;  the Government has indicated the need to intensifyregulatory and other structural reforms aimed at removing distortions to competition.