Japan WT/TPR/S/142 
 Page 1 
 
 
I. ECONOMIC ENVIRONMENT 
(1) MAIN ECONOMIC DEVELOPMENTS  
1. After recording negative growth in 2002, Japan's economy grew 2.4% in real terms in 2003 
(Table I.1), and continued to grow in the first th ree quarters of 2004, suggesting that Japan may be 
extricating itself from a protracted period of sl ow growth and from the recent economic downturn.1  
However, the sustainability of the seeming recovery re mains to be seen as the strength of growth has 
apparently been diminishing since the first quarte r of 2004 owing to a sharp drop in net exports, 
hitherto one of the main engines of growth.  The growth in 2003 was led by domestic demand, 
notably private non-residential investment and priv ate consumption, and external demand, notably a 
substantial growth in exports to China2;  the growth has helped Japan to solve its structural problems, 
including non-performing loans.  Since February 2003, seasonally adjusted unemployment in Japan 
has fallen, reaching 4.6% in September 2004.3  Downward pressure on prices also appears to be 
easing, with the year-on-year decline in the core CPI (excluding fresh food) becoming smaller.4 
Table I.1 
Selected macroeconomic indicators, 2001-04 
(¥ trillion and per cent)  
 2001 2002 2003 2004 
National accounts (% change, unless otherwise indicated)     
Real GDP 0.4 -0.3 2.4 3.9d 
Real domestic demand 1.2 -1.0 1.8 3.4d 
 Private consumption 1.7 0.9 0.8 3.9d 
 Government consumption 3.0 2.4 1.0 2.0d 
Gross fixed investment -1.1 -6.2 3.0 2.8d 
Real exports of goods and services -6.1 8.0 10.1 13.9d 
Real imports of goods and services 0.1 2.0 5.0 11.5d 
Exports of goods and services (% of GDP) 10.4 11.2 11.8 .. 
Imports of goods and services (% of GDP) 9.8 9.9 10.2 .. 
Employment  -0.5 -1.3 -0.2 0.4e 
Unemployment rate (annual average) 5.0 5.4 5.3 4.6f 
Household disposable income (% change)  -2.9 -0.5 .. .. 
Prices and interest rates      
Consumer prices (CPI)  (% change) -0.7 -0.9 -0.3 0.0g 
GDP deflator (% change) -1.5 -1.2 -2.5 .. 
Official discount rate (%) 0.1 0.1 0.1 0.1 
Table I.1 (cont'd) 
                                                      
1 For the first time since 2000, the Japanese economy was officially declared to be "recovering 
steadily" in January 2004 (Cabinet Office 2004). 
2 In 2003, private non-residential investment grew by 9.3% and private consumption 0.8%;  
contribution of domestic demand to GDP was 1.7 percenta ge points, while that of net exports of goods and 
services was 0.7 percentage points. 
3 The unemployment rate (seasonally adjusted) reached a record high of 5.5% in January 2003.  It 
would appear that many regular workers are being replaced by part-timers and contract workers, who account 
for about one third of the total workforce.  ( Financial Times,  28 August 2004).   
4 For example, while year-on-year changes of the monthly CPI (excluding fresh food) between 
January 2001 and February 2003 were below -0.7%, those from July 2003 onwards were between -0.3% and 
0.1%. WT/TPR/S/142 Trade Policy Review 
Page 2 
 
 
 2001 2002 2003 2004 
Money stocka (end of year, % change)      
M2 + CDs 2.8 3.3 1.7 2.1h 
Exchange rate (¥ per US$) 121.6 125.1 115.9 110.1i 
 (per cent of GDP, unless otherwise indicated) 
Fiscal balanceb     
Revenue 31.6 30.3 29.8 29.8 
Expenditure 37.7 38.2 37.7 36.9 
Balance -6.1 -7.9 -8.0 -7.1 
Balance excluding social security -6.2 -8.0 -8.0 -7.1 
Government debtc 142.3 149.4 157.3 163.4 
Saving and investment      
National saving (gross) 26.4 25.7 .. .. 
Domestic investment (gross) 25.8 24.2 .. .. 
 (¥ trillion, unless otherwise indicated) 
Current account balance     
Current account 10.7 14.1 15.8 9.6j 
Current account (% of GDP) 2.1 2.8 3.2 .. 
Goods balance 8.5 11.7 12.3 7.3j 
Services balance -5.3 -5.3 -3.9 -1.9j 
Income balance 8.4 8.3 8.3 4.7j 
Net transfer balance -1.0 -0.6 -0.9 -0.4j 
Capital and financial account balance -6.6 -8.5 8.1 7.7j 
Financial account -6.2 -8.1 8.6 8.0j 
Capital account -0.3 -0.4 -0.5 -0.3j 
Changes in reserve assets -4.9 -5.8 -21.5 -16.2j 
Statistical discrepancy 0.9 0.1 -2.4 -1.2j 
.. Not available. 
a Money stock here is measured by M2 + CDs, which include cash currency in circulation, deposit money (demand deposits), 
quasi-money (time deposits, etc.), and certificate of deposit accounts (CDs). 
b General Government basis. c Gross financial liabilities, including the debt of the Japan Railway Settlement Corporation and the National Forest Special 
Account from 1998 onwards. 
d 2
nd quarter 2004, % change from the same quarter previous year. 
e September 2004, % change from the same month previous year. 
f September 2004, seasonally adjusted figure.   
g September 2004, % change from same month previous year. h October 2004, % change from same month previous year. 
i September 2004, period average. 
j First half of 2004. 
Source:  Information provided by the Japanese authorities. 
2. The Bank of Japan has continued to relax its monetary policy;  the monetary base has been 
increased, and the official discount rate and the short- term call rates have been kept to nearly zero.  
With continuing negative inflation, real interest ra tes have tended to be somewhat higher than nominal 
rates.  This, together with remaining problems in the banking system, may be an impediment to 
corporate borrowing and investment.  The fiscal deficit is expected to reach 7.1% of GDP in 2004, 
and public debt continues to increase, reaching 163.4% of GDP in 2004;  the Government's Japan WT/TPR/S/142 
 Page 3 
 
 
medium-term target for fiscal consolidation is to achieve a primary surplus (excluding social security) 
by the early 2010s.5 
3. The Government has continued to place emphasis on structural reforms.  In this connection, 
progress has been made, inter alia , in the financial and corporate sectors (notably disposal of non-
performing loans (NPLs)), corporatization of stat e-owned enterprises (such as universities and postal 
services), and deregulation (parti cularly in telecommunications an d some professional services);  
Special Structural Reform Zones have also been es tablished, within which exceptions to particular 
regulations are granted.  Against this backdrop,  Japan's export competitiveness has apparently 
increased as shown in a continuing decline in unit labour costs.6  It remains to be seen whether the 
current recovery is cyclical in nature or  more long-term due to structural change. 
4. As regards the external sector, Japan's curre nt account surplus has increased;  the growing 
surplus reflects an increasing gap between gross do mestic saving and gross domestic investment.  The 
current account surplus was about ¥15.8 trillion (or 3. 2% of GDP) in 2003, reflecting an increase in 
the merchandise trade surplus and a decrease in the services deficit;  the merchandise trade surplus 
amounted to ¥12.3 trillion, while the services account deficit was ¥3.9 trillion.  By the end of March 2004, Japan's foreign exchange reserves ha d risen to about US$827 billion (compared with 
US$496 billion at the end of March 2003), reflecting Japan's substantial intervention in the foreign 
exchange market (e.g. purchasing of foreign curr encies).  After recorded a surplus of around 
¥8.1 trillion in 2003, Japan's capital and financial account surplus was ¥7 .7 trillion in the first half of 
2004 (compared with a deficit in 2002), reflecting la rgely an increase in portfolio investment and 
other investment. 
5. Trade plays an important role in the economy.  Although the shares of exports and imports 
amount to around 10% of GDP each, external demand has contributed substantially to Japan's 
economic growth since 2002.  The United States and the European Union have continued to be 
Japan's main trading partners, while China's share in Japan's exports and imports has been rising.  
Japan's inward and outward FDI flows both decreased in FY 2003.  FDI into Japan remains considerably lower than its outward FDI, and, despite a rapid increase in inward FDI over the past decade, the level of inflows remains low compared with other developed economies. 
6. The share of services in GDP has continued to  grow since 2002, 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 from 68.5% in 2001 to 69.4% in 2002.  Agriculture accounts 
for a small share of GDP and employment;  OECD es timates suggest that total government assistance 
was greater than the sector's value- added in 2002 (Chapter IV(2)(i)). 
                                                     
 
5 In 2004, the primary balance of the General Government was estimated to be in deficit of 5.3% of 
GDP.  The General Government includes the central government, local governments, and social security.  Data provided by the authorities indicate that the primary balance of central and local governments combined was 
estimated to be in deficit of 4.6% of GDP in 2004.  The primary balance of the Central Government is national 
debt service less government bond issues.  The primary balance for local governments is debt services + cost of repaying corporate debt included in money transfer to public enterprises - local bonds. 
6 The unit labour cost declined by 3.1% in 2002 and 2.3% in 2003 (OECD, 2003b). WT/TPR/S/142 Trade Policy Review 
Page 4 
 
 
Table I.2 
Shares of GDP and employment by sector, 2001-02 
 2001 2002 
Share of GDP (per cent)    
Agriculture, forestry and fishing 1.3 1.3 
Mining 0.1 0.1 
Manufacturing 20.8 20.5 
Services 70.6 71.1 
Construction 7.2 6.9 
Electricity, gas and water 2.9 2.8 
Wholesale and retail trade 13.7 13.7 
Financial services and insurance 6.6 6.8 
Real estate 13.3 13.7 
Transport and communications 6.5 6.3 
Other services 20.5 20.8 
Government 9.0 9.2 
Non-profit services for households 1.9 2.0 
Import tax and other 0.6 0.6 
Statistical discrepancy 1.4 1.0 
Total (¥ trillion) 505.8 498.1 
Share of employment (per cent)    
Agriculture, forestry and fishing 6.2 6.0 
Mining 0.1 0.1 
Manufacturing 18.4 17.7 
Services 68.5 69.4 
Construction 10.0 9.9 
Electricity, gas and water 0.7 0.7 
Wholesale and retail trade 18.1 18.0 
Financial services and insurance 2.9 3.0 
Real estate 1.4 1.4 
Transport and communications 5.9 5.9 
Other services 29.5 30.5 
Government 5.5 5.4 
Total (million) 66.2 65.3 
.. Not available. 
Note: Total and shares of employment data are based on SNA statistics on "Employed Persons".  Available at:  
 http://www.esri.cao.go.jp/en/sna/h16-nenpou/90s3_en.xls. 
Source : Information provided by the Japanese authorities. 
(2) MACROECONOMIC POLICIES  
(i) Monetary and exchange rate policy 
7. Monetary policy has been expansionary since Japan's previous Trade Policy Review.  The 
official discount rate has remained unchanged at  0.10%, and the balance of current accounts of 
financial institutions held at the BOJ, its main ta rget for money market operations since March 2001, 
has been raised to around ¥30-35 trillion since January 2004 (compared with ¥27-30 trillion Japan WT/TPR/S/142 
 Page 5 
 
 
previously).7  Against this backdrop, the call rates in the short-term money markets remain around 
zero.  The BOJ maintains that the current procedures for money market operations are to be continued 
until the core CPI (excluding fresh food) registers a st able zero per cent or an increase year on year for 
at least a few months.  In November 2002, the BOJ also started the purchase of stocks held by banks with a view to reducing market risk pertaini ng to the shareholdings of these institutions .  The question 
arises as to whether these measures coul d have artificially raised share prices.
8  The BOJ also started 
the purchase of asset-backed secu rities in June 2003, with a view to developing a market for these 
securities and thereby strengt hening the transmission m echanism of monetary policy.9  The BOJ is of 
the view that the low cost of credit resulting from the current monetary policy has supported banks' 
disposal of NPLs and the restructuring and rehabilitation of debtor companies10;  nonetheless, this has 
permitted inefficient companies to postpone addressing their problems.  
8. For the past two years, the nominal exchange rate of the yen has appreciated against the 
U.S. dollar (for example, from ¥119/US$ at the end of 2002 to around ¥106/US$ at the end of 
October 2004).  Accordi ng to the authorities, market intervention took place during 2003 and 2004 to 
smooth excessive short-term volatility in the yen.  
(ii) Fiscal policy 
9. During the period under review, Japan maintained a deficit in its budget; the General 
Government's fiscal deficit as a percentage of GDP  is estimated to be 7.1% in 2004 (compared with 
8.0% in 2003).11  Japan's public debt to GDP ratio is expected to increase to 163.4% in 2004 
(compared with 157.3% in 2003).  Nonetheless, these figures exclude the debts of some public 
enterprises (outside General Government), whose fi nancial situation tends to be opaque, as well as a 
variety of contingent liabilities in the pension,  state-owned banking, and credit guarantee systems.12  
The Government's medium-term fiscal consolid ation programme requires it to maintain its 
expenditure at or below its FY 2002 level until FY 2006, and to achieve a primary surplus by the early 
2010s (the actual amount of surplus is unspecified).   The FY 2004 budget amounts to ¥82.1 trillion, of 
which expenditure on public works accounts for 9.5% (¥7.8 trillion), down 3.3% from the FY 2003 budget, while the national debt service amounts to ¥ 17.6 trillion (21.4% of the budget), up 4.6% from 
                                                     
 
7 The BOJ is to conduct money market operations targeting the maintenance of the announced range of  
current account balances, which may, without such operations, fluctuate according to the demand for money.  
The BOJ is to provide more liquidity irrespective of the target if it recognizes a risk of financial market instability, such as a surge in liquidity demand.  The BOJ has raised the target several times since March 2001, 
when it was initially set at ¥5 trillion;  it was increased to ¥6 trillion in August 2001, ¥10-15 trillion in 
December 2001, ¥15-20 trillion in October 2002, and ¥27-30 trillion in May 2003. 
8 The purchasing of stocks by the Bank of Japan ended on 30 September 2004.  Between 
November 2002 and September 2004, it purchased stocks worth ¥2 trillion. 
9 The year-on-year growth rate of the monetary base (i.e. cash in circulation and current accounts of 
financial institutions held at the BOJ) was 16.4% in 2003, while that of money supply (i.e. the sum of cash 
currency in circulation, demand deposits, quasi-money (such as time deposits) and negotiable time certificate of 
deposit) was 1.7% in 2003, suggesting that the increase of the monetary base induced only a small increase in 
money supply.  This may be attributed to weakness in the monetary policy transmission mechanism, against a backdrop of persisting fragility of the financial system (as reflected in NPLs) and weaknesses in corporate 
balance sheets, and thus lack of investment demand. 
10 See, for example, a speech made by a BOJ Policy Board member, 25 March 2004.  Available (in 
Japanese) at:  www.boj.or.jp/press/04/press_f.htm. 
11 OECD (2004a).  Japan's public debt to GDP ratio includes the debt of the Japan Railway Settlement 
Corporation and the National Forest Special Account. 
12 Research Institute of Economy, Trade and Industry, Policy debate .  Available at:  
http://www.rieti.go.jp/en/special/policy- debate/01.html [5  November 2004]. WT/TPR/S/142 Trade Policy Review 
Page 6 
 
 
the FY 2003 budget.13  With a view to increasing fiscal transparency, a study group in the Ministry of 
Finance began to create a balance sh eet of the Japanese Government in  2000;  the authorities indicate 
that each ministry and agency is currently preparing financial statements.14 
10. Japan's FY 2004 tax reform measures include:  ex tension of tax cuts for residential mortgages, 
reduction of taxes on capital gains from land and housing and non-listed stocks, extension of the period for loss carried-forward from five years to seven years for corporations, and reform of taxation 
on pensions, including the abolition of a tax exemption for elderly and the reduction of the tax 
deduction in respect of pension income for those aged 65 and over.
15  Other changes in the taxation 
measures since the previous Review include tax cuts for IT or R&D-related investments. 
11. The Government has also been considering reforms of the fiscal relationship between the 
central and local governments.  To this end, the Government has deci ded to transfer about ¥3 trillion  
from personal income tax revenues to local inhabita nts tax accounts by FY 2006.  As an intermediate 
measure, about 3% (¥425 billion) of the expected personal income tax revenue (¥13.8 trillion) in 
FY 2004 is to be transferred to local governments in proportion to their population.  
(3) STRUCTURAL POLICIES  
12. Since the previous Review, the Government has continued to emphasize structural reform.  
The Government's main policy direction for structur al reform is described in  the "Basic Policies for 
Economic and Fiscal Management and Structural Reform" formulated annually by the Council on 
Economic and Fiscal Policy.  The 2003 Basic Policies stipulated, inter alia , that Japan would reduce 
impediments to business activities by eliminating various regulations and government interventions, creating Special Structural Reform Zones (see below) and reforming financial and corporate sectors.  In the 2004 Basic Policies, issued in June 2004, the authorities emphasized, as a policy objective for 
FY 2005 and FY 2006, the construction of a socio-economic system led by the private sector 
(including privatization of Japan Po st);  reform in both the public and private sectors, particularly in 
the financial system;  labour market reform;  and pe nsion and other areas of social security reform.  
The Government's concrete measures for regulatory reform are stipulated in the new three-year programme on regulatory reform, adopted in March 2004. 
(i) Financial system and corporate reform 
13. Non-performing loans (NPLs) and overhanging de bts have adversely affected the Japanese 
economy over the past decade.  The Government's main  policy agenda has thus included the reform of 
the financial sector, including disposal of NPLs, in  order to improve the efficiency of the capital 
market.  An efficient capital market, through whic h savings are channelled into profitable investment, 
is an essential factor in raising the productivity of the corporate sector.  Government-led reform of 
                                                     
 
13 For details of the budget formulating process, see WTO (2003), Chapter I(2)(ii). 
14 According to the Government Balance Sheet for FY 2002, the Government's assets totalled 
¥765 trillion.  According to Kurtzman et. al. (2004), out of 50 countries surveyed, Japan was ranked the 16
th "least opaque" country, as measured by their "opacity indices", which aim to indicate the degree to which 
countries lack "clear, accurate, easily discernible and widely accepted practices governing the relationships 
among businesses, investors, and governments, which form the basis of most small scal e, high frequency risks."  
Japan's opacity index in 2004 was 28 (100 = complete opacity), while that for Finland was 13, the 
United States 21, Canada 23, and Germany 25.  Opacity indices are available at:  
http://www.milkeninstitute.org/pdf/opacity_exhibits.pdf. 
15 The share of persons aged 65 or above in Japan's total population is estimated to reach 22.5% in 
2010, 27.8%  in 2020, and 29.6% in 2030. Japan WT/TPR/S/142 
 Page 7 
 
 
Japan's financial system included in particular further disposal of NPLs, introduction of limits to the 
protection of deposits, and corporatizing/priv atizing the Postal Savings and Insurance. 
14. In October 2002, the Financial Services Agency  (FSA) formulated a Program for Financial 
Revival (PFR), with the aim of, inter alia , halving by end-FY 2004 the ratio of NPLs to total credits 
held by major banks at the end of March 2002.  To this end, the PFR stipulated support measures in case a financial institution falls into distress or faces a capital shortage;  these measures include 
injection of public funds based on the Deposit Insurance Law, provision  of liquidity through special 
loans by the Bank of Japan, and enhanced monitoring of financial institutions to which public support 
is provided.  The disposal of NPLs has apparently progressed;  the ratio of NPLs to the total lending 
of all banks decreased to 5.8%  (¥26.6 trillion) in March 2004  (from 8.4% in March 2002).
16  
Moreover, according to the results of FSA's special in spections of major banks' lending in April 2004, 
the ratio of loans classified as "in danger of bankruptcy", or below, to total lending declined.17  In 
accordance with the PFR,  the Government has made decisions to  inject public funds into some 
distressed institutions.18 
15. Since 1 April 2002, full protection of bank deposits bearing interest has been limited to 
¥10 million (and interest therefrom) per depositor  per financial institution;  previously, the 
Government had fully protected all deposits.  Current deposits, ordinary deposits, and other 
miscellaneous liquid deposits continue to be fully protected until 31 March 2005;  from April 2005, 
only deposits for payment and settlement purposes be aring no interest and redeemable on demand are 
to be fully protected. 
16. The previous Postal Saving System, the largest financial institution in Japan, was reorganized 
into a part of a new state-run public corporation, Japan Post, in April 2003.19  It has been argued that 
the large share  of Japan Post in savings and insurance, toge ther with certain privileges it enjoys, may 
deter competition from the private sector.20  Moreover, the large amount of money supplied by postal 
savings and insurance to finance public projects ma y distort the allocation of savings among various 
investments.21  On 10 September 2004, the Government adopted a Basic Policy on the Privatization of 
the Japan Post, which stipulates privatization of Japan Post in 2007.  The Basic Policy also envisages establishment of four joint-stock corporations, to deal with postal services, postal savings, postal life 
insurance, and the maintenance of the post office network, with one holding company controlling the 
                                                     
 
16 The ratio of NPLs to the total lending of majo r banks decreased to 5.2% (¥13.6 trillion) in 
March 2004.  In accordance with the Financial Reconstruction Law, the FSA announces the status of NPLs held 
by all banks every six months. 
17 The result of the April 2004 inspection shows that out of total lending of ¥10.5 trillion by 11 major 
banks to 133 companies, loans of ¥1.8 trillion (17.1% of the total) to 22 companies were classified as "in danger 
of bankruptcy" or below (i.e. "in de facto bankruptcy" or "in legal bankruptcy");  in the April 2002 inspection, 
the ratio of loans classified as "in danger of bankruptcy" or below accounted for 28.7% of total lending.  These inspections have been carried out since October 2001. 
18 In May 2003, public funds were injected into Resona Holdings.  In December 2003, the Deposit 
Insurance Corporation acquired all shares of the Ashikaga Bank, thus bringing it under government control. 
19 At the end of June 2004, deposits in Japan Post's postal savings amounted to ¥226 trillion, which is 
about 16% of Japan's total households financial assets.  In addition to the postal savings, deposits with Japan 
Post's insurance system, Kampo, were ¥119 trillion at end-March 2004.  The Law Concerning Correspondence 
Delivery by Private-Sector Operators, which entered in to force in April 2003, also allowed private-sector 
operators to engage in correspondence delivery business, which was once monopolized by the Government. 
20 Japan Post also faces constraints such as universal service obligation, insurance and deposit ceiling 
regulations, limitations on the scope of products and services, and restrictions on asset management. 
21 See MOF 2003, p. 6.  Since FY 2001, the compulsory deposit of postal savings funds to the Trust 
Fund Bureau to finance public projects through the FILP has been abolished. WT/TPR/S/142 Trade Policy Review 
Page 8 
 
 
four companies.  The Government is to retain mo re than one third of the holding company's shares 
issued.22 
17. A growing awareness that ineffective corporate governance has contributed to the inefficient 
use of capital and labour in the corporate sector ha s prompted the Government to implement a number 
of policy measures since the previous Trade Policy Review of Japan.  These include:  an amendment to the Commercial Code, which involved the introduction of a new corporate governance structure 
and the relaxation of restrictions on issuance of stock options;  and the revision of the Certified Public 
Accountants Law, which introduced a revised stru cture for overseeing auditors and provisions to 
enhance the independence of auditors from private companies under audit  (Chapter III(5)(vii)).  
Other relevant regulatory changes include the amen dment in 2003 to the Law on Special Measures for 
the Revitalization of Industrial Dynamism (I ndustrial Revitalization Law), which introduced 
additional tax measures related to mergers and acqui sitions approved under th e law;  these measures 
are to expire before the end of March 2008. 
(ii) Pension reform 
18. Responding to the rapid aging of the population, a law concerning Japan's public pension 
reform was approved by the Diet in June 2004.
23  Reforms under the new law include annual increases  
in the contribution rates until 2017, gradual reduction of the benefit and increase in the government 
contribution, together with tax reform measures, until 2009.  Questions have been raised on possible 
effects of pension reform on the Japanese ec onomy, including whether the planned raise in 
contribution rates and the consequent increase in companies' expenditures may affect companies' 
employment strategies and increase unemployment , and whether the planned raise in contribution 
rates may reduce households' disposable income and thus reduce consumption.24  The authorities are 
of the view that pension reform will help impr ove the financial soundness of the pension system. 
(iii) Regulatory reform 
19. Sustained efforts have been made to gradually reduce regulatory intervention in various 
sectors, including energy, financial services, te lecommunications, legal, and education services 
(Chapter IV(5)).  In March 2004, the Council for the Promotion of Regulatory Reform issued a 
"Three-Year Program for Promoting Regulato ry Reform (TPPRR)", which includes some 
760 concrete measures (Chapter III(5)(v)).25  Moreover, under the Special Zone for Structural Reform 
Act, which entered into force in April 2003, over 320 special zones were established during the first 
fiscal year of implementation (FY 2003).  Within a particular zone, the Act allows relaxation or 
elimination of specific regulations;  these includ ed extending the period foreign researchers are 
allowed to stay in Japan from three years to five  years, round-the-clock opening of the Customs, and 
permission for joint-stock corporations to engage  in agriculture and lease farmland.  The question 
arises as to whether such measures should be app lied nationwide in the first place.  The Government 
                                                      
 22 Privatization of other public enterprises is under consideration.  On 2 June 2004 a law to privatize 
Japan's four public highway corporations was approved by the Diet.  According to the law, Japan's expressway public corporations are to be privatized by the end of March 2006. 
23 Japan's public pension system has a two-tier structure:  the first tier is the national pension plan, 
which basically covers all Japanese citizens;  in the second tier, based on salaries of participants, are employees' pension plans covering workers of private companies, and mutual aid pension plans covering civil servants. 
24 See, for example, "Japanese Pension Reform, Don't Grow Old", The Economist , 18 December 2003;  
and Takayama (2004). 
25 After the Council for Regulatory Reform expired at end-March 2004, a Council for the Promotion of 
Regulatory Reform and Headquarters for the Promotion of Regulatory Reform were established in 2004, with a 
view to, inter alia , overseeing the progress of the TPPRR. Japan WT/TPR/S/142 
 Page 9 
 
 
is of the view that special zones are pragmatic solutions to the promotion of regulatory reform, which 
has often been resisted by local authorities and th e private sector (presumably domestic firms), who 
apparently are in favour of ex isting regulations.  The Headquarters for the Promotion of Special 
Zones, headed by the Prime Minister, has been di scussing which deregulation measures applied to 
special zones would be beneficial for nationwide application.   
(4) DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT  
20. In 2003, the share of exports of goods and services in GDP was around 11.8% (11.2% in 
2002) and the share of imports around 10.2% (9.9% in 2002).  In 2003, Japan was the world's third 
largest exporter (counting the EU as one) and importer of goods. 
(i) Composition of merchandise trade 
21. Manufactures accounted for about 93% of Japan's exports in 2003, up slightly from 92.8% in 
2001 (Chart I.1).  During the period 2001-03, machinery and transport equipment remained Japan's 
most important merchandise export, accounting for 66.8% of total exports of goods in 2003;  the 
increase of merchandise exports was mainly attribut ed to the increase in exports of machinery and 
transport equipment. 
22. The share of primary imports increased in 2003,  and that of manufactured imports declined 
slightly.  Machinery and transport equipment cont inue to be Japan's most important merchandise 
imports, with a share of 27.6% in 2003, down slightly from 2002.   
(ii) Direction of merchandise trade 
23. The United States remains the main destination fo r Japanese exports, attracting 24.9% of total 
Japanese exports in 2003, although the share declined by 5.5 percentage points compared with 2001 
(Chart I.2).  The share of Asia increased to 49.2 % in 2003 (up from 43% in 2001);  in particular, the 
share of China has continued to grow since 2001.  During 2001-03, the share of the European Union 
(15 members) in Japan's exports decreased to 15.3% and APEC's share decreased to 75.7%. 
24. Since 2002, China has replaced the United States as Japan's main supplier of imports.  China's 
share in Japan's total imports increased to 19.7% in  2003, while the United States' share declined to 
15.6%.  The share of East Asia as a source of im ports continued to increase in 2003;  APEC's share 
declined to 68.2% in 2003.  
(iii) Composition of trade in services 
25. In 2003, Japanese cross-border sales (exports) of services increased, while its purchases 
(imports) declined (Table AI.1).  The services deficit was reduced from ¥5.3 trillion in 2002 to 
¥3.9 trillion in 2003.  Deficits in both tran sportation and travel decreased in 2003.  WT/TPR/S/142 Trade Policy Review 
Page 10 
 
 
Chart I.1
Product composition of merchandise trade, 2001 and 2003
2001 2003
(a)    Exports (f.o.b.)
Other  
4.2
Manufactures
92.8
Total:   US$403.4 billion Total:  US$472.0 billion
(b)    Imports (c.i.f.)
Other  
1.9
Fuels
20.1Agriculture
16.3
Transport equip.
3.7
Mining
25.2
Non-electrical
machinery
4.6Manufactures
56.7
Chemicals
7.2Office machines 
& telecom.
15.1Other electrical
machines  3.9
Other mining
5.1Other mining
4.9Textiles & clothing
6.4
Other electrical 
machines   
4.1Mining
26.1
Other 
semi-manuf.
5.2Transport equip.
4.7Fuels
21.2
Manufactures
57.0
Chemicals
7.7
Total:   US$349.3 billion Total:   US$383.5 billionPer cent
Manufactures
93.0Other 
4.3
Other consumer goods
9.8Iron & steel  3.8
Office machines & 
telecommunication
19.1
Other 
1.7Other consumer goods  
10.3
Non-electrical
machinery
4.6Other consumer goods 
10.2
Textiles & clothing 
6.9Office machines & 
telecommunication 
20.5Automotive 
products
19.9Non-electrical 
machinery
13.7Agriculture & 
mining
3.0Agriculture & 
mining
2.7
Other  semi-
manuf.  4.3
Office machines
& telecom.
14.2Non-electrical 
machinery
13.8Chemicals  8.3Chemicals  7.6
Other  semi-manuf.
4.3
Source :  UNSD, Comtrade database (SITC Rev.3).Other consumer goods  
10.3Agriculture
15.2Automotive
 products
21.8Other transport 
equip.  5.6
Other electrical machines
6.6Other transport
equip.  5.8
Other electrical machines  
7.3Iron & steel   3.4
Other 
semi-manuf.
5.0
 Japan WT/TPR/S/142 
 Page 11 
 
 
Chart I.2
Direction of merchandise trade, 2001 and 2003
2001 2003
(a)    Exports (f.o.b.)
Other  
3.5
East Asia
39.5
Total:   US$403.4 billion Total:  US$472.0 billion
(b)    Imports (c.i.f.)
Other  
2.9
Other 
America
4.8United States
18.3
Chinese Taipei
4.1
China
16.6East Asia
41.6
Other Europe  2.8Korea, Rep. of
4.9Indonesia
4.3EU15
12.8M.E.
12.7EU15
12.8Other East Asia
11.4
Indonesia
4.3
United Arab Emirates
3.7Chinese Taipei
3.7Other 
America
4.4
East Asia
43.8
Other Europe  2.9
Total:   US$349.3 billion Total:   US$383.5 billionPer cent
East Asia
45.5Oceania
2.6
Other East Asia   6.5 United States
24.9
Korea, Rep. of
7.4
Other 
3.2Chinese Taipei
6.0
China
19.7Australia
3.9
Other East Asia
11.7EU15
16.0China
7.7Hong Kong, 
China  5.8Other East Asia  7.2Other
4.1
EU15
15.3
Korea, Rep. of
4.7Middle East
2.8Other 
America
4.8United States
30.4
Other America
5.7
Source :  UNSD, Comtrade database (SITC Rev.3).Australia
4.1United States
15.6Hong Kong, China
6.3Singapore  3.1
Chinese Taipei
6.6
Korea, Rep. of
6.3
Middle East
2.7Thailand  2.9
United Arab 
Emirates
3.7Oceania
    2.3
China
12.2Singapore  3.6
Thailand  3.4
M.E.
13.4
Saudi Arabia  3.5
Other
Middle East
5.8Other
Middle East
5.5Saudi Arabia  3.8
 WT/TPR/S/142 Trade Policy Review 
Page 12 
 
 
(iv) Foreign direct investment (FDI) 
26. According to data provided by the Ministry of  Finance, FDI inflows decreased slightly to 
¥2.1 trillion in FY 2003.  Investment from the Un ited States and by foreign-owned companies in 
Japan were the main sources of inward FDI.  Ja pan's outward FDI also declined, to ¥4.1 trillion in 
FY 2003, reflecting a large decline in Japan's FDI into Europe and, to a lesser extent, into Latin America;  on the other hand, Japan's FDI into North America increased (Table AI.2).  Sectorally, a 
57% increase of inward FDI was observed in financial services in FY 2003, while FDI inflows in 
telecommunications declined by 65% (Table AI.3).  Outward FDI increased in electrical machinery, 
chemicals, retail and wholesale trade, and mining, wh ile FDI outflows of tran sport equipment, finance 
and insurance services declined in FY 2003. 
27. Inward FDI remains relatively low by developed-country standards.
26  Moreover, FDI into 
Japan remains lower than its outward FDI, although the gap has narrowed over the past decade, owing 
to a rapid increase in inward FDI.27  The authorities attribute the low level of FDI into Japan to 
macroeconomic factors, such as the appreciating trend of the yen, as well as the high costs of business 
and regulatory barriers, which Japan is taki ng steps to rectify (Chapter III(3)(ii)). 
(5) PROSPECTS  
28. The Government's official projection, announced in January 2004, forecast the economy 
would grow by some 1.8% in FY 2004, with de flation (CPI) of 0.2%, and unemployment at about 
5.1%.28  The latest quarterly estimates of GDP indicate  that in the third quarter of 2004, real GDP 
grew by 3.9% year on year, led mainly by domestic demand;  however, seasonally adjusted quarterly 
growth rates have been de clining since the first quarter of 2004.  The recovery up to the third quarter 
of 2004 is apparently associated with improving labour market conditions, as observed in a decline in 
the unemployment rate;  the recovery also helped to ease downward pressure on prices and increased 
private consumption. 
29. The Government is optimistic about the sustainability of the current recovery because of 
strong domestic demand compared with external de mand.  But the strength of the recovery remains to 
be seen, given the persistent deflation, seemingl y weak business and consumer confidence, and thus 
the continuing fragility of investment and consumer demand.  The sustainability of the recovery will 
also depend upon external factors, such as the pace of recovery in the world economy, including 
China, and prices of crude oil, medium- as well as long-term downside risks, such as a rapidly aging 
population and a decline in the labour force.  Of greater importance to Japan's longer-term growth 
prospects, together with accommodative macroeco nomic policy, will be its efforts to implement 
structural and other economic reforms, including continued disposal of NPLs, financial and corporate 
sector reform, pension reform, strengthening of  competition policy, and trade liberalization, 
particularly in agriculture, to boost competition.  If implemented, these reforms would help restore 
business and consumer confidence, thereby making an  important contribution to sustained growth of 
the Japanese economy.  The Government appears to believe in the need to intensify regulatory and 
other structural reforms aimed at removing distortions, including state involvement in various sectors, and impediments to competition. 
                                                     
 
26 According to UNCTAD (2004), FDI inflows into Japan in 2003 amounted to US$6.3 billion, while 
those into the United States, the European Union, and China were US$29.8 billion, US$295.2 billion and US$53.5 billion, respectively. 
27 The ratio between the outward and inward FDI was about 12:1 in FY 1993, while it was about 2:1 in 
FY 2003. 
28 According to the Cabinet Office forecast in July 2004, the economy would grow by some 3.5% in 
FY 2004, with deflation (CPI) of 0.1%, and unemployment at about 4.5%.