Development Bank of Japan
Research Report
No. 5

Recent Trends in the Japanese Economy:
The 1990s in Retrospect

March 2000

Economic and Industrial Research Department
Development Bank of Japan

Contents
Summary.............................................................................................................................. iii
I.

The Japanese Economy: Slow Recovery with Weak Private Demand ..........................1
1. Production: Starting to Recover .................................................................................................1
2. Shipments: Recovering, Inventories: Adjustment Completed...............................................3
3. Consumption: At a Standstill ......................................................................................................5
4. Plant and Equipment Investment: Sign of Bottoming Out ...................................................9
5. Housing Investment: Leveling Off ..........................................................................................12
6. Public Investment: Leveling Off ..............................................................................................15
7. Exports and Imports: Growth Led by Asia............................................................................16
8. Prices: Weak but Subdued Decline ..........................................................................................20
9. Employment Conditions: Still Harsh.......................................................................................22
10. Long-term Interest Rate: Stable, Continued Reduction in Lending despite Money
Supply: Expanding......................................................................................................................26

II. The 1990s in Retrospect................................................................................................29
1. Economic Growth of Major Industrialized Countries..........................................................29
2. Increased Concerns about the Future Discouraged Consumption.....................................30
3. Reappearance of Instability in Plant and Equipment Investment.......................................35
4. Preference for Safe Assets and Reduced Investment in Real Assets..................................38
5. Diversified Forms of Employment..........................................................................................40
6. Growing Budget Deficit and Increased Government Bond Issues ....................................44
7. Increased Trade with Asia and Import Dependency ............................................................46
8. Progress of Information Society...............................................................................................50

Development Bank of Japan Research Report/ No. 5iRecent Trends in the Japanese Economy:
The 1990s in Retrospect

Summary
1. The Japanese economy has bottomed out and is starting to recover, supported by fiscal andfinancial stimuli as well as increased exports. However, the path to recovery is not smooth, asprivate domestic demand remains weak. Real GDP in the third quarter of 1999 increased forthe second consecutive period, up 0.9% from the previous year. Private consumption remains
static, and plant and equipment investment is showing the sign of bottoming out. Public
investment and housing investment are leveling off, while production is rising as exports increase
and inventory adjustments have been completed.
Regarding personal consumption, the continued decline in income – bonus in particular –has not prevented a slight improvement in consumption propensity in the third quarter of 1999,
which increased on the previous year for the fourth consecutive period. Since the beginning ofautumn, however, personal consumption as a whole has leveled off, with a decline in service
consumption and automobile sales. Nevertheless, there are signs of improvement as
information-related consumption continues to grow rapidly.
The sharp drop in plant and equipment investment was somewhat subdued in the third
quarter of 1999, down 7.3% from the previous year. Whereas return on investment hasbottomed out in the manufacturing sector and is recovering slightly in the non-manufacturingsector, plant and equipment investment still remains sluggish. Nonetheless, it is showing signsof bottoming out as the decline in machinery orders, its leading indicator, has eased somewhat.
Largely due to a reduction in housing tax, housing starts rose in the second quarter of 1999
year-on-year. Although the construction of owned houses has slowed after leading the initialrecovery, the construction of condominiums has accelerated to take advantage of the tax
reduction, backed by strong sales.
The growth of public investment has come to a temporary halt. Largely due to theeconomic stimulus package of April 1998 and the emergency economic measures of November
1998, public capital formation increased on the previous year for three quarters to the second
quarter of 1999. So far in fiscal 1999, however, orders have been decreasing in local regions inparticular, reflecting the difficult fiscal conditions. As a result, public capital formation declinedin the third quarter of 1999, although it remains high.
Exports and imports have increased, both led by Asia. In the third quarter of 1999, exportsrose for the first time in six quarters, led by a strong increase of 15.1% in exports to Asia. After
starting to increase again in January 1999, imports continued to increase, up 9.3% in the third
quarter of 1999. Imports of industrial products from Asia in particular have grown significantly.
After showing signs of bottoming out since the end of 1998, industrial production has been
recovering, as shipments increased in the third quarter of 1999 for the first time in eight periods.
Although the recovery in producers’ goods has been rapid, recovery for consumer goods andcapital goods has been slower, reflecting the weakness in domestic demand.
Development Bank of Japan Research Report/ No. 5iii

Prices are still showing a slight decline, but the decline has been slowing. Recovery in the
Asian economies has stemmed the fall in commodity prices, while the decline in wholesale prices
is slowing due to progress in inventory adjustment and the rise in oil prices. However, service
consumption price remains sluggish.
Employment conditions remain harsh, although there are signs of improvement. Although
the unemployment rate and the ratio of job offers to applicants have improved slightly, theregular employment environment remains severe, as new jobs are mainly being offered to parttime workers.
As regards finance, interest rates have remained at zero in the money market since March
1999. The yield on long-term government bonds is almost static at present. The stable
growth of money supply contrasts with the continued decline in bank loans.
2. The Japanese economy grew faster than other major industrialized economies until the
1980s, but suffered a major setback in the 1990s. Since the mid-1990s, the economy has been
mired in a serious slump, in contrast with the recovery in Europe and the U.S.A. This report
looks back at the Japanese economy in the 1990s, with special focus on the destabilization of
consumption and investment, the diversification of labor market, the increase in government
debts, globalization and the progress of information technology.
The 1990s have seen the destabilization of the two major components of domestic demand:
consumption and plant and equipment investment. Heightened concerns about the future
made consumption responsive to the business cycle. The savings ratio stopped declining
despite the progress of aging, and personal financial assets shifted to safe assets as bank deposits.
Plant and equipment investment was no longer supported by the previously stable investment in
the non-manufacturing sector, and became unstable due to the widespread aftershocks following
the bursting of the economic bubble and the instability of the banking system. The decrease inplant and equipment investment prompted the corporate sector to cut back on borrowing, thus
generating surplus funds.
As regards employment, regular employment did not experience any significant fluctuation,
while the weight of part-time workers increased substantially. Changes in the demographic
structure and increased participation of women in the labor force accelerated the diversificationof employment style.
In the 1990s, the government deficit grew rapidly due to the sluggish economy andsuccessive economic stimulus measures. Consequently, outstanding debts in the government
sector have risen much faster than in other developed countries, and are expected to reach 120%of GNP in 2000. As there is small room for further falls in interest rates, the growing debt iscausing concern about the increased burden of interest payments in future years.
The 1990s were characterized by the rapid progress of globalization and information
technology. The overseas production ratio has risen to almost 14%, while the share of finishedproducts in total imports has increased to 60%. Information-related expenditures increased
rapidly in the latter half of the decade. The diffusion of IT (information technology) is expected
to continue for many years.

iv

Development Bank of Japan Research Report/ No. 5

I. The Japanese Economy: Slow Recovery with Weak Private Demand
1. Production: Starting to RecoverWith support from fiscal and financial stimuli as well as from increased exports, the Japanese
economy has bottomed out and is starting to recover. However, the recovery is very slow,
restrained by sluggish private domestic demand. Private consumption is not moving strongly
due to harsh income and employment conditions. Plant and equipment investment is showing
the sign of recovery. Housing investment is leveling off, whereas public investment is also
leveling off after substantial growth.
Real GDP (Figure 1-1) increased for two consecutive periods after recording a positive
growth for the first time in seven quarters in the second quarter of 1999. The revised
government estimate of 0.6% for fiscal 1999 will be attained even if the economy shrinks by
0.3% on the previous period in each of the next two quarters.
Figure 1-1. Trends in Real GDP(Year-on-year change by component)
(%)
9

91/2

97/3

93/10

7
GDP growth rate
5
Exports
Public demand
Inventory investment
Consumption
Housing investment
Plant and equipment investment

3
1-1

Imports (reversed sign)

-3
-5
90

91

92

93

94

95

96

97

98
99
(CY quarterly basis)

Source: Economic Planning Agency, “Annual Report on National Accounts,” 1990 as base year.

By demand component, growth in private final consumption expenditure accelerated on theprevious year for three consecutive periods from the fourth quarter of 1998, only to slow again in
the third quarter of 1999. Continued income and inhabitant tax relief measures have notcompensated improve the harsh employment and income conditions; the rise in consumption
propensity among workers’ households turned out to be unstable.
Plant and equipment investment of private corporations declined for seven consecutive
periods from the first quarter of 1998. Although the manufacturing sector has experienced asubstantial decline, the decline in the non-manufacturing sector has been slowing. Furthermore,machinery orders, the leading indicator, imply that plant and equipment investment is bottoming
Development Bank of Japan Research Report/ No. 5

1

out in both the manufacturing and non-manufacturing sectors.
Private housing investment rose in the second quarter of 1999 for the first time in nine
quarters as owned houses increased largely due to continued low interest rates and housing tax
relief. Condominium construction is accelerating on the back of tax relief measures. As aresult, annualized housing starts reached at around 1,200,000 units at an annual base. But the
housing investment is leveling off.
Public demand including government final consumption expenditure and public fixed asset
formation increased for the fourth consecutive period from the fourth quarter of 1998,
supported by the two economic stimulus packages in fiscal 1998. However, the growth has
been slowing recently. As the contract value of public works, its leading indicator, started to
decline in the second quarter of 1999, the government agreed to economic pump-priming
measures (total value of ¥18 trillion) in November 1999.
As regards exports and imports of goods and services, exports rose in the third quarter of1999 after six quarters of decline, led by the recovery of the Asian market as well as theEuropean and U.S. markets. Imports increased for the second consecutive quarter, led by Asia.
Figure 1-2 shows the trend of major production indicators including the industrial
production index, construction activity index and tertiary industry activity index.
Figure 1-2. Trend of Production Indicators (Seasonally adjusted)
91/2

120

97/3

93/10

Industrial production index(1995=100, weight 22.4%)
110

100

90
Tertiary industry activity index(1995=100, weight 59.5%)

Construction activity index(1995=100, weight 8.1%)

80
90

91

92

93

94

95

96

97

98
99
(CY quarterly basis)

Source: Ministry of International Trade and Industry, “Industrial Statistics Monthly.”

After suffering low levels since the second quarter of 1998, the industrial production index
seems to have bottomed out, recording the fastest growth since the first quarter of 1976 (up3.9% from the previous year) in the third quarter of 1999, largely due to increased production oftransport equipment and electric machinery. Based on the forecast of manufacturing industry
production, the index will continue to rise in the fourth quarter of 1999.

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Development Bank of Japan Research Report/ No. 5

The construction activity index continued to improve from the fourth quarter of 1998 withthe progress of public works projects, but has since fallen again. The tertiary industry activity
index is recovering slightly, with contributions from industries such as transportation andcommunications.
2. Shipments: Recovering, Inventories: Adjustment Completed
The relationship between the growth of shipments and that of inventories shows that theJapanese industry entered a “recovery phase” at the end of 1998, with the decrease in shipments
tapering off. Currently, inventory adjustment has completed as shipments in the third quarterof 1999 increased for the first time in eight quarters (Figure 1-3). Although inventories havebeen reduced for all types of goods, the recovery in shipments owes much to the contribution
from producers’ goods. On the other hand, the recovery is still weak for final demand goods.
By type of goods, shipments of capital goods (excluding transport equipment) andconstruction materials are still on the decline due to sluggish plant and equipment investment,
but the decline has been curtailed and even reversed for the month of August (Figures 1-4 and 15). Although consumption goods were the first to see an upturn in shipments (4Q/98), therecovery stagnated due to the persistent harsh income and employment conditions (Figure 1-6).
Shipments of producers’ goods have increased rapidly so far this year, thus leading the recoveryof the whole industry (Figure 1-7). In general, the recovery of producers’ goods precedes thatof final demand goods.1 Thus, whether the current recovery of producers’ goods leads to asustained recovery of the industry as a whole depends on the trend of final demand goods in the
coming several months.2

1 According to Ministry of International Trade and Industry, “Analysis of Industrial Production Activity, April-June 1999,”

production trend by type of goods since 1986 indicates that producers’ goods tend to precede final demand goods by about twoquarters when year-on-year change in production turns from negative to positive.
2 If shipments of final demand goods do not recover as expected, readjustment of inventories may be required for producers’
goods.
Development Bank of Japan Research Report/ No. 5

3

Figure 1-3. Inventory Cycle(Mining and manufacturing sector)
97/1-3

Concept

99/10-12

5

Change in shipments on
previous year (%)

Change in shipments on
previous year (%)

10

99/7-999/4-60

99/1-3-5

98/1-393/10-12
98/10-12
98/7-9

-10
-10

-5

0
5
10
Change in inventories on previous year (%)

Figure 1-5. Inventory Cycle ofConstruction Materials
5
97/1-3

97/1-3

99/10-12

5
0

98/1-3

99/7-9-5
93/10-12

99/4-6

-10

-20

-15

0

99/10-12
99/7-999/4-6-5-10
98/7-9
-15

-10
-5
0
5
10
15
Change in inventories on previous year (%)

10

-10

-5

10

99/10-12

99/10-12
99/1-3

99/7-998/10-12
98/7-998/4-693/10-12

98/1-3-10

Change in shipments on
previous year (%)

99/7-999/4-6

5

0

97/1-3
99/4-6
99/1-3

-5

-10

-5
0
5
10
Change in inventories on previous year (%)

-10

-5

Source: Ministry of International Trade and Industry, “Industrial Statistics Monthly.”

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Development Bank of Japan Research Report/ No. 5

98/10-12

98/1-3

98/7-998/4-6

98/10-12
-10

-15

0
5
10
Change in inventories on previous year (%)

Figure 1-7. Inventory Cycle of Producers’
Goods

97/1-3-5

98/1-3

98/4-6

98/7-9Figure 1-6. Inventory Cycle of Consumer
Goods

5

93/10-12

99/1-3
98/10-12

98/4-6

98/10-12

99/1-3

Change in shipments on
previous year (%)

Change in shipments on
previous year (%)

10

Change in shipments on
previous year (%)

Adjustment phase
Change in inventories on previous year (%)

15

0

Unintended
accumulation
phase

Recoveryphase

98/4-6

Figure 1-4. Inventory Cycle of Capital Goods(Excluding transport equipment)-15

45-degree line
Buildup phase

0510Change in inventories on previous year (%)

3. Consumption: At a Standstill
Income continues to decline. Wage and salary per person (Figure 1-8) have declined for eight
consecutive quarters since the first quarter of 1998. As the summer and winter bonus in 1999
was again lower than the previous year, the negative contribution from bonus remains substantial.
In addition, the growth of regular wage and salary has been leveling off. On the other hand,
overtime pay has risen, reflecting an increase in overtime hours due to the recovery in production.
Overall, the drop in income has gradually abated.
Figure 1-8. Trends in Wage and Salary per Person(Trend of year-on-year change by component)(%)
6−Firms employing 5 or more workers−

4

2

0

-2

-4
91

92

93

94

95

Regular wage and salary
Bonus and special earnings

96

97

98

99
(CY quarterly basis)

Overtime pay
Total wage and salary

Source: Ministry of Labor, “Monthly Labor Survey.”

Figure 1-9 identifies the factors behind the slump in consumption by analyzing the trend ofreal consumption expenditure in workers’ households according to the Family Income andExpenditure Survey. Here, the factors influencing consumption are classified into three
categories: income (pre-tax income including regular pay, overtime pay and bonus), tax andcharges (income tax, inhabitant tax, social insurance premium, etc.) and consumption propensity(ratio of consumption to disposable income, which is equivalent to income minus tax andcharges).
In 1998, the reduction in tax and charges due to the re-introduction of special tax relief
measures propped up consumption (year-on-year contribution from the first through fourth
quarter amounting to 0.9%, 1.4%, 1.6% and 0.7% respectively), while the reduction in actual
income and the decline in consumption propensity acted as constraints. In 1999, the positiveeffect of the continued tax relief measures on the reduction in tax and charges disappeared, andincome, which had been briefly boosted by the distribution of local sales promotion vouchers,
Development Bank of Japan Research Report/ No. 5

5

again exerted substantial downward pressure (year-on-year contribution from the first throughthird quarter amounting to 0.1%, 0.0% and –3.3% respectively). Although consumption
propensity rose in the third quarter, it has been fluctuating from quarter to quarter without a clear
trend.
Figure 1-9. Factoral Resolution of Real Consumption Expenditure of Workers’
Households (Change on previous year)
6%
4%
2%
0%
-2%
-4%
-6%
-8%
91

92

93

94

95

96

97

98

99
(CY quarterly basis)

Income factor
Consumption propensity factor
Notes:

Non-consumption expenditure factor
Real consumption

1. C/P = α × (Y−T)/P is resolved according to the following formula:∆ (C/P)＝α × ∆ (Y/P)−α × ∆ (T/P)＋∆α × (Y−T)/P＋residual(income factor) (tax and charges factor) (consumption propensity factor)
C: consumption expenditure, Y: income, T: tax and charges,α: average consumption propensity, P:
consumer price2. Contribution of local sales promotion vouchers to actual income amounts to +1.0% for 1Q/99 and+0.1% for 2Q/99.
Consumption propensity (seasonally adjusted)
71.8%
98/4Q
69.4%
99/1Q
72.0%
99/2Q
71.7%
99/3Q
71.5%
99/4Q

Sources: Management and Coordination Agency, “Family Income and Expenditure Survey” and “Consumer Price
Index.”

6

Development Bank of Japan Research Report/ No. 5

Figures 1-10 and 1-11 show the trend of personal consumption from the demand side
(Family Income and Expenditure Survey) and the supply side (sales statistics). The realconsumption level index for all households (seasonally adjusted values after adjustments for thenumber of household members and the number of days, 1995=100) and retail sales index(seasonally adjusted, 1995=100) both indicate that the consumption trend has been mixed in
1999, reflecting the slowness of the recovery. As regards the former index, service consumption
including housing alteration, education and accommodation has been in a slump since September
1999, after recovering from April to August. The latter index fell below the post-bubble recordin the third quarter of 1999, largely due to the sluggish sales of autumn and winter clothes due tothe unseasonably warm autumn. In the fourth quarter, positive factors such as sales to celebrate
the victory of a professional baseball team (which is owned by a major retail company) andeleventh-hour demand in preparation for possible Y2K problems should be roughly offset by
negative factors including the reaction to last year’s “consumption tax refund” sales.
Developments in the coming months must be monitored.
Figure 1-12 shows new car registrations (seasonally adjusted), a major indicator of durable
goods consumption. The new car registrations in the first quarter of 1998 (1,004,000 vehicles)
fell below the previous post-bubble bottom. Subsequently, the number rose gradually for four
consecutive periods largely due to the introduction of new models of sub-compact automobilesin October 1998, only to level off from the second quarter of 1999. In the fourth quarter(October-November average), it again declined substantially (down 7.2% from the previous
period) and reached a record low, with the fall in new sub-compact automobiles more thanoffsetting the slight recovery in full size car sales thanks to the introduction of new models.
Whereas the recovery in consumption as a whole remains weak, the consumption of
information-related items has been growing steadily. Based on the Family Income andExpenditure Survey, Figure 1-13 shows the trend of information-related consumption (converted
into real values using consumer prices corresponding to individual items and then seasonallyadjusted by Census X-11) indexed on the first quarter of 1995 (=100). The data indicate that
information-related consumption has increased by 60%. During the same period, consumptionof traditional home electric appliances (refrigerators, washing machines, TVs, VCRs, airconditioners, etc.) increased by only 30%.

Development Bank of Japan Research Report/ No. 5

7

Figure 1-10. Trend of Real Consumption
Level Index (Seasonally adjusted)

Figure 1-11. Trend of Retail Sales Index(Seasonally adjusted)

106

115

(1995=100)

All households
104

110

102

105

100

100
3-quarter moving average

98of which: Large-scale retailstores (department stores +supermarkets)

95* Monthly consumption expenditure perhousehold is adjusted to the value for a
4-member household in 30.4 days
(365 days/12), indexed on 1995 as abase year, then converted into real value
by using consumer price index as deflator.

96(Before store adjustment 1995=100)

Retail industry total
90

85

94
92

93

94

95

96

97

98

92

99

93

94

95

96

(CY quarterly basis)

Source: Management and Coordination Agency,“Family Income and Expenditure Survey.”

97
98
99
(CY quarterly basis)

Source: Ministry of International Trade and Industry,“Report on the Current Survey of Commerce.”

Figure 1-12. Trend of New Car Registrations (Seasonally adjusted)(10,000 vehicles)
140
90/3Q
97/1Q

130
120

99/1Q

110
100

93/4Q

98/1Q

90
80
70
60
88

89

90

91

92

93

94

95

Source: Economic Planning Agency, “Indexes of Business Conditions.”
8

Development Bank of Japan Research Report/ No. 5

96

97

98
99
(CY quarterly basis)

Figure 1-13. Trend of Real Information-related Consumption (Seasonally adjusted)170(1Q/95=100)① Information-related consumption

160
150
140
130
120
110
100

② Traditional household electrical appliances, etc.
90
80
95

96

97

98

99
(CY quarterly basis)

1. c= personal computers/word processors + communication equipment + telephone charges + TV
games + broadcast reception fees.
d = durable goods for housework + air-conditioners + durable goods for education and recreation(excluding personal computers/word processors, desks/chairs and repair charges) + AV disks + AV
tapes.
2. Converted into real values by corresponding consumer prices.
Sources: Management and Coordination Agency, “Family Income and Expenditure Survey,” and “Consumer Price
Index.”
Notes:

4. Plant and Equipment Investment: Sign of Bottoming Out
On a real GDP basis, plant and equipment investment dropped 7.3% from the previous year in
the third quarter of 1999. Although the fall has decelerated somewhat, investment has now
declined for seven consecutive quarters.
Return on investment (operating profit-asset ratio – average new lending rate: see Notes of
Figure 1-14 for details) for companies (capitalized at ¥10 million or over) has bottomed out in the
manufacturing sector and has been recovering slightly in the non-manufacturing sector (Figure 114). On the other hand, the growth of plant and equipment investment (based on the Statistical
Survey of Incorporated Enterprises), which is also shown in Figure 1-14, indicates that investment
is more than 20% lower than in the previous year in the manufacturing sector. Plant andequipment investment in the non-manufacturing sector also continues to fall, although lessdrastically. Even excluding the inflating effect from the change in accounting rules concerningbusiness tax, which took effect in the first quarter of 1999, return on investment has reached a levelthat should cause plant and equipment investment to recover (approximately 5% for the
manufacturing sector and 2.5% for the non-manufacturing sector according to past experience).
Thus, the recovery of plant and equipment investment is long overdue, judging from the trend of
return on investment.

Development Bank of Japan Research Report/ No. 5

9

Figure 1-14. Plant and Equipment Investment and Return on Investment(All-size corporations)
Manufacturing

(%)
30

91/2

93/10

(%)
15

97/3

20
10
10
5

0
-10

0
-20
-30
90

91

92

93

94

95

96

97

98

Non-manufacturing

(%)
30

91/2

93/10

-5
99
(CY quarterly basis)

(%)
10.0

97/3

20

7.5

10

5.0

0

2.5

-10

0.0

-20

-2.5

-30

-5.0
90

91

92

93

94

95

96

97

98

99
(CY quarterly basis)

Change on previous year in plant and equipment investment
Return on investment (right scale)Notes:

1. Return on investment = operating profit-asset ratio – average contracted lending rate of domesticallylicensed banks, etc. (new loans, total), where operating profit-asset ratio = operating profit/(tangible
fixed assets + inventories).
2. No adjustments are made for changes in the accounting rule on business tax (ministerial order revised in
Dec. 1998).
Sources: Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated Enterprises,” etc.

10Development Bank of Japan Research Report/ No. 5

The drop in machinery orders, which typically lead plant and equipment investment by two
to three quarters, has been slowing mainly in the manufacturing sector (Figure 1-15). Looking
at the contribution by user industry, electric machinery led the whole manufacturing sector forthe second consecutive quarter. In the non-manufacturing sector, the contribution has turned
slightly positive for finance/insurance, telecommunications and construction. Forecasts for
October-December indicate that the decline in machinery orders on a private demand basis
excluding ships/electricity will be further alleviated, down 4.7% from the previous period ascompared with the actual decline of 6.2% for July-September. Thus, the leading indicatorsuggests that plant and equipment investment will be bottoming out in the near future.
Figure 1-15. Trends in Orders Received for Machinery(Trend of year-on-year change by industry)(%)
25

Manufacturing

15
5-5
OthersAutomobiles
Electrical machinery
General machinery
Iron & steel
Chemicals
Manufacturing

-15
-25
-35
90

91

92

93

94

(%)
25

95

96

97

98

99
(CY quarterly basis)Non-manufacturing

15
5
-5

OthersReal estate
Finance/Insurance
Wholesale/retail
Telecommunications
Construction
Non-manufacturing (excl. ships and electricity)

-15
-25
-35
90

91

92

93

94

95

96

97

98
99
(CY quarterly basis)

Source: Economic Planning Agency, “Machinery Orders Statistics.”

Development Bank of Japan Research Report/ No. 5

11

5. Housing Investment: Leveling Off
After falling to around 1.2 million in fiscal 1998 (1.18 million units) for the first time in 15 years,
housing starts have recovered slightly in fiscal 1999. The January-October average has reached
an annualized figure (seasonally adjusted) of 1.23 million units (Figure 1-16).
Figure 1-16. Trend of Housing Starts (Seasonally adjusted annual rate)(1,000 units)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
90

91

92

Owned houses

93

94

Houses for rent95

96Company houses

97

98
99
(CY quarterly basis)

Dwellings for saleNote: Census X11 is used for seasonal adjustment.
Source: Ministry of Construction, “Report on Statistical Survey on Construction Starts.”

The recovery was at first led by owned houses. The construction of owned houses started
to rise in the first quarter of 1999 in terms of year-on-year change, stimulated by fiscal andfinancial incentives such as extended tax breaks for housing3 and low interest rates offered by the
Housing Loan Corporation. After hitting a record low of 2.0% in November 1998, thestandard lending rate of the Housing Loan Corporation has been rising gradually, although it hasremained within the 2% range (Figure 1-17). Expectations of higher interest rates appear tohave fueled potential demand for housing. The construction of detached houses in October
3 The current tax relief measures for housing represent a substantial expansion of the incentives provided up to 1998.

Principal
features includes the following:(i) The period of income tax reduction for housing loan was extended from six years to 15 years.
(ii) The scope of tax reduction was expanded from the loans only for buildings (up to ¥30 million) to the loans for bothbuildings and land (deductible up to ¥50 million).
(iii) The tax deduction scheme became applicable simultaneously with the “realized capital loss carryover scheme,” underwhich any losses accrued from the sale of old houses are deductible from income for up to four years.
These tax reduction measures were initially made applicable to those who will have purchased a house and dwelt in that house by
the end of December 2000. However, the government proposed to extend this time limit to June 2001.

12

Development Bank of Japan Research Report/ No. 5

declined from the previous year (down 4.9%) for the first time in nine months. The
applications for the Corporation’s housing loans for owned house construction, a leading
indicator of housing starts, showed a decline of 47.2% from the previous year for the third
invitation in fiscal 1999. These applications should result in the weak housing starts in the
beginning of 2000 (Figure 1-18).
Fig.I-17. Trend of Housing Loan Interest Rates(Unit: %)10

11

Housing Loan
Corporation

2.55

2.00

City bank variable
rate

2.50

City bank fixed
rate (5 years)

2.70

2.65

City bank fixed
rate (10 years)

3.20

3.15

12

99/1

2

3

2.20

4

5

2.40

6

7

2.50

2.60

2.70

8

9

10

11
2.80

2.375
3.15
3.20

3.80

3.10

2.90

2.55

2.40

2.60

3.70

3.30

3.20

3.55

2.85

2.70

2.65

3.75

3.60

3.70

Notes: 1. Interest rate of the Housing Loan Corporation represents the standard rate.
2. The rate represents that at the end of the month.

Figure 1-18. Housing Loan Applications for Owned Houses

FY1997

FY1998FY1999Application deadline

Application period(days)

Change on previous
year (%)

Standard rate(%)

1

May 30

10

-47.7

3.10

2

Sep. 12

15

-60.3

3.10

3

Nov. 28

18

-21.9

3.00

4

Mar. 6

19

-33.2

3.00

1

Jun. 5

23

13.3

2.75

2

Sep. 30

31

28.8

2.55

3

Dec. 25

37

49.9

2.00

4

Mar. 26

48

75.1

2.20

1

Jun. 18

36

0.0

2.40

2

Oct. 29

67

32.6

2.60

3

Jan. 14

35

-47.2

2.80

Source: Housing Loan Corporation, “Monthly Report on Housing Loans.”

The construction of condominiums, began to increase around last summer after recovery of
the sales of detached houses. As in the case of detached houses, condominium sales have been
buoyant since the beginning of 1999 largely due to the housing tax reduction and low interest
rates, with the contract rate in the Tokyo metropolitan area around 80%. Although the strong
sales did not immediately lead to an increase in housing starts due to excessive inventories(Figure 1-19), the construction of condominiums began to pick up around last summer, as strong
sales continued and inventory adjustment progressed steadily. In addition, there is a marked
housing start rush to complete construction by the end of December 2000, the initial time limit
for the present housing tax relief measures. As a result, housing starts in October recorded a
Development Bank of Japan Research Report/ No. 5

13

substantial increase of 30.0% from the previous year regarding dwellings for sale.
Unlike owned houses and dwellings for sale, houses for rent have not experienced any
upsurge, since they are not directly covered by the tax relief measures. Although, rental housing
starts are showing signs of bottoming out, recording a year-on-year increase in August for the
first time in 33 months, they have been declining since October.
Figure 1-19. Contract Rate and Completed Inventories of Condominiums(Tokyo metropolitan area)(Units)100%

14,00095%

12,00090%
10,000

85%
80%

8,000

75%
6,000

70%
65%

4,000

60%
2,000

55%

0

50%
90

91

92

93

94

95

Inventories (right scale)
Note:

96

97

98
99
(CY quarterly basis)

Contract rate

Contract rate represents the quarterly average ratio of units sold in the months to units marketed in themonth. Completed inventories are measured at the end of each quarter.
Source: Real Estate Research Institute, “Trend of Condominium Market in Tokyo Metropolitan Area.”

14

Development Bank of Japan Research Report/ No. 5

6. Public Investment: Leveling Off
Public investment (public capital formation) (Figure 1-20) was falling up to the third quarter of1998 but has recovered since the fourth quarter of 1998, reaching 9.1% of GDP in the second
quarter of 1999. Demand during this period was supported by fiscal stimulus package of April
1998 (total project cost of over ¥16 trillion) and the emergency economic measures ofNovember 1998 (total project cost of ¥23.9 trillion). Although public investment remains high,it was 8.5% down from the previous period in the third quarter of 1999.
The contract value for public works (Figure 1-21), which is a leading indicator, started to risein the third quarter of 1998 and recorded a substantial year-on-year increase of 52.7% in the firstquarter of 1999. So far in fiscal 1999, however, it has been declining due to negative
contributions from local governments reflecting their financial difficulties. The contribution
from the national government has also fallen, accelerating the decline in contract value.
Thus, the effect of public investment in supporting demand has leveled off. However,public investment is expected to support the economy toward fiscal 2000, as the government
agreed on new economic stimulus measures (with a project cost of some ¥18 trillion) in
November 1999.
Figure 1-20. Trend of Public Investment(\ billion)
50,000(%)
10.5

Sep. 1993 Emergency economic measures(about \6 trillion)

Sep. 1995 Temporary economic measures(\14.22 trillion)

Nov. 1998 Emergency economic measures(\23.9 trillion)

45,000
Apr. 1993 Integrated economic measures(about \13.2 trillion)

10
9.5

40,000935,0008.5
830,000
Apr. 1995 Emergency economic measures against yen appreciation(about \4.62 trillion)

25,000

7.5

Feb. 1994 Economic stimulus package(about \15.25 trillion)

20,0007
Apr. 1998 Economic stimulus package(over \16 trillion)

Aug. 1992 Economic stimulus package(about \10.7 trillion)

6.5
615,000
91

92

93

94

95

96

Public fixed
capital formation
公的固定
資本形成

97

98
99
(CY quarterly basis)As% of GDP (right scale)
対GDP比(右軸)

Note: Data represent seasonally adjusted annual rate.
Source: Economic Planning Agency, “Annual Report on National Accounts.”

Development Bank of Japan Research Report/ No. 5

15

Figure 1-21. Trend of Contract Value for Public Works (Change on previous year)(%)
60
Others
Local
Central
Total

50
40
30
20
10
0
-10
-20
92

93

94

95

96

97

98

(FY)

4-6 7-9 10-12 1-3 4-6
1998
1999

7-9 10-12

Source: Association of Surety Companies, “Table of Surety Business.”

7. Exports and Imports: Growth Led by Asia
Figure 1-22 shows the trend of the real effective exchange rate of major currencies. The yen
weakened after peaking in the second quarter of 1995, but began to recover in September 1998.
It has remained strong against major currencies after experiencing an upsurge in September 1999.
Hit by the Asian economic crisis, the growth of export volume (Figure 1-23) slowed
substantially from the latter half of 1997, bottoming in the fourth quarter of 1998 at –6.4% on
the previous year, only to rise in the third quarter of 1999 after six consecutive quarters of decline(up 4.1% from the previous year). Data for fourth quarter indicate that the recovery is
continuing (up 9.0% from the previous year).
By region, exports to Asia fell in the first quarter of 1998 due to the currency crisis in
ASEAN countries and South Korea, and declined heavily by 17.7% in the third quarter of 1998.
However, they rose in the second quarter of 1999 (up 5.7%) and led the entire exports in thethird quarter, increasing 15.1% on the previous year. Backed by robust demand, exports to theUnited States increased substantially from the fourth quarter of 1996, and have remained strong
so far. Exports to Europe recorded double-digit growth from the second quarter of 1997,
supporting the otherwise sluggish Japanese exports, but the growth has been slowing of late.

16

Development Bank of Japan Research Report/ No. 5

Figure 1-22. Trend of Real Effective Exchange Rate (1990=100)
150
Japan

U.S.

Germany140

Yen appreciation

130

120

110

100

90
(CY quarterly basis)
Note:

Real effective exchange rate is a trade-weighted currency index after adjustment for inflation, covering the
trading partners including 21 developed and 23 developing countries.
Source: JP Morgan, “World Financial Market.”

By product, exports of general machinery continue to plummet. They began to slow as
early as in the latter half of 1997, and have declined for seven consecutive periods since the firstquarter of 1998. Exports of electric machinery increased in the second quarter of 1999 for the
first time in four quarters, and recorded a substantial increase of 19.7% on the previous year in
the fourth quarter of 1999. In addition to the buoyant exports of VCRs, the substantial increasein exports of semiconductors and other electronic parts made a good contribution. Exports oftransport equipment, which led Japanese exports in fiscal 1997, has been leveling off since fiscal
1998, and in the third quarter of 1999, declined 0.4% from the previous year.
Import volume (Figure 1-24) started to decline on the previous year in the fourth quarter of1997 due to sluggish domestic demand and bottomed out in the third quarter of 1998, dropping
6.8% from the previous year. The volume has been increasing for three quarters since starting
to rise in the first quarter of 1999, when it rose 4.0% on the previous year.
By region, the large negative contribution of imports from Asia up to the third quarter of1998 has been reversed, recording double-digit growth on the previous year in the second
through fourth quarter of 1999. Meanwhile, imports from Europe and the United States havenot been so active.
By product, the drop in imports started in the fourth quarter of 1997 with raw materials,
then expanded to industrial products. In the first quarter of 1999, however, imports ofindustrial products rose 4.3%, and have led the overall increase in imports by recording doubledigit growth in the second through fourth quarter of 1999.

Development Bank of Japan Research Report/ No. 5

17

Figure 1-23. Trend of Export Volume (Change on previous year)(%)
15

By destination
World

10

5

0

-5

-10
95

96

97
U.S.

(%)
15

98
Europe99
Asia(CY quarterly basis)
OthersWorld

By type of goods

10
Total
5

0

-5

-10
95

96
General machinery
Others97

98

Electrical machinery
Total

Source: Ministry of Finance, “The Summary Report on Trade of Japan.”
18

Development Bank of Japan Research Report/ No. 5

99(CY quarterly basis)
Transport equipment

Figure 1-24. Trend of Import Volume (Change on previous year)
By origin

(%)
20
World

16
12
8
4
0
-4
-8
95

96

97
U.S.

Europe98
Asia

Others99(CY quarterly basis)World

By type of goods

(%)
20
Total

16
12
8
4
0
-4
-8
95

96

Foods

Mineral fuels

97

98

Raw materials

99(CY quarterly basis)
Industrial products

Total

Source: Ministry of Finance, “The Summary Report on Trade of Japan.”

Development Bank of Japan Research Report/ No. 5

19

With export volume turning up and import volume rising for four consecutive quarters, theyear-on-year increase of net exports has been shrinking. Although the increase of imports
continued to exceed that of exports, the trend was reversed for the first time in four quarters,with the contribution of net exports to real GDP rising to 0.4% in the third quarter of 1999.
However, net exports have had limited effect in supporting real GDP. The balance of
payments surplus has been shrinking recently, declining to a seasonally adjusted annualized valueof some ¥12.5 trillion in the fourth quarter of 1999.
8. Prices: Weak but Subdued Decline
Prices remain weak but the decline has been subdued.
As shown in Figure 1-25, international commodity prices (primary products excluding crudeoil) fell sharply in 1998 mainly due to the Asian economic crisis in latter 1997, but have stabilized
somewhat on the back of the recovery of the world economy including Asia (down 17.0% on theprevious year in the third quarter of 1998 and down 5.5% in the third quarter of 1999).
The decline in wholesale (domestic demand goods) prices (Figure 1-25) accelerated in 1998
reflecting the slump in domestic demand, but the decline has slowed since the second quarter of1999 due to the progress of inventory adjustment and the rise in oil prices (down 1.0% on theprevious year in the fourth quarter of 1999).
Figure 1-25. Trend of Commodity Market and Wholesale Prices(Domestic demand goods)(Contribution to year-on-year change)

5%

25%

4%

20%

3%

15%

2%

10%

1%

5%

0%

0%

-1%

-5%

-2%

-10%

-3%

-15%

-4%

-20%
90

91

92

93

94

95

96

97

98

99
(CY quarterly basis)

Raw materials
Final goods
International commodities (excl. crude oil, right scale)Intermediate goods
Domestic demand goods

Note: Wholesale prices represent the average of domestic and import prices for domestic demand goods.
Sources: Bank of Japan, “Price Index Monthly;” IMF, “International Financial Statistics.”

20

Development Bank of Japan Research Report/ No. 5

Corporate service prices (Figure 1-26) have continued to decline since the second quarter of1998 reflecting the backdrop of deregulation and corporate efforts to reduce costs. Currently,
however, the decline is decelerating except in industries such as lease/rental, real estate andcommunications.
Figure 1-26 shows consumer prices of commodities and services. Commodity prices(agricultural, marine, livestock and industrial products) have generally been falling since thesecond quarter of 1998, although they increased in the fourth quarter of 1998 as fresh food pricesrose due to poor weather. The sharper drop for the fourth quarter of 1999 is attributable to thedecline in fresh food prices.
Meanwhile, service prices including personal and public services are becoming weaker.
Apparently, this is not only due to deregulation and cutbacks in personnel costs in the laborintensive service industry but also due to the exemption of the elderly from the payment forpharmaceuticals since July 1999. Thus, the composite consumer price index has been falling
gently.
Figure 1-26. Trend of Corporate Service and Consumer Prices (Goods and services)(Contribution to year-on-year change)
4%

4%

3%

3%

2%

2%

1%

1%

0%

0%

-1%

-1%

-2%

-2%
90

91

92

93

94

95

96

97

98

99
(CY quarterly basis)

Public services
Agricultural, marine, livestock and industrial products
Corporate service price index

Personal services
Composite consumer priceNotes: 1. Personal services, include publications, rents and restaurants. Public services, include electricity, city
gas and water supply.
2. Corporate services include lease/rental, transport, communications, real estate rental, bank commissions,insurance premiums, etc.
Sources: Bank of Japan, “Price Index Monthly;” Management and Coordination Agency, “Price Index Monthly.”

Development Bank of Japan Research Report/ No. 5

21

9. Employment Conditions: Still Harsh
Employment conditions are still harsh but currently experiencing a lull, with some signs ofbottoming out.
Although the ratio of job offers to applicants in December 1999 was still low at 0.49, thisrepresents a slight improvement from the record low level of 0.46. This modest improvement in
the labor market is largely attributable to the bottoming out of job offers. After declining on theprevious year for two years from November 1997, effective job offers rose in September andrecorded a 1.6% increase in December. Also, the publication of job offers has been increasing on
the previous year for five months since August.
The unemployment rate in December stood at 4.6%, also a slight improvement from therecord 4.9% in June and July. However, the number unemployed has remained over 3 million
people for 12 consecutive months (3.15 million in December). Figure 1-29 shows unemployment
among men by age group. The unemployment rate has been rising in all age groups, including therelatively unaffected 35-54 age bracket, which has experienced a 1% rise in unemployment since1995. Unemployment has risen to almost 10% for the usually vulnerable 15-24 and 60-64 age
brackets, pointing to increasing hardship.
The number employed has remained below the previous year’s level since the first quarter of1998 (Figure 1-27). The decline first occurred in the manufacturing and construction sectors,
followed by the service sector, which lost labor-absorbing capacity and accelerated the decline.
Recently, however, employment has been increasing in the service sector. In addition, theincrease in industrial production has slowed the decline in employment in the manufacturingsector. Consequently, the decrease in the number employed has been shrinking slightly as awhole. Overtime hours have also risen again, led by the manufacturing sector.
Figure 1-27. Number Employed by Industry (Change on previous year)
(%)
12.0
10.0

1999

8.0
1997
6.0

1995

4.0
2.0
0.0
15～24

25～34

35～44

45～54

55～59

Source: Management and Coordination Agency, “Labor Force Survey.”

22

Development Bank of Japan Research Report/ No. 5

60～64

65～
(Age)

Nevertheless, the increase in labor demand has not necessarily resulted in an increase in fulltime employment. By form of employment (full-time or part-time/daily employment), full-timeworkers have continued to decrease on the previous year since the first quarter of 1998, reflecting
the tough environment for full-time employment (Figure 1-28). In contrast, temporary
employment has been increasing including part-time and temporary workers. The number ofpart-time and temporary workers recorded a year-on-year increase of 170,000 in December 1999.
This indicates that demand has been rising for temporary workers, who impose lower personnel
costs on firms.
Figure 1-28. Contribution to Change in Number Employed(Non-agricultural Sector)
(%)
3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0
91

92

93

94

95

96

97

98

99
(CY quarterly basis)

Construction

Manufacturing

Wholesale/retail, restaurants

Transport/communications

Services

Others

Total

Source: Management and Coordination Agency, “Labor Force Survey.”

1998 saw the first decrease in the number employed in 23 years since the recession after the
first oil crisis. The decline is largely attributed to the shrinking demand for labor due to therecession; nevertheless more workers are now leaving the labor market because of aging. Figure
1-30 breaks down the growth of the number employed into the contributions of four factors:
change in the population aged 15 or over, change in the age structure (the two representing the
population structure factors), change in the labor force participation ratio and change in theunemployment rate (the two representing the business cycle factors). The decline in thenumber employed in 1998 can be primarily attributed to the change in unemployment rate, whichmeans the reduction of labor demand. If we consider the change in the labor force
participation ratio as a business cycle factor on the ground that the ratio tends to decline during arecession as more people stop looking for work, we can conclude that the two business cycle
factors have reduced the number employed by some 600,000 workers. In addition, the change
Development Bank of Japan Research Report/ No. 5

23

in the population structure has had a considerable impact largely due to the aging of the
population, reducing the number employed by about 200,000. While the business cycle factors
including the change in unemployment rate and in the labor force participation ratio either
increase or decrease the number employed according to business conditions, the change in the
population structure has constantly exerted downward pressure on the number employedthroughout the 1990s. As aging of the population will accelerate, such pressure will continue
for some time.
Figure 1-29. Trend of Non-agricultural Regular and Temporary Workers(Contribution to year-on-year charge)
(%)
6
5
4
3
2
1
0
-1
-2
91

92

93

94

95

Part-time and daily workers

96

97

Full-time workers

Source: Management and Coordination Agency, “Labor Force Survey.”

24

Development Bank of Japan Research Report/ No. 598

99(CY quarterly basis)

Total

Figure 1-30. Contribution to Work Force Growth (Change on previous year)(10,000 persons)
150

100

50

0

-50

-100
91

92

93

Unemployment rate
Change in age structure
Errors and omissions

94

95

96

97

98

(CY)

Labor force participation ratio
Population aged 15 or overNumber employedNotes: 1. Factoral resolution is according to the following formulae:
Number employed = over-15 population × Σ (share of age group × labor force participation ratio by age
group × employment rate by age group).
Employment rate = 1 – unemployment rate.
2. Factoral resolution is made separately for men and women and then aggregated.
3. 15-70 year-old population is classified into age groups at an interval of five years. Those aged 70 orover constitute a single age group.
Source: Management and Coordination Agency, “Labor Force Survey.”

Development Bank of Japan Research Report/ No. 5

25

10. Long-term Interest Rate: Stable, Continued Reduction in Lending despite Money
Supply: Expanding
As the Bank of Japan continues its policy of zero interest rate, inter-bank overnight lending rates(not collateralized) have stayed near 0% since March 1999 (Figure 1-31). Although yields on
three-month CDs have been rising since the end of September, the rise is explained by seasonal
demand and preparations for Y2K problems. Long-term interest rates started to rise slightly in
mid-May due to expectations of economic recovery and concerns about increased government
bond issues, only to level off at around 1.8% with no significant fluctuation in general.
Figure 1-31. Trend of Long-term and Short-term Interest rates
(%)
2.5

2.0

1.5

1.0

0.5

0.0
97/7

9

11

98/1

3

5

7

9

11

99/1

3

5

7

9

11

(year/month)Inter-bank overnight lending rateLong-term government bellwether bonds

Three-month CDs (buy)Note: Three-month CDs are represented by the quotation rate on new issues.
Source: Nihon Keizai Shimbun.

26

Development Bank of Japan Research Report/ No. 5

The growth of money supply (M2+CD) has been stable at 3 to 4% as a whole (Figure 1-32).
Under the low interest rate environment, however, money is shifting from term deposits to cash
deposits in search of greater liquidity. As a result, M1 (cash deposits) has been growing by morethan 10% since May 1999, while the monetary base and money supply have stabilized.
Figure 1-32. Growth of Monetary Base/Money Supply
16%
14%
12%
10%
8%
6%
4%
2%
0%
97/1

7

98/1
ﾏﾈﾀﾘｰﾍﾞｰｽ
Monetary
base

7

99/1
M1

7 (year/month)
Ｍ2+CD

Note: Average balance, change on previous year.
Source: Bank of Japan, “Economic Statistics Monthly.”

Development Bank of Japan Research Report/ No. 527

On the other hand, outstanding bank credits continue to decline despite the increase inmoney supply. This can be partially attributed to the efforts by banks to shrink balance sheets
by asset sales and amortization. As at the end of January, outstanding bank credits declined
6.0% from the previous year, but excluding such special factors the decrease was 2.4% (Figure 133). Another factor behind the weak lending is the weak corporate demand for funds, reflecting
the slump in plant and equipment investment and corporate efforts to reduce debts. As
deposits increase and lending stagnates, the banks are increasingly purchasing government bonds
for investment.
Figure 1-33. Credit Balance of National Banks(Change on previous year)
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
97/1

7

98/1

7

99/1

7

(year/month)Credit balance of national banks
Credit balance of national banks (adjusted for specific factors)
Real deposits + financial bonds + loan trusts
Note: Real deposits do not include money deposited with long-term trust banks or held in trust.
Source: Bank of Japan, “Trend of Credit Absorption.”28

Development Bank of Japan Research Report/ No. 5

II. The 1990s in Retrospect
1. Economic Growth of Major Industrialized Countries
A comparison of real GDP growth of major industrialized countries (Japan, U.S., Germany,
France and U.K.) since the 1970s (Figure 2-1) indicates that the countries experienced aslowdown in general in the 1970s and 1980s, while Japan maintained a relatively high growth rate.
The growth in the early 1990s (1990-93) slowed considerably as a whole, as the countries except
Japan experienced severe recessions. As described below, however, the trend since 1994 differs
to some extent among those industrialized countries.
Figure 2-1. Real GDP Growth in Selected Industrialized Countries
(％)
6
5
4
3
2
1
0
-1
1970s

1980s

(％)
6
5
4
3
2
1
0
-1

1990s

(1990-93)(1994-99)

1980s

(％)
6

1990s

(1990-93)

3
2
1
0
-1
1990s

1980s

(％)
6
5
4
3
2
1
0
-1
-2

5
4

1980s

1980s

(1990-93)

Private consumption

1990s(1990-93)(1994-99)(1990-93)(1994-99)(1990-93)(1994-99)

Germany

1970s(1994-99)

France

1970s

1970s
(％)
6
5
4
3
2
1
0
-1

U.S.

1970s

Japan

(％)
6
5
4
3
2
1
0
-1

Japan
U.S.
Germany
France
U.K.

1990s
U.K.

(1994-99)

1970s

Fixed capital formation

1980s
Net exports

1990s

OthersＧＤＰ
Notes: 1. Germany represents West Germany for 1970s, 1980s and 1990-93. Data for 1990s represent
average
growth for 1991-99.
2. Data for 1999 are produced based on actual data for 1997 and OECD growth forecast for 1998 and1999.
Sources: OECD, “National Accounts” and “Economic Outlook.”

Development Bank of Japan Research Report/ No. 4

29

The United States and Europe recovered as a whole in the late 1990s from the recessions in
the early 1990s. The United States in particular achieved an unprecedented economic growth in
the latter half of the 1990s with substantial contribution from personal consumption and fixed
asset formation including plant and equipment investment. Although Europe experienced arecession in the latter half of the decade, the economy has been recovering gradually from thetrough in 1991-93. In Germany, however, real GDP growth slowed slightly in the late 1990s,
and the economic recovery has not been strong since 1994.
Japan experienced a substantial slowdown in economic growth well into the latter half of thedecade. Average growth in the 1990s was significantly slower than in other industrializedcountries due to the serious recession in the late 1990s in particular.
2. Increased Concerns about the Future Discouraged Consumption
The consumption slump in the 1990s was all the more spectacular compared with the buoyancy
during the bubble years of the late 1980s.
Income was limited to a slower growth than in the 1970s and 1980s. The Economic
Planning Agency’s “Annual Report on National Accounts” indicates that the growth of realdisposable income in households slowed gradually: 6.0% in the 1970s, 2.8% in the 1980s and2.0% in the 1990s (1990-98). In particular, fiscal 1997 saw the first decline from the previous
year (down 0.9%). Figure 2-2 breaks down total income into three components: earned income,net asset income and other income (proprietorship income, net social security benefits, etc.).
The growth of earned income slowed substantially from fiscal 1992 through 1997. Net asset
income has declined for seven consecutive years due to low interest rates. Other income, on
the other hand, grew rapidly from fiscal 1992 through 1996 thanks to the special tax relief
measures which continued for three years (fiscal 1994-96) and the contribution from operating
surplus on owned houses as well as to the increase in pension and medical care benefits whichaccompanies the aging of the population. It fell in fiscal 1997, due to the suspension of the tax
relief measures and the cutback on medical care benefits following the increase in the share of
medical expenses shouldered by patients, which took effect in September 1997. After that it
rebounded in fiscal 1998.
As income stagnated and the aging progressed (ratio of population aged 65 or over: 7.1% in1970 and 14.6% in 1995), the decline in household savings ratio as observed in the 1980s was
expected to continue. Actually, however, it bottomed out in the 1990s, as indicated by Figure
2-3.

30

Development Bank of Japan Research Report/ No. 5

Three major factors underlie such developments.
The first factor concerns consumption structure. The trend of consumption is closely
related to the fact that the ratio of optional consumption (the share of the expenditure of items
whose expenditure elasticity exceeds 1 in total consumption expenditure, based on Management
and Coordination Agency),4 which is highly responsive to business conditions, was stagnant ataround 44% throughout the 1990s (coefficient of correlation = -0.903 for 1970-98). Since
optional consumption is not necessary and thus easily reduced in bad times, any increase in its
weight implies the rising sensitivity to business conditions. Thus, the savings ratio bottomed
out in the 1990s mainly because consumers cut back on their optional consumption.
Figure 2-2. Breakdown of Real Disposable Income Growth for Households(%)
16

Earned income
Others14

Net asset income
Disposable income

12
10
8
6
4
2
0
-2
-4
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 (FY)
PeriodAverage growth

1970-79
6.0%

1980-89
2.8%

1990-98
2.0%

Note: “Others” include proprietorship income, net social security benefits, etc.
Source: Economic Planning Agency, “Annual Report on National Accounts.”

4 See Development Bank of Japan, Chosa No.1, p.17.

Development Bank of Japan Research Report/ No. 4

31

Figure 2-3. Relationship between Household Savings Ratio and Optional Consumption
Ratio
(%)

(%)
25

50
Optional consumption ratio (CY, left scale)
45

20

40

15

35

10
Household savings ratio (FY, right scale)
Coefficient of correlation –0.903 (1970-98)30

570 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 (Year)

Note:

Optional consumption means expenditures sensitive to business conditions (expenditure elasticity > 1) andincludes durable goods for education and recreation, interior decorations, traditional Japanese clothes,outfits for men and women, eating out, automobile goods, education, educational and recreational services,
housing alterations, personal belongings, transport, cosmetics, etc.
Sources: Economic Planning Agency, “Annual Report on National Accounts;” Management and Coordination
Agency, “Annual Report on Family Income and Expenditure Survey” and “National Survey of Family
Income and Expenditure.”

32

Development Bank of Japan Research Report/ No. 5

The second factor is the deterioration of consumer confidence in future prospects.
According to the Economic Planning Agency’s “Survey on Consumption Trend” (Figure 2-4),
views on “income growth” and “employment conditions” over six months were not optimistic
throughout the 1990s. Particularly since 1998, expectations for future income may havechanged substantially as overtime pay and bonus were reduced and the growth of regular wage
and salary stopped. Employment conditions have also deteriorated rapidly since the major
financial collapses in 1997 as the unemployment rate reached a new high, thus damaging
consumer confidence. Although both indicators recovered slightly in 1999, they have not yet
reached the level of 1997. Consumers remain pessimistic about future income andemployment.
Figure 2-4. Change in Consumer Confidence
55
Income growth
50
45
40
35
30
Employment conditions

25
20
82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98 99
(Survey year)

Note:

Expected changes in six months are evaluated in five levels and then converted into a weighted averagebased on the composition of answers. 1999 represents the average of March, June and September surveys.
Source: Economic Planning Agency, “Survey on Consumption Trends.”

Development Bank of Japan Research Report/ No. 4

33

The third factor is the increasing importance of post-retirement life as a purpose of savings.
Figure 2-5 shows the four most important purposes of savings according to the Central Council
on Savings Information, Bank of Japan, “Public Opinion Survey on Savings and Consumption.”
Among the four items, “preparation for post-retirement life” is the only purpose that continued
to increase in importance in the 1990s (38.3% in the 1970 and 56.7% in 1999). This is largely
due to longer life expectancy and the need to prepare for one’s own nursing care as the numberof household members dwindles. Since Japan is expected to experience the fastest population
aging among the industrialized countries in the 21st century, the increased need to prepare forpost-retirement life will probably cause the savings ratio to rise for some time to come. A
policy response is required concerning pensions, medical care and nursing care, lest concerns
about the future should lead to overemphasis on needs after retirement, thus causing excessive
preference for savings.
Figure 2-5. Change in Purposes of Savings (4 main items)
(%)
100
90

Preparation for diseases and contingencies

80
70
60

Preparation for child’s education and marriage

5040Preparation for post-retirement life

30
20
10

Preparation for house purchase or alteration

0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99(Survey year)
Note: Multiple answers up to three items.
Source: Central Council on Savings Information, Bank of Japan, “Public Opinion Survey on Savings andConsumption.”

34

Development Bank of Japan Research Report/ No. 5

3. Reappearance of Instability in Plant and Equipment Investment
The two recessions in the 1990s were characterized by a substantial drop in plant and equipment
investment from the latter half of the recessions into the initial stage of recovery, which amplified
and prolonged the economic hardship. Plant and equipment investment on a real GDP basis
experienced a double-digit drop from the second through fourth quarters of 1993 following the
bursting of the bubble, for the first time since the second to third quarters of 1974 directly after
the oil crisis. During the current recession, it recorded a double-digit decline again in the fourth
quarter of 1998. In contrast, plant and equipment investment in the 1980s rarely declined on
the previous year, let alone a double-digit drop.5 Compared with the 1970s and 1990s, it played
a greater role in stabilizing economic fluctuations. The stability of plant and equipment
investment in the 1980s had several causes. In the context of the decline in average growth rate
and the change in the content of investment (decreased weight of capacity expansion), a reporton the trend in individual industries noted the following.6(i) Investment became less volatile in individual industries.
(ii) Factors specific to individual industries had a larger impact while total demand fluctuations
had less impact, thus reducing the correlation between industries.
Figure 2-6 shows the chronological trend of investment fluctuation by sector from the 1970s
through the 1990s (until 1998). As regards sectoral contribution to the growth of plant andequipment investment, the non-manufacturing sector, which gave a negative contribution only
once in the 1970s and 1980s (in 1974), weakened overall investment in the 1990s by making
negative contribution three times (in 1993, 1994 and 1998). We therefore aggregated the annual
growth of plant and equipment for each decade and calculated the average and standard
deviation. The average growth rate of the 1980s rose from that of the 1970s, and then fall fromthat of the last decade in the 1990s. The slump in the non-manufacturing sector in the 1990s isparticularly significant. Standard deviation, which indicates the level of fluctuation of thegrowth rate, once declined in the 1980s compared to the 1970s, rose in the 1990s and regained
the level of the 1970s. This reflects the destabilization once again of plant and equipment
investment, which stabilized in the 1980s as mentioned above. From the viewpoint of variation
coefficient, which normalizes the standard deviation based on the level of average value, plantand equipment investment has become even more unstable than in the 1970s, particularly in the
non-manufacturing sector.
Figure 2-7 breaks down the two sectors and identifies the standard deviation of plant andequipment growth in each industry and its inter-industry correlation. The following points
should be noted. First, standard deviation declined in the 1980s compared to the 1970s androse in the 1990s in each industry except for wholesale/retail and transport/telecommunications,which corresponds to the trend for all industries combined. Second, the coefficient ofcorrelation indicates that the growth of plant and equipment investment in each industry is moreclosely related to the growth of overall investment in the 1990s than in the 1980s, with the
exception of agriculture/fishery/mining. Therefore, the higher standard deviation of
investment growth in the 1990s is due to the increase in standard deviation in individual
industries as well as to the increased correlation between industries, which is a complete reversalof the factors that helped stabilize plant and equipment investment in the 1980s. This implies
that developments such as the bursting of the bubble economy, concerns about the banking
system, technological innovation related to telecommunication and the escalation of global
5 Although plant and equipment investment did decline in the first and second quarter of 1983, the decline only represented aslight adjustment and stayed within 0.9%.
“Setsubi Toshi to Keiki Hendo kara Mita Kinnen no Nippon Keizai (Recent Japanese Economy Viewed
from Plant and Equipment Investment and Economic Fluctuation).” Chosa No.160. The Japan Development Bank.

6 Kojiro Sakurai (1992).

Development Bank of Japan Research Report/ No. 435

competition are influencing corporate behavior concerning plant and equipment investment, thus
making it more responsive to fluctuations in total demand.
Figure 2-6. Chronological Trend of Plant and Equipment Investment(%)
20

Annual growth of plant and equipment investment and contribution by sector

15
10
5
0
-5
Non-manufacturing
Manufacturing

-10
-15

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 CY

Average1970-79
1980-89
1990-98
Standard deviation
1970-70
1980-89
1990-98

Change in annual growth of plant and equipment investment
All industries
ManufacturingNon-manufacturing
3.92
0.43
6.63
7.84
9.03
7.33
0.88
1.20
0.88
All industries
8.71
5.22
9.25

Manufacturing
13.30
9.55
12.97

Non-manufacturing
7.69
4.54
8.58

Notes: 1. 1990-based real values on a progress basis. Annual data (CY).
2. Non-manufacturing sector comprises all non-manufacturing industries including agriculture, forestry,
fishery and mining.
3. Annual growth represents the simple average of growth in each year.
Source: Economic Planning Agency, “Statistics on Capital Stock in Private Companies.”

36

Development Bank of Japan Research Report/ No. 5

Figure 2-7. Factors for Plant and Equipment Investment Destabilization in the 1990s
Standard deviation of annual change in plant and equipment investment
3 machinery industries
Other manufacturing
Electricity/gas/water
Wholesale/retail
Construction/finance/real estateTransport/telecommunications
Services
Agriculture/forestry/fishery/mining
0

5

10

15

20

25

Coefficient of correlation to annual change in total plant and equipment investment
3 machinery industries
Other manufacturing
Electricity/gas/water
Wholesale/retail
Construction/finance/real estateTransport/telecommunications
Services
Agriculture/forestry/fishery/mining
-0.4

-0.2
1970

0.0

0.2
1980

0.4

0.6

0.8

1.0

1990s (-

Notes: 1. Data are the same as in Figure 2-6, except that values for 3 machinery industries (total of generalmachinery, electrical machinery and transport equipment) and other manufacturing are based on data up
to 1997.
2. From the macroeconomic viewpoint, the change in the volatility of plant and equipment investment
growth (change in standard deviation) can be resolved into three factors:(i) change in the standard deviation for individual industries,(ii) change in inter-industry correlation, and(iii) change in the shares of individual industries.
The figure is for factors (i) and (ii) above.

Development Bank of Japan Research Report/ No. 437

4. Preference for Safe Assets and Reduced Investment in Real Assets
Regarding money flow in the personal sector (Figure 2-8), the 1990s have seen the share of cash
deposits rise. The share of deposits in personal investment fell in the 1980s as people invested
more in insurance and other assets, but started to rise again in the mid-1990s. Particularly since
fiscal 1997, cash deposits have been increasing while other assets such as bonds have been
declining, pointing to increased preference for safer assets.
Figure 2-9 shows the surplus or shortage of funds by sector. In the 1990s, the corporate
sector enjoyed fund surpluses while the government sector suffered fund shortages. From thelate 1980s to the early 1990s, the corporate sector experienced a dire shortage of funds, reflecting
active investment in plant and equipment, but since fiscal 1994 it has enjoyed a surplus of funds
largely due to the slump in plant and equipment investment. The fund surplus of the corporate
sector exceeded that of the personal sector in fiscal 1998. Although the personal sector has
continuously had a fund surplus, its size has fallen slightly since the mid-1990s. The public
sector, after enjoying a small surplus of funds from the mid-1980s through the early 1990s, has
witnessed the largest shortage of funds among the three sectors, reflecting the deteriorating
financial situation.
As regards investment by the corporate sector, investment in non-financial assets declined
substantially in the 1990s (Figure 2-10), and total investment started to fall in fiscal 1996. The
trend of corporate financing is shown in Figure 2-11. Under the bubble economy, financing
through stock and bond issues increased substantially as well as through borrowing. However,total corporate financing turned down in the 1990s. Borrowing has also been decreasing since
fiscal 1995, and in fiscal 1998 it decreased by more than 20% from the previous year.
Figure 2-8. Money Flow of the Personal Sector
(%)
160
140
120
100
80
60
40
20
0
-20
-40
-60
80

82

84

86

88

Cash deposits

90

Insurance

92

Trust

OthersOthers = bonds + stocks + investment trusts

Source: Bank of Japan, “Money Flow Accounts.”

38

Development Bank of Japan Research Report/ No. 5

94

96

98
(FY)

Figure 2-9. Fund Surplus or Shortage by Sector
(%)
15
10
5
0
-5
-10
80

82

84

86

Corporate sector

88

90

92

Personal sector

94

96

98

(FY)
Overseas sector

Public sector

Source: Bank of Japan, “Money Flow Accounts.”

Figure 2-10. Investment of the Corporate Sector

Figure 2-11. Financing of the Corporate Sector(\ trillion)120(\ trillion)
120

100

100

80

80

60

60

40

40

20
0

20

-20

0

-40

-20

-60

-40

-80
80 82 84 86 88 90 92 94 96 98
Cash deposits, etc.
Real investment

Business credit (FY)
OthersOthers = stock + bonds + CP + insurance +trusts + investment trusts + external credit

-60
80

82

84

86

88

Private loans
Business credit

90

92

94

Public loans
Others

96

98
(FY)

Others = stocks + corporate bonds + CP +foreign bonds + external loans + others

Source: Bank of Japan, “Flow of Fund Accounts.”

Development Bank of Japan Research Report/ No. 4

39

5. Diversified Forms of Employment
Following the two recessions in the 1990s, two of the most important characteristics of theJapanese employment system are under pressure to change: lifetime employment and senioritybased pay. Judging from macroeconomic statistics, however, the pace of change in thesepractices has been very slow.
The average annual income of men with a college degree employed by large companies(employing 1,000 or more workers) indicates that their wages are still increasing significantly as
they grow old. In fact, the wage curve has remained similar since the 1970s (Figure 2-12). In
the 1990s, however, the wage curve became slightly flatter. The highest income age bracket
earned more than 2.6 times the annual income of the 25-29 age group in the 1980s (2.65 times in1980 and 2.64 times in 1985), but the gap narrowed in the 1990s, at 2.58 times in 1990, 2.47
times in 1995 and 2.38 times in 1998.
The average period of service by age group has changed little since the 1970s, whichindicates that the practice of long-term employment continues. However, it declined slightly inthe 1990s for the late 30s-early 40s age bracket, largely due to the impact of restructuring. The
steady increase in average period of service for the 55-59 age group since the 1980s is mainly
attributable to the rise in retirement age.
Figure 2-12. Annual Income by Age Group (Men with college degree)(\ million)
14

1998 (2.38)

12
1995 (2.47)

1990 (2.58)

10

1985 (2.64)
8

1980 (2.65)

61975 (2.51)

4
2
0
20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64
(Age)

Notes: 1. Enterprises with 1,000 employees or more.
2. Annual Income = Contractual cash earnings × 12 + Bonus and Others
3. The highest annual income/the annual income of the 25-29 age group is in the parenthesis.
Source: Ministry of Labor, “Basic Survey on Wage Structure.”

40

Development Bank of Japan Research Report/ No. 5

No substantial change can be observed in the 1990s for labor turnover ratio, an indicator of
employment liquidity (Figure 2-13). Labor turnover ratio means the ratio to all workers of those who
were hired by a new employer within one year of leaving their former employer. The aggregate laborturnover ratio rose in the late 1980s during the bubble years, but fell in line with the recession.
Although the ratio has been rising again of late, it is not significant.
Figure 2-13. Trend of Labor Turnover Ratio
(%)
18
16
Part-time workers

14
12

All workers

108
6
Full-time workers

4
2
0
75

77

79

81

83

85

87

89

91

93

95

97 (CY)

Note: Labor turnover ratio = number of job changers/number of workers.
Source: Ministry of Labor, “Survey on Employment Trends.”

Development Bank of Japan Research Report/ No. 4

41

Rather, there have been major changes in employment forms, which have become
increasingly diversified. The share of part-time and temporary workers in the total work force
has been rising, exceeding 20% in 1999 (Figure 2-14). Labor turnover is higher for part-timeworkers than for regular employees, as the former change jobs more frequently. With theincrease of part-time workers, the differential of labor turnover ratio has been widening between
regular and part-time workers. Thus, the growth of part-time labor has been raising overalllabor liquidity.
Figure 2-14. Ratios of Less than 35-hour-week Workers and Part-time and Temporary
Workers(%)
25
Ratio of part-time and temporary workers

20

15

10
Ratio of less than 35-hour-week workers

5

0
75

77

79

81

83

85

87

89

91

93

95

97

99 (CY)

Note: The ratio of part-time and temporary workers is as of February in each year.
Sources: Management and Coordination Agency, “Labor Force Survey,” and “Labor Force Special Survey.”42

Development Bank of Japan Research Report/ No. 5

Figure 2-15 breaks down labor force growth into three factors: change in over-15 population,change in age structure and change in labor participation ratio (by sex). Clearly, the change inage structure has constantly exerted downward pressure on the labor force since the 1970s withthe progress of aging. In the 1990s, the decline in birth rate reduced the upward pressure of thechange in population aged 15 or over. According to the National Institute of Social Security
and Population Problems (median estimate as of January 1997), the over-15 population will peakin 2007, followed by a continued decline, which will also exert downward pressure on the labor
force in the future. Therefore, expectations are high for women’s participation in the labor
force. The change in women’s participation in the labor force has constantly made a substantial
contribution to labor force growth by an annual average of some 200,000 workers. At the sametime, employment forms have become increasingly diversified, with the increase in part-time andtemporary workers. On the demand side, the demand for these workers has been rising amongcorporate employers seeking to cut back on personnel costs. The need for part-time andtemporary employment will also increase on the supply side, as more women are expected toparticipate in the labor force.
Figure 2-15. Factoral Resolution of Labor Force Growth (Annual average)(10,000 persons)
120
100
80
60
40
20
0
-20
-40
75-80

80-85

85-90

Labor force participation ratio (men)Change in age structure
Errors and omissions

90-95

95-98

(CY)

Labor force participation ratio (women)
Population aged 15 or overLabor force

Notes: 1. Factoral resolution is according to the following definition:
Labor force = over-15 population × Σ (share of age group × labor force participation ratio by age group).
2. Factoral resolution is made separately for men and women and then aggregated.
3. 15-70 year-old population is classified into age groups at an interval of five years. Those aged 70 orover constitute a single age group.
Source: Management and Coordination Agency, “Labor Force Survey.”

Development Bank of Japan Research Report/ No. 4

43

6. Growing Budget Deficit and Increased Government Bond Issues
Tax revenues on the general account increased steadily in the 1980s (Figure 2-16), peaked infiscal 1990 at ¥60.1 trillion and then plunged to ¥45.7 trillion in fiscal 1999 (after supplementarybudget).
Government bond issues declined in the 1980s, due to budget restruction and favorable
economic conditions (Figure 2-17). Since fiscal 1992, however, the drop in tax revenues andsupplementary budgets accompanying economic stimulus measures have substantially inflatedbond issues. Particularly, bond issues for fiscal 1999 (after supplementary budget) set a newrecord of ¥38.6 trillion (of which deficit-financing bonds accounted for ¥25 trillion).
Outstanding gross government debts are expected to reach 120% of GDP in 20007 (Figure2-18), far higher than in the U.S. and the U.K., which succeeded in revamping their budgets, aswell as the Germany and France, which have limited the ratio to 60% in view of EU integration.
The ratio of public bond interest payments to GDP has not risen despite the increase in
outstanding public bonds (Figure 2-19). This can be explained by the rapid economic growthand slow increase in debts in the 1980s, and by falling interest rates in the 1990s. However,there is smaller room for the interest rates to go lower as they have fallen to a substantially low
level. Consequently, the increase in debts is expected to result in increased interest payments inthe future.
Figure 2-16. Trend of Tax Revenues(\ trillion)
70
60.1
60
50

49.4

45.7

40
30
20
10
0
80

81

82

83

84

85

86

Initial budget

87

88

89

90

91

92

93

After supplementary budget

94

95

96

97

98

99 (FY)

Settlement

Note: Tax and stamp revenues on the general account.
Source: Ministry of Finance.
7 According to the governmental announcement after the 1999 supplementary budget, outstanding debts of the national and local

governments combined are expected to exceed 120% of GDP as at the end of fiscal 1999.
44

Development Bank of Japan Research Report/ No. 5

Figure 2-17. Trend of Government Bond Issues(\ trillion)
45
40

38.6

35

34.0

30
25
20
15
10
5
0
80

81

82

83

84

85

86

87

Initial issues

88

89

90

91

92

93

94

After supplementary budget

95

96

97

98

99 (FY)

Actual issues

Source: Ministry of Finance.

Figure 2-18. Outstanding Debts of General Government as % of GDP
(%)
140
120
100
80
60
40
20
82

84

86
Japan

88
U.S.

90

92
Germany

94

96
France98

2000 (CY)U.K.

Notes: 1. Data for 1999 and 2000 are forecast by OECD.
2 Outstanding debts represent gross amounts.
Source: OECD, “Economic Outlook.”

Development Bank of Japan Research Report/ No. 445

Figure 2-19. Factors for Change in Interest Payments on Public Bonds/GDP Ratio
(%)
20
15
10
5
0
-5
-10
-15
1980→85

1985→90

Rise in interest rates
GDP growth (reversed sign)

1990→95

1995→98 (FY)

Growth of outstanding public bonds
Rise in (interest payments/GDP)

Sources: Economic Planning Agency, “Annual Report on National Accounts;” Ministry of Finance, “Public Finance
Data Book.”

7. Increased Trade with Asia and Import Dependency
The weight of Asia in Japanese trade increased in the 1990s. As Asian countries achieved rapid
economic growth, their relations with Japan became increasingly strong. This section considers
Japan’s relationship with Asia in terms of the change in exports and imports by country (region)and by product, the trend of finished goods imports, the increase in the overseas production ratio
and the rise in import dependency.
Figure 2-20 shows Japanese exports and imports by country and region. Asia has had aconsiderable share in exports, but the United States alone accounts for 25% of total exports andits share exceeded that of the whole of Asia in the 1970s. In the 1980s, the U.S. accounted for
32% of Japanese exports, single-handedly surpassing Asia and EU. In the 1990s, however, theshare of Asia increased to almost 40% as it became an increasingly important trading partner.
Since mineral fuels have accounted for a substantial part of Japanese imports, “other”
regions have maintained a preeminent position. As in the case of exports, however, theimportance of Asia in imports has been increasing: in the 1990s, Asia came to enjoy a 34.5%
share in Japanese imports. This surge was largely due to Japanese manufacturers transferring
plants overseas (primarily to Asia) in search of cheaper labor following the rapid appreciation of
the yen.
As regards exports by product (Figure 2-21), the share of machinery including electrical andgeneral machinery rose constantly from the 1970s through the 1990s. Automobiles and othertransport equipment have seen their share in exports decline as overseas production increased.
Looking at the change in imports by product at an interval of five years, imports of capital
46

Development Bank of Japan Research Report/ No. 5

goods, particularly electrical and general machinery, have been increasing since the late 1980s.
Thus, electrical machinery and general machinery have emerged as primary items both in exports
and in imports.
Figure 2-20. Exports and Imports (Destinations and origins)
Exports

38.8%

27.3%

Imports

16.4%
50.3%

Others

26.8%

37.8%

Asia

34.5%

ＥＵ

25.3%
9.9%

29.1%
43.4%

13.9%

16.8%

26.1%

32.0%

29.0%

1970s

1980s

1990s

27.8%

21.5%

U.S.

13.7%

6.4%

8.6%

21.7%

20.2%

22.7%

1970s

1980s

1990s

Figure 2-21. Exports and Imports (Composition)

E xp o rts

Im p o rts

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
70～ 74 75～ 79 80～ 84 85～ 89 90～ 94 95～ 98

70～ 74 75～ 79 80～ 84 85～ 89 90～ 94 95～ 98( CA )O th ers

Fo o d s an d o th er d irect co n su m p tio n g o o d s

In d u strial raw m aterials to tal

G en eral m ach in ery

E lectrical m ach in ery

T ran s p o rt equ ip m en t

A u to m o b iles

Co n su m er n o n -d u rab les to tal

H o m e electrical ap p lian ces

Co n su m er d u rab les to tal

Note:1970-82 data for Asia are estimated customs clearance values of exports and imports. Export and import
items are defined according to the special classification of commodity.
Source: Japan Tariff Association, “The Summary Report on Trade of Japan.”

Development Bank of Japan Research Report/ No. 4

47

Figure 2-22 shows the share of finished products in total Japanese imports. The share
increased throughout the 1980s and 1990s, and has exceeded 80% for Asian NIEs. The share
has also been surging for the ASEAN 4 since the early 1990s. The rising share of finishedproducts in total imports is largely the result of Japanese manufacturers transferring production
centers to combat rising production costs due to the rapid yen appreciation following the 1985
Plaza Agreement.
The trend of the overseas production ratio is shown in Figure 2-23. By 1998, the ratio hadrisen to almost 14% in the whole manufacturing sector. The transfer of production facilities toAsia became prominent in the 1990s, subsequently increasing capital goods exports to, and final
product imports from Asia.
As the weight of Asia in Japanese trade increases, import dependency also continues to rise.
Figure 2-24 indicates that import dependency is rising rapidly for capital goods in particular.
Reflecting the progress of international division of labor, the 1990s have seen a substantial
increase in the weight of Asia in Japanese trade.
Figure 2-22. Trend of Finished Product Imports
(%)
90
80
70
60
50
40
30
20
83

84

85

86

87

88

89

90

World

91

Asian NIEs

Source: JETRO “International Trade of Japan.”48

92

Development Bank of Japan Research Report/ No. 5

93

94

95

ASEAN 4

96

97

98

99 first half(CA)

Figure 2-23. Trend of Overseas Production Ratio
(%)
40
35
30
25
20
15
10
5
0
85

86

87

88

89

90

91

92

Whole manufacturing sector

93

94

95

96

97

98 (CA)

Companies involved in overseas production

Sources: Ministry of International Trade and Industry, “Basic Survey on Overseas Business Activities,” and“Statistical Survey of Incorporated Enterprises.”

Figure 2-24. Trend of Import Dependency
(%)
16%
14%
12%
10%
8%
6%
4%
2%
0%
83

84

85

Capital goods

86

87

88

89

90

Consumer durables

91

92

93

94

95

Consumer non-durables

96

97

98

99 (CA)

Producers' goods

Import dependency = (import index × weight of imports)/(total supply index × weight of total supply).
Constant at 1995 price. 1999 represents estimate based on data for the first two quarters.
Source: Ministry of International Trade and Industry, “Industrial Total Supply Table.”
Note:

Development Bank of Japan Research Report/ No. 4

49

8. Progress of Information Society
Structurally, the 1990s have seen a rapid progress in information technology. This section
examines the development of the information society in Japan in comparison with othercountries.
Figure 2-25 compares expenditures for software and tangible asset investment in 1995 as apercentage of GDP among OECD countries. Expenditures for software can be considered as
investment in intangible assets because their utility continues for several years. In countries likethe United States, the United Kingdom and Sweden, the ratio of tangible asset investment to
GDP is not high, ranging from 14% to 18%, but software investment accounted for as much as
1.5% of GDP. Contrary, the ratio of tangible asset investment is higher in Japan, while that ofsoftware investment is lower at 0.9%.8
Figure 2-25. Tangible Asset Investment and Software Investment in Selected Countries(1995)(Software investment: %)
1.6
U.K.
U.S.
Sweden1.4

CanadaNetherlands

FranceFinland

1.2

OECD average
Denmark

1.0

EU average

Australia

BelgiumJapan
Norway0.8

Germany
Austria

Italy(Tangible asset investment: %)

0.6
14

16

18

20

22

24

26

28

30

Note: Software investment represents estimate by OECD. Total of private corporations and government.
Source: OECD, “Science, Technology and Industry Scoreboard 1999.”

An OECD estimate indicates that expenditures on information and communication in
Japan9 rose rapidly from 5.3% in 1995 to 7.4% in 1997 (Figure 2-26).
In Japan, about 10% of the population had access to the Internet as of 1998. This percentage is
as high as over 30% in such countries as the United States and Canada (Figure 2-27). In this context,
there is much room left in Japan for further increases in information-related expenditures.

8 In Japan, a revision to SNA statistics slated for fiscal 2000 will include software investment of private companies in GDP.

According to Ministry of International Trade and Industry, “Survey on Specific Service Industries,” sales of the softwaredevelopment industry rose 28.7% from the previous year in fiscal 1998. It is therefore estimated that software investment has
increased correspondingly.
9 According to the international standard industry classification, seven hardware items and four service/software items are definedfor the manufacturing sector.
50

Development Bank of Japan Research Report/ No. 5

Figure 2-26. Information and Communication Expenditures as % of GDP
(%)
8.0
7.5
7.0
6.5
6.0
5.5
5.0
92

93

94

Japan

U.S.

95
Germany

96

97 (CY)France

U.K.

Note:

Information and communication expenditures include purchases of hardware, services and software related
to information and communication.
Source: OECD.

Figure 2-27. Share of Population with Internet Access (1998)
(%)
40
35
30
25
20
15
10
5
0
U.S.

CanadaNordiccountries

Australia

U.K.

Germany

Japan

FranceSource: U.S. Department of Commerce.

(as of February 18, 2000)[by Economic Research Group (e-mail: noarai@dbj.go.jp)]

Development Bank of Japan Research Report/ No. 4

51

List of Back Numbers (Including JDB Research Report)
No.5

Recent Trends in the Japanese Economy: The 1990s in Retrospect (This Issue)

No.4

Destabilized Consumption and the Post-bubble Consumer Environment, February 2000

No.3

The Slump in Plant and Equipment Investment in the 1990s: Focusing on Lowered Expectations, the Debt
Burden and Other Structural Factors, January 2000

No.2

Survey on Planned Capital Spending for Fiscal Years 1998, 1999 and 2000, November 1999

No.1

Corporate Strategies in Japan’s Semiconductor Industry: Implications of Development in Other AsianCountries, November 1999

JDB Research Report
No.96

Recent Trends in the Japanese Economy: Focused on Fixed Investment and Capital Stock, August 1999

No.95

Efforts to Protect the Natural Environment in the United States and Germany: Environmental Mitigation
and Biotope Conservation, July 1999

No.94

Survey on Planned Capital Spending for Fiscal Years 1998 and 1999, June 1999

No.93

Towards the realization of ‘environmental partnership’: A survey of Japan’s environmental NPO sector
through comparison with Germany, June 1999

No.92

The Impact of Demographic Changes on Consumption and Savings, March 1999

No.91

Recent Research and Development Trends in Japanese Enterprises: Technology Fusion, March 1999

No.90

Recent Trends in the Japanese Economy: Prolonged Balance Sheet Adjustment, January 1999

No.89

Impact of Asset Price Fluctuations on Household and Corporate Behavior: A Comparison between Japanand the U.S., December 1998

No.88

Survey on Planned Capital Spending for Fiscal Years 1997, 1998, and 1999, December 1998

No.87

Foreign Exchange Rate Fluctuations and Changes in the Input-Output Structure, November 1998

No.86

Structural Changes in Unemployment of Japan: An Approach from Labor Flow, November 1998

No.85

Recent Trends in the Japanese Economy: Characteristics of the Current Recession, August 1998

No.84

R&D Stock and Trade Structure in Japan, August 1998

No.83

Survey on Planned Capital Spending for Fiscal Years 1997 and 1998, August 1998

No.82

The Significance, Potential, and Problems of DNA Analysis Research: Establishing Public Acceptance isEssential, May 1998

No.81

The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996, 1997 and 1998
Conducted in August 1997, March 1998

No.80

Recent Trends in the Japanese Economy: Growth Base of the Japanese Economy, January 1998

No.79

Information Appliances: The Strength of Japanese Companies and Tasks for the Future, January 1998

No.78

Challenges and Outlook for the Japanese Machinery Industries: Impact of ISO14000 Series andEnvironmental Cost, January 1998

No.77

Current Conditions and Issues of Computerization in the Health Care Industry : For the Construction of a
Health Care Information Network, January 1998

No.76

Household Consumption and Saving in Japan, December 1997

No.75

The Direction of Japanese Distribution System Reforms: Strengthening the Infrastructure to Support
Diverse Consumer Choices, November 1997

No.74Foreign Direct Investments by Japanese Manufacturing Industries and Their Effects on International Trade,
October 1997

No.73

The Impact of the Changing Trade Structure on the Japanese Economy: With Special Focus on the Effects
on Productivity and Employment, October 1997

No.72

An Analysis of Foreign Direct Investment and Foreign Affiliates in Japan, August 1997

No.71

Recent Trends in the Japanese Economy: Stock Replacement and New Demand as Aspects of Economic
Recovery, August 1997

No. 70 Corporate Fundraising : An International Comparison, June 1997
No. 69 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in February 1997, May 1997
No. 68 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in August 1996, August 1997
No. 67 An International Comparison of Corporate Investment Behavior: Empirical Analysis Using Firm Date fromJapan, France and the US, April 1997
No. 66 Housing in the National Capital: Analysis of the Market for Housing using Micro Data, March 1997
No. 65 The Environment for Locating Business Operations in Major East Asian Cities, January 1997
No. 64 Direction of Reconstruction of Business Strategy in the Chemical Industry, January 1997
No. 63 Reflection on Discussions Concerning Regulation of the Electric Power Industry: Deregulation of theElectric Power Industry in Japan and Implication of Experiences in the United States, December 1996
No. 62 Current Status and Future Perspective of the Japanese Semiconductor Industry, November 1996
No. 61 A Breakthrough for the Japanese Software Industry?: Responsiveness to Users’ Needs is the key, October
1996
No. 60 Recent Trends in the Japanese Economy Focusing on the Characteristics and Sustainability of the Current
Economic Recovery, September 1996
No. 59 Analysis of the Primary Causes and Economic Effects of Information: Related investment in the UnitedStates and Trends in Japan, August 1996
No. 58 Selected Summaries of Research Reports: Published in FY 1995, June 1996
No. 57 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1995 and 1996
Conducted in February 1996, May 1996
No. 56 Recent Trends in the Japanese Economy, May 1996
No. 55 Issues Concerning the Competitiveness of the Japanese Steel Industry, February 1996
No. 54 Changes in the Financial Environment and the Real Economy, January 1996
No. 53 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994, 1995 and 1996
Conducted in August 1995, October 1995
No. 52 Current Economic Trends: Focusing on the Appreciation of the Yen and its Effects, October 1995
No. 51 Problems Concerning the International Competitiveness of the Petrochemical Industry, October 1995
No. 50 An Economic Approach to International Competitiveness, October 1995
No. 49 Selected Summaries of Research Reports Published in FY 1994, July 1995
No. 48 Strategies for Improving the Efficiency of the Japanese Physical Distribution System: Part2, July 1995
No. 47 Issues on International Competitive Strength of the Auto Industry, June 1995

No. 46 Problems Concerning the International Competitiveness of the Electronics and Electric Machinery Industry,
June 1995
No. 45 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994 and 1995
Conducted in March 1995, June 1995
No. 44 Strategies for Improving the Efficiency of the Japanese Physical Distribution System, March 1995
No. 43 Capital Spending Recovery Scenario Cycle and Structure, August 1994
No. 42 Progress of International Joint Development between Industrialized Countries on the Private Level, May
1994
No. 41 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993, 1994 and 1995
Conducted in August 1994 , November 1994
No. 40 Selected Summaries of Research Reports Published in FY 1993, June 1994
No. 39 Recent Trends in Japan’s Foreign Accounts, April 1994
No. 38 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993 and 1994
Conducted in March 1994, April 1994
No. 37 Economic Zones and East Asia Prospect for Economic Activity Oriented Market Integration, December
1993
No. 36 Japanese Corporate Responses to Global Environmental Issues, December 1993
No. 35 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992, 1993 and 1994
Conducted in August 1993, September 1993
No. 34 Structure of Profit to Capital in the Manufacturing Industry, September 1993
No. 33 Comparison of the Japanese and The U.S. Labor Markets, October 1992
No. 32 The Relative Competitiveness of U.S., German, and Japanese Manufacturing, March 1993
No. 31 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992 and 1993
Conducted in March 1993, April 1993
No. 30 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991, 1992 and 1993
Conducted in August 1992, December 1992
No. 29 Flow of Funds in the 80s and Future Corporate Finance in Japan, November 1992
No. 28 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991 and 1992
Conducted in February 1992, April 1992
No. 27 An Analysis of Foreign Direct Investment in Japan, March 1992
No. 26 Projection of Japan's Trade Surplus in 1995: Analysis of Japan's Trade Structure in the 80s, February 1992
No. 25 Intra-Industry Trade and Dynamic Development of The World Economy, November 1991
No. 24 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990, 1991 and 1992
Conducted in August 1991, September 1991
No. 23 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990 and 1991
Conducted in February 1991, March 1991
No. 22 Trends of the Petrochemical Industry and its Marketplace in East Asia, March 1991
No. 21 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989, 1990 and 1991
Conducted in August1990,September 1990
No. 20 Deepening Economic Linkages in The Pacific Basin Region: Trade, Foreign Direct Investment andTechnology, September 1990

No. 19 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989 and 1990
Conducted in February 1990, March 1990
No. 18 Petrochemicals In Japan, The US, and Korea an Assessment of Economic Efficiency, February 1990
No. 17 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1988, 1989 and 1990
Conducted in August 1989, October 1989
No. 16 Impact of the EC Unification on Japan’s Automobile and Electronics Industries, August 1989
No. 15 Industrial and Trade Structures and the International Competitiveness of Asia’s Newly Industrializing
Economies, August 1989
No. 14 The Japan Development Bank Reports on Capital Investment Spending: Survey for Fiscal Years 1988 and1989 Conducted in February 1989, March 1989
No. 13 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1987, 1988 and 1989
Conducted in August 1988, September 1988
No. 12 Growing Foreign Investors’ Activities and the Future of Internationalization, September 1988
No. 11 Futures Tasks and Prospects for the Japanese Machine-Tool Industry, July 1988
No. 10 International Division of Labor in the Machine Industries Among Japan, Asia’s NICs and ASEANCountries, June 1988
No. 9

Trends of the Petrochemical Industry and its Marketplace in East Asia around Japan, May 1988

No. 8

The International Competitiveness of Japan and U.S. in High Technology Industries, April 1988

No. 7

The Japan Development Bank Reports on Private Fixed Investment in Japan, March 1988

No. 6

Economic Projections of the Japan’s Economy to the Year 2000, February 1988

No. 5

The Japan Development Bank Reports on Private Fixed Investment in Japan, September 1987

No. 4

Current Trends in the Japanese Auto Parts Industry in Overseas Production, July 1987

No. 3

Current Moves for Foreign Direct Investment into Japan, May 1987

No. 2

Overseas Direct Investments by Japanese Corporations, May 1987

No. 1

Current U.S. Consumption Trends, May 1987