Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

Sources of Regional Economic Growth in Japan:

A Case of Hokkaido Prefecture between 1970 and 19851
By

Takahiro Akita*

Abstract

This paper examines, using Hokkaido prefecture as a case, the effect of regional characteristics
and government policies on the growth of regional economy in Japan. The sources of regional
economic growth are investigated through the growth factor decomposition method applied toregional input-output tables. The study finds that the growth pattern of the Hokkaido economy

changed conspicuously in the 1980s and this change was brought about, to a large extent, by a shift
in the central government's economic policies toward a smaller government.

1. Introduction
The Japanese economy regained pre-war economic levels in the middle of the 1950s and since thenenjoyed an unprecedented high economic growth, due partly to low and stable crude oil prices.
But this was only until the early 1970s. The two oil crises which occurred during the 1970s changed

the economic condition substantially. Not only has the economic growth rate been reduced tosomewhere around 5%, half of the rate in the rapid growth period, but the structure of theeconomy has also changed conspicuously. While oil prices have decreased in the 1980s, the growthrate has never recovered to the level of the rapid growth period.
Changes in the economic environment and consumer preferences have had differential impacts
on a regional economy corresponding to regional economic structure and resource endowments.
In the process of structural adjustments, some regions reveal higher economic growth than otherregions and this is in part attributable to a difference in regional industrial structure. The primary
purpose of this paper is, using Hokkaido prefecture as a case, to examine the effect of regional

characteristics and government policies on the pattern of regional economic growth in Japan forthe period between 1970 and 1985. In order to achieve this purpose, a regional input-output (I-O)
analysis was conducted using 1970, 1975, 1980, and 1985 regional I-O tables. The study period

was thus divided into three subperiods: (1) 1970-75; (2) 1975-80; and (3) 1980-85. Morespecifically, the factor decomposition method, which was proposed by Chenery, was applied to
the Hokkaido regional I-O tables to identify the sources of the regional economic growth fromthe demand side for each of these three subperiods.2
The Japanese government has constructed the nine-region interregional I-O tables (survey-

based) every five years, in which one region is Hokkaido.3 In this study, the 43-sector 1970-75-80
Manuscript received October 21, 1991. Revised February 12, 1992.

* International University of Japan'Support for this research by the International Development Center of Japan (IDCJ) is gratefully acknowledged. I am
grateful to Y. Nabeshima of the Hokkaido Electric Power Co., Ltd. and Y. Nakamura of the Economic Planning Agencyof Japan for data collection. I also would like to thank N. Toyomane of IDCJ for his useful suggestions in conducting
this research. The views expressed here are my own and neither represent the IDCJ nor any other institution.

2The Chenery's factor decomposition method will be detailed in Section 3.
3The nine regions are Hokkaido, Tohoku,- Kanto, Chubu, Kinki, Chugoku, Shikoku, Kyushu, and Okinawa.

Sources of Regional Eonomic Growth in Japan

89

Table 1 Sector Classification
10 Sectors

28 Sectors

1 Agriculture, Forestry & Fishery

1

Agriculture, Forestry & Fishery

2 Mining

2

Mining3 Manufcturing
3-1 Light Industries

3

Food Processing

4

Textile5

Wood Processing

6

Pulp & Paper

7

Printing/Publishing

8

Leather Products

93-2 Industrial Materials

3-3 Processing & Assembling

Rubber Products

20

Other Manufacturing

10

Chemical Products

11

Oil & Coal Products

12

Cement & Ceramics

13

Iron Products

14

Non-Ferrous Metal

15

Metal Products

16

Nonelectrical Machinery

17

Electrical Machinery

18

Transportation Machinery

19

Precision Apparatus

4 Construction

21

Construction & Civil Engineering

5 Electricity, Gas & Water

22

Electricity

23

Gas & Water

6 Trade24

Trade

7 Finance & Insurance

25

Finance & Insurance

8 Services

26

Services

9 Transportation & Communication

27

Transportation & Communication

10 Unclassified

28

Unclassified

linked regional I-O table and the 45-sector 1985 regional I-O table are used to perform the factor
decomposition analysis for Hokkaido (both of them are of the competitive-import type). Since thelinked 1970-75-80 table is at constant 1980 prices, the 1985 table is converted into one with constant1980 prices by using sectoral GDP deflators.4 Furthermore, sectors are aggregated into 28
sectors, since there is a difference in sector classification between these I-O tables. However, toclarify the overall picture of the regional economic growth, the 10-sector classification is used in
the text (see Table 1 for the classification).

It was not until the Meiji era that full-scale development was started in Hokkaido, thenorthernmost and second largest of the four main islands of Japan. With a population of 5.6
million people, and while occupying 22% of Japan's total land area, Hokkaido is the least densely
populated prefecture in Japan. It still lacks social capital stock and has been suffering fromchronic large out-migration. Hokkaido's manufacturing is based largely on extractive and primaryindustries. Fish canning, lumbering, pulp and paper manufacturing, sugar refining, and dairy
processing are some of the prominent manufacturing activities. While Hokkaido is regarded asa frontier area and depends heavily on the nation's development policies and budget, it hastremendous opportunities for development and thus presents a very interesting case in analyzing

4Since Hokkaido does not publish real figures for sectoral GDP, national GDP deflators are used in this study. This
would distort some of the relative magnitude.

90

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

regional economic development in Japan.

The paper is organized as follows. Section 2 discusses the characteristics of the Hokkaido
economy and introduces some of the government policies relevant to Hokkaido. Section 3
performs a factor decomposition analysis using the Hokkaido regional I-O tables to identify thesources of regional output growth for the aforementioned three periods. Conclusions arepresented in the fourth section.

2. Characteristics of the Hokkaido Economy

Hokkaido, the northernmost island of the Japanese Archipelago and the largest prefecture in
Japan, is situated at latitude 41 to 45 degrees north and occupies 22% of Japan's total land areawith 83.4 thousand km2, which is about the same size as Austria (83.8 thousand km2) and slightly
smaller than South Korea (99 thousand km2). With the population of 5.6 million people, the area
is relatively sparsely populated. The population density is 68 persons per square km, and this isabout 21% of the Japanese average (320 persons/km2). Surrounded by the Pacific Ocean, the Seaof Okhotsk, and the Japan Sea, Hokkaido has a long coastline and is rich in marine resources.

In addition, it contains 56 thousand km2 of forest area and thus has an abundant supply of forest
resources.

Sapporo is the largest city in Hokkaido with a population of 1.64 million people in 1990, which
is followed, in terms of population size, by Asahikawa, Hakodate, Kushiro, Obihiro, Otaru,

Tomakomai, and Muroran.5 Among them, Sapporo, Otaru, Tomakomai, and Muroran arelocated in the Central Hokkaido Area (Doh-Oh Chiiki), which was designated in 1964 as a New
Industrial City in line with the Comprehansive National Development Plan (KYUZENSO)

formulated in 1962.6 It was proposed that the Central Hokkaido Area should serve as a strategic
regional center for industrial development in Hokkaido, and steel, pulp and paper, foodprocessing, machinery, and other local resource-based industries were designated as desirable
industries for promotion in the area. Although most of the industrial estates established in
Hokkaido are located within the Central Hokkaido Area (more than 80% in terms of land areain 1985), their performance was not very satisfactory as they failed to achieve the target amount
5The population of these cities is (in 1,000):
Asahikawa
Hakodate
KushiroObihiro

364
311
209
168

Otaru
Tomakomai
Muroran

166
160
123

6The KYUZENSO was the first comprehensive national development plan formulated under the Comprehensive
National Land Development Law of 1950. The Plan, which was the national land development version of the IncomeDoubling Plan of 1960, aimed at solving the problem of overcrowding, depopulation and regional disparity, and thereby
achieving balanced development throughout the country. It thus attempted to disperse industrial and urban development
into the whole country, especially outside the Pacific Coast Belt connecting the three overcrowded industrial areas ofTokyo, Nagoya, and Osaka. In order to realize this goal and to maximize the effectiveness of the development, the Plan

adopted the Kyoten Kaihatsu Method (growth pole scheme), in which it was proposed that investments should beconcentrated in strategic points (growth poles) selected outside the Pacific Coast Belt in the hope of inducing thedevelopment benefits to the surrounding areas. In the Plan, the country was classified into three areas in terms ofdevelopment level: (1) overconcentrated areas (large metropolitan areas); (2) adjustment areas (those surrounding
overconcentrated areas); and (3) development areas (underdeveloped northeast, the Japan Sea coast, and southernmost
areas), where Hokkaido was designated as a development area. Under the Law for the Promotion of New Industrial City
Construction (1962), one of the three laws enacted to implement the Plan, 15 sub-areas were designated as new industrial
cities primarily within development areas. For a discussion of the comprehensive national land development planning up
to the Third Comprehensive National Development Plan (SANZENSO), see Honjo (1978), in which the growth pole
concept was introduced in connection with the Kyoten Kaihatsu Method. Though written in Japanese, Tadenuma (1990)
provides an excellent account of the evolution of the comprehensive national development plans. Lo (1978) took up the
Okayama Ken-nan New Industrial City (Southern Okayama) as a case and analyzed the growth pole approach applied tothat area.

Sources of Regional Eonomic Growth in Japan

91

Table 2 Major Economic Indicators for Hokkaido and Japan
Hokkaido

Economic indicators

1970

Japan

Hokkaido/Japan (%)

1975

1980

1985

83.4

83.4

83.4

5184

62.2
2447

5338
64.0
5681

472

1064

335
667

689

826

905

3970

8098

8561

2. Secondary Industry

1678

3025

3110

24926

119232

2.7

1510

4270

7571

32824

154331204719

4.6

4.7

Total
GDP (Sectoral Share, in %)1. Primary Industry

2512

6638

11422

9276
13290

59113
91534

94577

3. Tertiary Industry

61720

158745 257470 333146

4.2

4.2

4.4

4.0

13.3

10.4

7.2

6.8

5.1

3.3

2.8

2.07

2.04

2.18

2.47

2. Secondary Industry

26.5

25.3

26.5

23.4

6.4
40.4

37.2

36.7

35.8

0.66

0.68

0.72

0.65

3. Tertiary Industry

60.1

64.3

66.3

69.8

53.2

57.7

59.9

61.5

1.13

1.12

1.11

1.14

5.8
3.5

3.2

Land Area (1000 Square km)
Population (in 1000)
Pop. Density (Persons/Sq. km)
Income (in billion yen)

Income/Capita (in 1000 yen)
GDP (in billion yen)
1. Primary Industry

1970

1975

1980

1985

1970

1975

1980

1985

83.4

377.7

377.7

377.7

377.7

22.1

22.1

22.1

22.1

5576

5679

103720111940117060121049

5.0

4.8

4.8

4.7

66.9

274.6

296.4

309.9

320.5

22.6

21.2

4.1

4.8

4.3

1729

1989

126453 202847 263313
1130
1733
2175

21.6
4.5

21.6

9640

68.1
11297

81.8

94.2

99.8

91.4

8.5

9.7

2.8

3.2
4.9

9.8
2.6

59828
577

9195

8.4

4.5

Persons Employed (in 1000)
1. Primary Industry

5419

5.1

5.4

628

639

662

618

10151
17897

6111

2. Secondary Industry

18106

18737

1316

1427

1584

1670

24545

27681

30963

5.4

3.5
5.2

Total
Labor Productivity (in 1000 yen)
1. Primary Industry
2. Secondary Industry
3. Tertiary Industry

2460

2462

2598

2625

52592

53141

55811

19206
33593
58218

3.5

3. Tertiary Industry

4.7

Total
GDE (in billion yen)

Note:

Source:

516

397

353

336

7354

6.2

5.1

5.0

4.6

4.7

4.5

648

1737

2339

2690

391

1101

1401

1697

166

158

2627

4572

1393

3265

5048

6208

76

80

1148

2993

4781

5030
5554

167
91

158

1061

1337

3307

4984

6094

91

2696

4396

5064

1174

2987

4613

5722

90
90

96

1021

86
87

95

88

2971

6449

11122

12889

75502

152735248970 321159

3.9

4.2

4.5

4.0

81

1. Figures in 1970 are from Annual Report on Prefectural Income Statistics, 1979 and are based on old SNA, whereas figures for 1975, 1980, and1985 are from Annual Report on Prefectural Accounts, 1988 and based on new SNA. (This applies to Income, GDP, and GDE figures.)
2. GDP = Gross Domestic Product; and GDE = Gross Domestic Expenditure.
3. Income, GDP, GDE are all nominal figures (i.e., at current prices).
4. Figures in 1970 corresponding to GDP are Net Domestic Product (NDP).
5. Figures in HOKKAIDO/JAPAN columns corresponding to GDP (Sectoral Share) are Location Quotients.
6. Primary Industry = Agriculture, Forestry, and Fishery. Secondary Industry = Mining, Manufacturing, and Construction; and Tertiary Industry =Electricity, Gas & Water, Trade, Finance & Insurance, Real Estate, Transportation & Communication, Services, and Public Administration.
1. Economic Planning Agency, Annual Report on Prefectural Income Statistics, 1979.
2. Economic Planning Agency, Annual Report on Prefectural Accounts, 1988.
3. Hokkaido Development Bureau, General Conditions of Hokkaido Prefecture, 1990
4. Management & Coordination Agency, Population Census, various issues.

of shipment of industrial products for each of the three basic plans so far formulated (1. 1965-75;

2. 1975-80; and 3. 1980-85).7
Table 2 compares Hokkaido with Japan as a whole in terms of major economic indicators forthe period of 1970-1985. The following are some of the characteristics of the Hokkaido economy.

First, the income of Hokkaido accounted for 4.3% of the national income in 1985, which was
smaller than the population share of 4.7%, leading to a less than average per capita income (91 %of the national average). It is interesting to observe that the income disparity measured by percapita income differential between Hokkaido and Japan seems to have widened since 1980, aftera narrowing down period during the 1970s. As a matter of fact, this coincides with the movementof regional income inequality based on 47 prefectures in Japan. According to the coefficient ofvariation which measures the dispersion of the regional income per capita levels relative to thenational average, regional income disparity, which showed a downward trend during the 1970s,

seems to have increased since 1979 (from a bottom of 12.6% to 14.2% in 1985). There are several
factors which would bring about this change. Firstly, while regions having a relatively large
proportion of processing and assembling industries maintained a relatively high growth, thosewhich lacked the development of processing and assembling industries and relied heavily on

industrial material industries such as iron and steel, aluminum smelting, and petrochemicalindustries mostly stagnated. Secondly, regions which contain large urban areas have benefited
from the so-called "Softization" of the Japanese economy which refers to the increasing
importance of services in production and consumption, since the "Softization" has been most
7The rate of achievement is 75%, 18%, and -3% for the first, second, and third basic plans, respectively. Recnetly,
emphasis has shifted to promoting high value-added new materials industries and high-tech industries (i.e., 1C industry
and bioindustry), and these industries are supposed to be located in the vicinity of the Chitose airport.

92

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

prominent in large urban areas.8 Tokyo became an international financial center and has
absorbed many of these "soft" industries such as information processing, research anddevelopment, and planning. This promoted an excessive concentration of population andeconomic activities in the Tokyo region.9 Tokyo's per capita income relative to the national

average made a significant increase during 1980-85 (from 138% to 148%).10 Finally, as describedin detail in the next section, a cut in the central government expenditures, especially in public

works, has severely affected those regions which rely very much on public works investments.11
Second, according to the Location Quotient (LQ) of GDP, Hokkaido specializes extensively inthe primary industry as its LQ has been exceeding 2.0 constantly over the 1970-85 period. Thisis true even though the share of the primary industry decreased conspicuously over the period(from 13.3% to 6.8% in nominal terms). Since Hokkaido is abundant in natural resources, it isquite natural that Hokkaido specializes in those activities that are based on locally available
natural resources. The labor productivity of the primary industry in Hokkaido is much larger than
the national average. Hokkaido has thus a comparative cost advantage in the primary industry.
On the contrary, however, it still lacks a solid base for manufacturing activities as its LQ was
merely 0.38 in 1985 (see Table 3). Among manufacturing industries, local-resource-based lightindustries such as food processing and wood processing are relatively prominent, reflecting theabundant supply of natural resources, while the development of heavy and chemical industries isstill weak (see Table 4).
Table 3 Gross Domestic Product and Its Location Quotient (LQ) in 1985
(in billion yen)

Japan

LQ

1

Agricul., Forest., Fish.

905

9949

2.30

2

Mining

111

1226

2.28

3

Manufacturing

1426

94257

0.38

3-1 Light Industries

823

29621

0.70

3-2 Industrial Materials

270

22616

0.30

3-3 Processing & Assembling

333

42020

0.20

4

Construction

1557

23129

1.70

5

Elect., Gas, Water

459

11519

1.01

6

Trade

2078

43313

1.22

7

Trade'

520

17782

0.74

8

Real Estate

1216

30997

0.99

9

Transport. & Commun.

928

19652

1.20

10

Services

2798

61912

1.14

11

Public Administration

960

14358

1.69

12956

328095

1.00

SectorTotal

Hokkaido

Source: 1. Hokkaido, Annual Report on Hokkaido Prefectural Accounts, 1987.
2. Economic Planning Agency, Annual Report on National Accounts, 1987.

8For the "Softization" of the Japanese economy, see Tachi (1985).
9The Tokyo region includes Tokyo and the three surrounding prefectures: Kanagawa, Saitama, and Chiba. Net inmigration to the Tokyo region increased from 275 thousand for 1975-80 to 509 thousand for 1980-85. On the other hand,
Hokkaido has been experiencing net out-migration since 1960. Net out-migration from Hokkaido increased from 16
thousand for 1975-80 to 83 thousand for 1980-85.

l0However, the excessive concentration of population and economic activities created the so-called Tokyo problem: arapid increase in land prices, traffic congestion, air pollution, and so on. For a discussion of the Tokyo problem, see Mera,
Miyao, and Sakashita (1988).

"Mera (1989) advanced a hypothesis that the recent rejuvenation of the Tokyo region is due for the most part to the shift
in the central government's economic policies toward a smaller government (i.e., decreasing growth rate of public
expenditures, privatization of public enterprises, and deregulation of private economic activities), supported by theexistence of economies of scale in the region. If this is true, then the policy shift from a large government (interventionist)to a smaller government (market oriented) seems to be the principal factor for reversing the declining trend in regional
income disparity.

Sources of Regional Eonomic Growth in Japan

93

Table 4 Gross Domestic Product and Its Location Quotient (LQ)for Manufacturing Industries in 1985
(in billion yen)

SectorHokkaido

Japan

LQ

368

10018

2.43

1

Food Processing

2

Textile

7

3085

0.15

3

Wood Processing

146

2564

3.76

4

Chemical Products

24

7027

0.23

5

Oil & Coal Products

53

3027

1.16

6

Cement & Ceramics

121

3058

2.61

0.50

7

Iron & Non-Ferrous Metal

72

9505

8

Metal Products

93

4275

1.44

9

Nonelect. Machinery

88

11036

0.52

10

Elect. Machinery

43

13753

0.21

11

Transp. Machinery

107

11097

0.64

12

Precision Apparatus

2

1858

0.08

13

Other Manufacturing

302

13954

1.43

Total

1426

94257

1.00

Source: 1. Hokkaido, Annual Report on Hokkaido Prefectural Accounts, 1987.
2. Economic Planning Agency, Annual Report on National Accounts, 1987.

Third, in heavy and chemical industries, Hokkaido relies significantly on industrial material

industries.12 According to Table 5, which presents a change in the structure of industry in terms ofreal gross output (at 1980 constant prices), the share of industrial materials industries was still larger
than that of processing and assembling industries in 1985, though it decreased to 7.8% from 10.2%
in 1975 and the decrease was covered partially by an increase in the share of processing andassembling industries. As described further in the next section, the two oil crises which occurred in
the 1970s facilitated a structural shift in heavy and chemical industries toward processing andassembling industries such as electrical machinery and automobile industries. In accordance with

the Third Hokkaido Comprehensive Development Plan which was formulated in 1970,13 Hokkaido
embarked upon the construction of two large-scale coastal industrial estates, one in East
Tomakomai, located 60 km south of Sapporo City and facing the Pacific Ocean with a total areaof 11,000 ha and the other in the Ishikari Bay Area, to the north of Sapporo City and facing theJapan Sea, with an area of 3,000 ha. However, due to the oil crises, the construction of oil refining
and petrochemical plants planned in the East Tomakomai Industrial Estate has been delayed. In East
Tomakomai, the construction of an automobile engine plant and oil storing bases (public andprivate) was already completed. On the other hand, most of the firms which started to operate in
the Ishikari Bay Area are related to housing and construction industries. Another industrial estate,
the Sorachi Core Industrial Estate, which was started together with the above two industrial estatesand is located midway between Sapporo and Asahikawa with a total area of about 300 ha, wasdesigned for machine and metal industries and supposed to accommodate 10,000 workers.14
l2Heavy and chemical industries consist of industrial materials industries and processing and assembling industries (ormachine industries).

13Hokkaido Comprehensive Development Plans have been formulated occasionally since 1950 by the Hokkaido
Development Agency under the Hokkaido Development Law which was enacted in 1950 along with the Comprehensive
National Land Development Law. (The Hokkaido Development Agency is an external organization of the Prime
Minister's Office which is responsible for the formulation of comprehensive development plans in Hokkaido, and its
Director General is a Minister of State.) The Third Hokkaido Comprehensive Development Plan was formulated in linev/ith the New Comprehensive National Development Plan (SHINZENSO) of 1969. The SHINZENSO proposed, with theaim of diffusing development opportunities over the whole national land, large-scale development projects such as theconstruction of new networks of trunk railway lines, expressways, and communications and the establishment of largescale industrial bases around the new networks, especially in the remote areas of Japan.
I4A11 these industrial estates are located in the Central Hokkaido Area (Doh-Oh Chiiki).

94

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

Table 5 Total Gross Output by Industry at Constant 1980 Prices (Percentage Share)
(0/0)

1

2
3

4

5
6
7
8
9
10

Sector

1970

1975

1980

1985

Agricul., Forest. & Fish.
MiningManufacturing
3-1 Light Industries
3-2 Industrial Materials
3-3 Processing & Assembling
Construction
Electricity, Gas & Water
Trade
Finance & Insurance
Services
Transport. & Communicat
Unclassified
Total

13.4
2.2

9.5
1.4

7.9

8.7

30.9
17.0
9.7
4.2
12.1
1.8

28.6
14.5
10.2
3.8
14.8
2.1

1.4
27.6
13.9

27.2

7.5
6.5
18.8
4.6
2.4
100.0

9.7
8.6
19.5
3.8
2.0
100.0

1.2
14.4

9.7

7.8

4.1

5.0

14.6
2.6

11.5
2.9
10.8

10.8
7.6
21.0
4.8
1.6
100.0

9.1
20.9
6.3
1.6
100.0

Source: 1. MITI, 1970-75-80 Linked Regional 1-0 Table, 1986.
2. MITI, 1985 Regional 1-0 Table, 1990.

Fourth, compared with Japan as a whole, the Hokkaido economy depends highly upon govern

ment sectors. According to real GDE figures in 1985, about 28% of the total GDE was due togovernment sectors in Hokkaido (government consumption expenditure plus government fixed
capital formation), which is much larger than Japan's figure of 16% (see Table 6). This implies thatthe Hokkaido economy is very sensitive to government policies, especially development policies by
the central government, since Hokkaido relies heavily on national subsidies (Kokko Shishutsukiri)

for its public works expenditures.15 The construction industry has been playing an important rolein the Hokkaido economy reflecting high dependence on public works investments by the central
government (see Table 3). Financially, Hokkaido is not very healthy as its local tax revenue falls far

short of its government expenditures necessary to maintain standard local public services. The
reason is that while local tax revenue depends very much on the local income level (especially,
corporate income), necessary government expenditures are determined to a considerable extent by
the population size and area. Local allocation tax (Chiho Koufuzei), which is transferred from thecentral government to local governments to make up for local deficits, accounts for 25% of the total
revenue in Hokkaido prefecture in 1988 (536 billion yen out of a total revenue of 2.127 trillion yen),which is much larger than the national average figure of 17%.16
15About 10% of public works expenditures by the central government is channeled to the Hokkaido region through the

Hokkaido Development Agency. In 1990, around 770 billion yen was allocated to the Hokkaido region out of the total
public works expenditures of 7,250 billion yen. For the system of national subsidies to local governments (Kokko
Shishutsu-kin), see, for example, Atoda and Hashimoto (1991).

l6The amount of local allocation tax for a local government is determined based on the difference between the Standard

Fiscal Demand (Kijun Zaisei Juyou) and the Standard Fiscal Revenue (Kijun Zaisei Shunyu), where the Standard Fiscal
Revenue is calculated by the following formula (since fiscal 1989 when the new consumption tax was introduced):
Standard Fiscal Revenue = a (LT + NCTL) + NTL,
where LT = local tax revenue,

NCTL = national consumption tax revenue transferred to local government (Shohi Joyozei),
NTL = national tax revenue transferred to local government (Chiho Joyozei), anda = 0.8 for prefectures and 0.75 for cities, towns, and villages.

Fiscal Power Index (Zaiseiryoku Shisu), which is the ratio between Standard Fiscal Revenue and Standard Fiscal Demand,
is around 0.4 for Hokkaido. On the other hand, total amount of national treasury disbursements for local allocation tax(Chiho Koufuzei Koufukin) is estimated by the following formula (since fiscal 1989):
National Treasury Disbursements for Local Allocation Tax= 0.32 (IT + CT + LT) + 0.24 CNT + 0.25 TBT,

where ITCT
LT

= income tax,
= corporate tax,
= liquor tax,

CNT = consumption tax (excluding Shohi Joyozei), and
TBT = tobacco tax.

Necessary adjustments are made whenever the total disbursement is not equal to the total required amount. For the systemof local allocation tax, see, for example, Takabayashi (1991).

Sources of Regional Eonomic Growth in Japan

Table 6 Gross Domestic Expenditure at Constant Prices Component Shareand Location Quotient (LQ)
Hokkaido

Japan

95

(o/o)

Hokkaido/Japan (LQ)

Economic Indicators

1970

1975

1980

1985

1970

1975

1980

1985

1970

1975

1980

1985

Private Consump. Expend.

57.0

62.8

58.5

64.1

54.8

57.2

53.7

55.8

1.04

1.10

1.09

1.15

Govern. Consump. Expend.

14.5

15.5

13.7

13.6

9.7

9.9

9.4

9.3

1.50

1.56

1.45

1.46

Private Fixed Capital

18.5

24.7

24.8

19.7

26.4

23.4

227

23.2

0.70

1.05

1.09

0.85

Govern. Fixed Capital

14.4

15.2

17.7

14.9

8.3

9.1

9.4

7.1

1.74

1.67

1.89

2.10

Inventory Increase

2.4

1.8

1.1

0.2

3.2

0.3

0.9

0.8

0.74

5.36

1.23

0.23

Exports — Imports

-15.2

-24.0

-23.9

-18.2

-2.3

0.0

3.9

3.8

Exports

30.2

34.6

33.1

34.4

9.6

12.9

16.6

16.9

3.15

2.69

200

204

Imports

45.5

58.6

57.0

52.6

11.9

12.8

12.6

13.1

3.83

4.56

4.51

4.01

8.6

4.0

8.1

5.7

0.0

0.0

0.0

0.0

100.0

100.0

100.0

100.0

100.0

1000

100.0

100.0

1.00

1.00

1.00

1.00

Others
Total
Source:1. Economic Planning Agency, Annual Report on Prefectural Accounts, 1988.
2. Economic Planning Agency, Annual Report on National Accounts, 1985 and 1987.
3. Hokkaido, Annual Report on Hokkaido Income Statistics, 1982.

Finally, Hokkaido's trade structure reflects its basic economic conditions: an abundant supplyof natural resources and a relatively low level of industrialization. In other words, Hokkaido isexporting primary commodities and food and wood products, while it imports high value-added
items such as machines and chemical products. Using Hokkaido regional I-O tables, import ratio

and export ratio are calculated (interregional as well as international), where import ratio =imports/(total regional demand) and export ratio = exports/(total output). Tables 7 to 10 provide
the results obtained for the period of 1970-85. As shown in Table 10, more than 50% of the total
domestic demand for manufacturing industries was satisfied by interregional imports in 1985

(almost 60% when international imports are included). It is interesting to note also thatinterregional import ratio increases as one moves from light industries (42%) to industrial material
industries (51%) and to processing and assembling industries (70%). In contrast, interregional
export ratio decreases as one moves from light industries (47%) to industrial material industries(29%) and to processing and assembling industries (23%). This pattern remained unchanged overthe 1970-85 period. This clearly indicates Hokkaido's backwardness in industrial development. Of
particular interest in this connection is that Hokkaido has been suffering from a chronic regional
trade balance deficit, especially a large trade deficit in the manufacturing industry. In 1985, thetotal regional deficit amounted to 2.007 trillion yen (at 1980 constant prices), which was more than

30% of the total imports, while the trade deficit in the manufacturing industry was 2.61 trillion
yen and this was more than 50% of the manufactured imports.

3. The Sources of Regional Economic GrowthViewed from the demand side, the growth of a region is brought about by a mixture of thefollowing factors:(1) Changes in regional (internal) demand such as regional final private and public consumption
expenditures, regional private and public fixed capital formation, and an increase in regional
inventory;(2) Changes in regional exports, where regional exports include interregional exports (i.e., exports
to other parts of the country) and foreign or international exports; and(3) Regional import substitution (i.e., substitution of regionally produced goods and services forimported (domestic and/or foreign) goods and services).

Without any supply constraints, an increase in demand, whether it originates inside or outside

the region, will induce an increase in regional output to meet the change, though some of theeffects will leak through interregional and foreign imports. Increasing public works investment by

96

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

Table 7 Export Ratio and Import Ratio in 1970 (International and Interregional)(o/o)

INT.NAT.

INT.REG.

INT.NAT.

INT.REG.

ExportExportImportImportSector

Ratio

Ratio

Ratio

Ratio

1

Agricul., Forest. & Fish.

0.58

33.87

7.07

9.76

2

Mining

0.28

59.12

52.07

3.73

Manufacturing

3.71

32.41

4.15

43.06

3-1 Light Industries

2.57

41.44

4.32

35.24

3-2 Industrial Materials

4.14

26.03

4.92

42.95

3-3 Processing & Assembling

7.35

10.86

2.68

57.42

4

Construction

0.00

0.00

0.00

0.00

5

Electricity, Gas & Water

0.15

0.00

0.00

0.00

6

Trade

1.10

2.48

0.02

10.37
7.67

3

7

Finance & Insurance

0.04

0.03

0.21

8

Services

0.05

2.12

0.18

1.28

9

Transport. & Communicat.

1.74

21.03

1.69

5.24

Unclassified

1.89

0.00

2.45

0.00

Total

1.45

17.39

3.39

18.35

10

Note: INT.NAT. = International and INT.REG. = Interregional.
I NT. NAT. Export Ratio = International Exports/Total Output,

INT.REG. Export Ratio = Interregional Exports/Total Output,
INT.NAT. Import Ratio = International Imports/Total Regional Demand,
INT.REG. Import Ratio = Interregional Imports/Total Regional Demand.

Table 8 Export Ratio and Import Ratio in 1975 (International and Interregional)(o/o)

INT.NAT.

INT.REG.

INT.NAT.

INT.REG.

ExportExportImportImportSector

Ratio

Ratio

Ratio

Ratio

Agricul., Forest. & Fish.

0.61

36.17

9.47

15.06

2

Mining

0.18

59.63

81.94

0.78

3

Manufacturing

4.27

34.23

4.97

46.13

1

3-1 Light Industries

2.01

42.02

6.11

40.46

3-2 Industrial Materials

4.82

31.48

4.79

42.61

3-3 Processing & Assembling

11.37

12.05

3.19

61.62

4

Construction

0.00

0.00

0.00

0.00

5

Electricity, Gas & Water

0.00

0.00

0.00

0.00

6

Trade

0.51

5.14

0.70

10.05
5.44

7

Finance & Insurance

0.01

1.56

0.30

8

Services

0.02

5.55

0.24

2.23

9

Transport. & Communicat.

1.02

16.48

1.54

10.94

Unclassified

3.40

0.73

5.29

0.14

Total

1.44

16.43

5.20

18.66

10

Note: INT.NAT. = International and INT.REG. = Interregional.
INT.NAT. Export Ratio = International Exports/Total Output,
INT.REG. Export Ratio = Interregional Exports/Total Output,

INT.NAT. Import Ratio = International Imports/Total Regional Demand,
INT.REG. Import Ratio = Interregional Imports/Total Regional Demand.

Sources of Regional Eonomic Growth in Japan

Table 9 Export Ratio and Import Ratio in 1980 (International and Interregional)
INT.NAT.

INTREG.

INT.NAT.

INTREG.

ExportExportImportSectorImport

Ratio

Ratio

Ratio

Ratio
11.40

1

Agricul., Forest. & Fish.

0.64

34.81

11.20

2

Mining

0.38

46.00

74.05

1.77

3

Manufacturing

2.38

33.63

4.45

48.62

3-1 Light Industries

1.30

41.32

5.17

40.97

3-2 Industrial Materials

3.00

28.99

4.31

44.06

3-3 Processing & Assembling

4.62

18.33

3.58

65.57

4

Construction

0.00

0.00

0.00

0.00

5

Electricity, Gas & Water

0.00

0.21

0.01

0.46

6

Trade

0.34

4.12

0.03

4.56

7

Finance & Insurance

0.26

0.13

0.41

3.04

8

Services

0.02

5.75

0.36

2.99

9

Transport. & Communicat.

4.15

16.94

3.27

6.37

Unclassified

9.07

1.33

5.36

0.60

Total

1.12

15.23

4.68

18.96

10

Note: INT.NAT = International and INTREG. = Interregional.
INT.NAT Export Ratio = International Exports/Total Output,

INTREG. Export Ratio = Interregional Exportsfibtal Output,
INT.NAT. Import Ratio = International ImportsHbtal Regional Demand,

INTREG. Import Ratio = Interregional Imports/Total Regional Demand.

Table 10 Export Ratio and Import Ratio in 1985 (International and Interegional)(0/0)

INT.NAT.

INTREG.

INT.NATINTREG.

ExportExportImportImportSector

Ratio

Ratio

Ratio

Ratio
13.14

1

Agricul., Forest. & Fish.

0.09

33.00

12.53

2

Mining

0.27

31.21

75.39

0.70

3

Manufacturing

2.43

37.08

4.99

53.73

3-1 Light Industries

1.20

46.62

6.54

41.64

3-2 Industrial Materials

3.33

28.84

5.51

50.78

3-3 Processing & Assembling

4.56

22.72

2.84

69.59

4

Construction

0.00

0.00

0.00

0.00

5

Electricity, Gas & Water

0.00

0.52

0.00

0.25

6

Trade

0.36

20.44

0.04

25.57

7

Finance & Insurance

0.14

0.03

0.06

5.66

8

Services

0.04

5.68

0.26

2.84

9

Transport. & Communicat.

2.54

24.06

2.63

14.42

Unclassified

2.13

26.11

7.10

2.12

Total

0.93

18.65

5.09

24.10

10

Note: INT.NAT = International and INTREG. = Interregional.
INT.NAT. Export Ratio = International Exports/Total Output,

INTREG. Export Ratio = Interregional Exports/Total Output,
INT.NAT Import Ratio = International Imports/Total Regional Demand,

INTREG. Import Ratio = Interregional ImportsATotal Regional Demand.

97

98

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

a regional government, most of which is financed by the central government as a subsidy, is a good
example of a demand-side activity originating within the region and triggering the regional output

growth, whereas an increase in the exports of consumption goods to satisfy the needs of consumers
outside the region is an example of a source of regional growth which is initiated externally.
Strictly speaking, regional import substitution is not a demand-side growth factor, but a factor
which brings about regional growth through the reduction of goods and services supplied fromthe outside of the region. In order to maintain a supply of necessary goods and services to meeta demand previously satisfied by imports, the regional production is encouraged in this process.

Import substitution has, in essence, the same effect on the regional economy as an increase inexports, which leads to an increase in sales by producers within the region. The idea of importsubstitution is, however, to promote regional production to reduce demand leakage in themechanism of a regional multiplier, rather than to satisfy demand increase.

Regional input-output tables provide a consistent framework within which one can identify thesources of regional output growth from the demand side. This section examines, by using a seriesof the Hokkaido regional I-O tables (at constant 1980 prices), the sources of real output growthin Hokkaido. An I-O analysis in the section relies on the factor decomposition method which wasdeveloped by Chenery. For the factor decomposition method and its applications, see: Chenery(1980); Chenery and Syrquin (1979); Chenery (1986); Kubo, Robinson and Syrquin (1986); Urata(1987); Fujita and James (1987); and Akita (1991). But, the applications are all for the growth ofa country, not for the growth of a region in a country.

3.1. Factor Decomposition Method Applied to Regional I-O Tables

The factor decomposition method used in this paper is based on the following balance equation
for the regional input-output accounts:
X=W+D+E-M(1)

where X, W, D, E, and M are vectors of gross regional output, regional intermediate demand,regional final demand, exports, and imports, respectively, and in which each element of the vectors

designates an industrial sector of the regional economy. It should be noted that in a regional I-O
table, exports and imports include interregional and foreign (international) exports and imports.
Using W = AX where A is a matrix of input-output coefficients and M = m (W + D) where mis a diagonal matrix of import coefficients ( = import ratios = imports/(total regional demand)),equation (1) can be rewritten as
X = (l-m) (AX + D) + E(2)

X=p(AX + D) + E

(3)

or

where p is a diagonal matrix of regional supply ratios ( = l-m). The system in equation (3) canbe solved for X to yield the regional production needed to satisfy a specific level of regional andexport demand with a given technology embodied in the input-output coefficient matrix, A, andimport structure represented by the diagonal matrix, p.

X = (I-M)"' (pD + E)

(4)

or

X

B(D

E)

(5)

Sources of Regional Eonomic Growth in Japan99

where B is the regional Leontief inverse (B = (I -pA) *).
Equation (5) can be used to solve the change in gross regional output, A X, in terms of changes

in regional and export demand and changes in the two sets of structural parameters, p and A. Aftersome algebraic manipulations, the change in gross regional output can be written as:
AX = Xt-Xo= Bo [(A -po) (AtXt + Dt) +p0 (At - Ao) X, +p0 (Dt - Do) + (Et - Eo)](6)

where subscripts 0 and t designate the base year and the terminal year, respectively. The change
in the gross regional output is thus decomposed into the following four factors:(a)Import substitution (IS),17 or the total (direct and indirect) effect on regional output fromeach sector of increasing the proportion of regional demand in all sectors that is supplied fromregional production ( = B0(pt-p0) (AtXt + Dt)),(b) Technological change (TC),18 or the total effect (direct and indirect) on regional output
from each sector of changing input-output coefficients throughout the regional economy( = Bo/3o(At-Ao)Xt),(c)

The expansion of domestic demand (DD), or the total (direct and indirect) effect on regional
output from each sector of the expansion of regional demand in all sectors( = BoA)(Dt-Do)), and(d)Export expansion (EE), or the total (direct and indirect) effect on regional output from eachsector of increasing exports in all sectors ( = B0 (Et-E0)).
The factor decomposition equation in (6) is obtained by using the base year structuralparameters, p0 and Bo, and the terminal year volume weights, Xt and Dt. However, we can also
derive a factor decomposition equation based on the base year volume weights, Xo and Do, andthe terminal year structural parameters, pt and Bt, as follows:

AX = Bt [(A -po) (AoXo + Do) + A (At - Ao) Xo + A (Dt - Do) + (Et - Eo)]

(7)

In this study, we used a simple average of the above two factor decomposition equations.
Moreover, the expansion of regional final demand (DD) is further decomposed into household

consumption (DD1), government consumption (DD2), capital formation (DD3), and change ininventory (DD4), whereas the expansion of exports (EE) is divided into international exports (EE1)

and interregional exports (EE2). Likewise, import substitution (IS) is decomposed into interna
tional import substitution (IS1) and interregional import substitution (IS2). The factor decomposi
tion equation will thus be:

AX = (IS 1 + IS2) + TC + (DD 1 + DD2 + DD3 + DD4) + (EE 1 + EE2)

(8)where each component is a simple average of the corresponding components in equations (6) and (7).
3.2. Major Findings

Tables 11 through 13 provide the results obtained by using the factor decomposition method

described above, in which each entry presents absolute growth for each growth factor and for eachsector.'In order to see the regional characteristics of growth performance for the study period,
Table 14 is also presented, which compares Hokkaido with Japan in terms of real GDE growth.

l7Import substitution in this analysis is defined for each sector by the increase in the proportion of total supply that isprovided by regional production.

1 technological change in this analysis is defined by the change in input-output coefficients throughout the regional
economy.

100

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

Table 11 Sources of Growth (Absolute Growth) 1970-1975
IS1

Sector-640
1 Agriculture-1442
2 Mining-725
3 Manufacturing-575
3-1 Light Industries-17
3-2 Industrial Material-134
3-3 Process. & Assembl.
-30
4 Construction-110
5 Elect., Gas & Water-208
6 Trade-119
7 Finance & Insurance-119
8 Services-46
9 Transport. & Commun.
-205
10 Unclassified
-3644
Total

(in 100 million yen)

IS2

TC

DD1

DD2

DD3

DD4

EE1

EE2

Total

Growth

-1474
408
-2812
-1641
-516
-656
3
-41
-79
212
-400
-444
-81
-4707

-2231
67
-189
29
-281
62

1417
112
4135
2873
853
408
436
545
4732
3657
6109
832
431
22404

5
4
43
14
22
7
7
290

342
130
3058
743
1644
671
9551
170
1211
410
501
344
485
16201

-11
-61
-553
-489
73
-137
-5
-12
-75
-26
-26
-17
-26
-810

-38
25
921
-115
633
402
3
9
-5
16
4
-36
79
979

332
167
3486
992
2228
265
68
28
869
All
1717
-150
183
7176

-2297
-591
7361
1831
4641
888
10000
1255
7312
6628
8652
351
233
38904

-2.30
-3.72
2.89
1.35
5.51
2.56
8.90
7.53
10.25
10.65
5.31
0.97
1.23
4.56

-34
377
855
1987
710
-140
-647
754

11

14
155
8
14
550

Note: Growth is the average annual growth rate of sectoral output (in percentage).

Table 12 Sources of Growth (Absolute Growth) 1975-1980

1

2
3

4
5
6
7
8
9
10

Sector

IS1

IS2

TC

DD1

DD2

DD3

DD4

Agriculture
MiningManufacturing
3-1 Light Industries
3-2 Industrial Material
3-3 Process. & Assembl.
Construction
Elect., Gas & Water
Trade
Finance & Insurance
Services
Transport. & Commun.
Unclassified
Total

-310
581
398
349
178
-128
5
69
177
32
-10
-136
24
832

524
-131
-185
-161
300
-324
58
14
1277
611
-201
447
9
2422

-549
49
1262
212
691
359
-479
537
1150
-1788
1776
564
-712
1809

267
51
1836
802
532
503
179
592

65
13
356
183
115
57
43
196
145
164
2749
648
73
4451

91
51
2138
376
914
848
5047
105
599
233
326
226
-34
8782

-233
38
46
262
-260
44
-2
1
-34
-5
-4
-7
-31
-229

2468
1484
4779
674
179
12508

(in 100 million yen)

EE1
-35
-7
-1119
-170
-500

-449
8
9
-17
59
30
404
198
-471

EE2

Total

Growth

-59
-134
3215
1813
476
926
22
225
222
-56
856
753
115
5159

-240
511
7947
3666
2445
1836
4882
1747
5985
733
10301
3574
-179
35261

-0.26
3.40
2.71
2.47
2.37
4.48
3.18
7.32
5.65
0.87
4.92
8.12
-0.92
3.38

Note: Growth is the average annual growth rate of sectoral output (in percentage).

Table 13 Sources of Growth (Absolute Growth) 1980-1985
IS1

Sector
1

2
3

4

5
6
7
8
9
10

Agriculture-315
Mining-143
Manufacturing
-870
-707
3-1 Light Industries
3-2 Industrial Material-342
178
3-3 Process. & Assembl.
Construction-4
Elect., Gas & Water
-58
-49
Trade
24
Finance & Insurance
16
Services
Transport. & Commun.
43
Unclassified
-72
-1428
Total

(in 100 million yen)

IS2

TC

DD1

DD2

DD3

DD4

EE1

EE2

Total

Growth

-199
148
-707
-272
-584
148
-117
-159
-5603
-1278
-420
-1145
-188
-9669

918
175
-658
-184
-855
380
-311
214
-768
1957
-1768
2163
-661
1261

-214
3
666
-137
266
538
172
599
2799
2505
1415
1423
142
9511

13
0
34
33
7
-6
3
190
15
-4
596
-558
4
292

23
-94
-1838
-367
-1269
-202
-7137
-161
-1068
-387
-514
-387
-162
-11725

313
13
363
107
211
45
5
8
72
27
20
22
38
879

-116
-14
-181
-63
-195
78
-8
-9
-23
-50
-27
-120
-271
-817

1259
-739
2225
2641
-1507
1091
102
62
4435
683
569
1951
1037
11585

1680
-651
-966
1050
-4266
2250
-7294
687
-190
3477
-113
3391
-133
-112

1.77
-4.26
-0.31
0.65
-4.16
4.42
-4.76
2.24
-0.15
3.70
-0.05
5.49
-0.72
-0.01

Note: Growth is the average annual growth rate of sectoral output (in percentage).

Table 14 Gross Domestic Expenditure at Constant Prices (Annual Average
Growth Rate)
Hokkaido

Japan

Extenditure Item

70-75

75-80

80-85

70-75

75-80

80-85

Private Consump. Expend.
Govern. Consump. Expend.
Private Fixed Capital
Govern. Fixed Capital
Inventory Increase
Exports and Imports
Exports
Imports
Total

6.09
5.48
10.21
5.23
-1.53

3.91
2.84
5.56
8.68
-5.15

2.93
2.09
-0.55
-1.54
-28.63

5.55
5.15
2.18
6.61
-33.31

3.80
4.04
4.51
5.83
27.08

2.88
2.78
4.91
-2.15
4.89

6.89
9.45
4.05

4.49
4.84
5.40

2.77
1.11
0.86

10.94
6.27
4.64

10.56
4.78
5.13

7.82
1.78
3.82

Source:1. Economic Planning Agency, Annual Report on Prefectural Accounts, 1988.
2. Economic Planning Agency, Annual Report on National Accounts, 1985 and 1987.
3. Hokkaido, Annual Report on Hokkaido Income Statistics, 1982.

Sources of Regional Eonomic Growth in Japan

101

Though there are notable differences in the pattern of output growth between the threesubperiods (1970-75, 1975-80, and 1980-85), household consumption (DD1) has been the primarysource of the total output growth throughout the study period. For 1970-75 and 1975-80,

household consumption accounted for 58% and 35% of the total output growth, respectively. In
terms of relative magnitude, the expansion of interregional exports (EE2) was the largest

contributor to the total output growth for 1980-85 and household consumption came next.19
However, this is attributable mostly to the sudden export expansion of the trading sector. While
it is not certain why this happened during this period, there was a concurrent rapid increase in theinterregional imports in the trading sector which more than offset the export increase (see Tables
9 and 10).

In the 1970s, capital formation (DD3) and the expansion of interregional exports (EE2) camenext after household consumption in order of contribution to the total output growth. Capitalformation accounted for 42% and 25% of the total growth for 1970-75 and 1975-80, while theexpansion of interregional exports explained 18% and 15%, respectively. There are, however, twomajor differences in the pattern of total output growth between 1970-75 and 1975-80. First, while
there was an import substitution effect (IS1 and IS2) for 1975-80, no such effect was observed for
1970-75. Second, government consumption (DD2) was also prominent for 1975-80 by accountingfor 13% of the total output growth, but not for 1970-75. In sum, the growth of 1970-75 was led

to a large extent by regional domestic demand as it accounted for 99% of the total growth. On
the other hand, the sources of growth became diversified for 1975-80, though domestic demand
still claimed the largest share (72%).

In the 1970s, the Japanese economy was faced with a succession of problems and changes, which

eventually matured into a stage of stable growth in contrast to the nearly two decades of
unprecedented rapid growth. The following are some of the problems and changes which occurredin the 1970s.20(1) The Japanese government was forced to switch to the floating exchange rate system in
February 1973 in the aftermath of the so-called "Nixon shocks" which took place in August
1971. This marked the end of the fixed exchange rate system, which had been maintained sinceApril 1949 with an exchange rate of 360 yen to the US dollar. After the introduction of the
new system, the yen appreciated substantially to the US dollar though there were fluctuations(from 308 yen per dollar in 1973 to 210 in 1980).
(2) The outbreak of the first oil crisis in October 1973 brought about a four-fold increase in thedollar price of crude oil. Combined with an extraordinarily "easy money" situation which had

been prevalent until early 1973, this triggered rampant inflation in the 1973-74 period.21 The
Japanese economy fell into the so-called "trilemma of inflation, recession, and balance of pay

ments deficits."22 Later, the second oil crisis took place in 1979 and the standard price of crude
l9It is not possible to calculate the percentage share of each factor in the total output growth, since this period
experienced a negative growth.
20For a discussion of the structural changes and problems faced by the Japanese economy in the 1970s, see, for example,
Saxonhouse (1979), Nakamura (1981), Komine (1981), Miyazaki (1982), Kosai and Ogino (1984), Patrick and Rosovsky(1985), and Kosai (1986).
2lExpansive monetary and fiscal policies were adopted from late 1970 until early 1973 to stem the recession following theso-called "Izanagi" boom, to achieve international payments balance, to counteract the impact of the "Nixon shocks,"(i.e., buying up dollars on a large scale to avoid a revaluation of the yen) and to try to realize the "Plan for Rebuilding

the Japanese Archipelago" (officially "Basic Economic and Social Plan") by Prime Minister Tanaka who took office inJuly 1972. These policies created an excessive liquidity in the money supply. The money supply of M2 increased sharply
at an annual rate of 26.5% in 1972 and 22.7% in 1973.
^The government decided to switch to tight monetary and fiscal policies in the first half of 1973. While they lasted until
the first quarter of 1975, they eventually succeeded in bringing inflation under control. The official discount rate recorded
an all-time high rate of 9% in December 1973, which continued until March 1975. However these tight monetary policies
produced such side-effects as a decline in profit rates and an increase in unemployment. The Japanese economy
experienced a negative real growth (-0.4%) in 1974 for the first time since World War II.

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Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

oil was raised again to more than 30 dollars a barrel in 1980 from around 14 dollars. Though

the shock was not so severe as the first oil crisis and was absorbed rather quickly,23 theJapanese economy could no longer enjoy cheap imported energy resources which had prevailed

in the rapid growth period.24(3) By the early 1970s, Japanese industries had been sufficiently competitive internationally under
the fixed exchange rate system, thereby creating a continued large trade surplus, and the balanceof payments no longer served as a constraint on economic growth.25 At the same time, theJapanese economy had become such a large factor in world trade that its policies became
matters of major concern to all countries.

(4) The Japanese fiscal policy was drastically changed in 1975. In the rapid growth period, tax
revenue increases were sufficient to permit balanced budgets. From 1974 onward, however, thegovernment was faced with revenue shortages. While expenditures increased because of
inflation, tax revenues remained flat as corporate tax receipts declined due to a sudden dropin corporate profits and indirect taxes stagnated after the first oil crisis. In order to cover the
fiscal deficits, a large amount of deficit financing bonds (Akaji Kokusai) had been constantly
issued since 1975 along with an issue of national bonds financing public works expenditures(Kensetsu Kokusai).26 Deficit financing bonds reached 7.3 trillion yen in 1980, which
accounted for about 17% of the total government revenue.

(5) In the 1970s, investments for improving the living conditions and preserving the environment
increased gradually, and the proportion of direct investments in production capacity declined.
This resulted in a large increase in net investment necessary to maintain the growth.

These problems and changes have had a profound but differential impact on the Hokkaido
economy. The growth rate dropped sharply after 1980, and Hokkaido experienced virtually zero

growth during 1980-85 (0.86% annually in terms of real GDE). This contrasts significantly withthe performance of the Japanese economy as a whole during the same period, in which the annual
average growth rate of GDE was maintained at 3.8%, though it was slightly less than the rate in
the 1970s (see Table 14).

There are two major factors which brought about this stagnation in Hokkaido. First, the23Suzuki (1981) attributed the better performance of the Japanese economy after the second oil crisis to thetransformation of monetary policy since 1975. The main changes made in monetary policy were: (1) focusing of the policy

objective on price stability (rather than full employment and the balance of payments); (2) application of M2 + CD(money supply plus certificate of deposit) as an intermediate target (i.e., appropriate control over the money supply); and(3) lifting of restrictions on interest rates. The growth of M2 + CD has been quite stable at around 11% since 1977, anddespite the rapid rise in the wholesale price index (more than 20% in the first half of 1980), the growth rate of the consumer

price index kept relatively low even after the second oil crisis (about 8% in 1980).
24After the two oil crises, however, a remarkable conservation of oil has been achieved. The conservation was carriedout, for example, by a reduction in the oil input per finished output, a switch to goods that consume less oil, and a shift
to alternative energy sources (Miyazaki, 1982).

25In the rapid growth period, the major constraint on Japan's economic growth was its balance of payments position.
When the balance of payments deficits grew in a boom and foreign exchange reserves began to fall, a tight monetary policy
was chosen to curb domestic demand; thereby reducing imports on the one hand, while expanding export capacity on theother. Further economic expansion was thus temporarily sacrificed, whereas the balance of payments began to improve.

However, tight monetary measures in 1969 were taken in a period when a balance of payments surplus continued to exist
in a boom (the latter part of the "Izanagi boom"), and their objective was to curb inflation. As described in (2) in the
text above, easy monetary measures were introduced in late 1970 in order to reduce a balance of payments surplus (while
keeping the fixed exchange rate at 360 yen), but this resulted in excess liquidity and inflation. The balance of payments

went into the red after the first oil crisis. However, it turned again to a surplus in the 1977-1978 period because of a rapid
increase in exports, during which the yen appreciated substantially from 300 yen to less than 200 yen to the dollar.

26Based on the Special Law on Public Finance, deficit financing bonds of 250 billion yen were issued in 1965 for the firsttime since World War II to cover the fiscal deficits resulting from the 1965 recession. This marked the end of the balanced
budget principle which had prevailed since the economic stabilization plan by Joseph Dodge (the Dodge Plan) in 1949.

Sources of Regional Eonomic Growth in Japan

103

Japanese industrial structure underwent a substantial change after the first oil crisis. In the rapid
growth period, heavy and chemical industrialization was the engine of the growth, wherein basic
materials industries had been developed in tandem with processing and assembling industries(machine industries) through interindustrial linkages.27 However, the sharp rise in energy prices
changed this pattern greatly. Combined with the stagnation of domestic demand due to the falling
growth rate, the development of basic industrial materials industries, such as aluminum smelting,oil refining, petrochemical, and iron and steel, stagnated and the profitability of these industries was
significantly impaired.

Being a highly energy-intensive manufacturing industry, the aluminum smelting industry lost

ground in Japan and was thrown into a process of large-scale structural adjustment.28 In 1978, thealuminum smelting industry was designated as a structurally depressed industry under the Industry

Stabilization Law.29 The aluminum smelting capacity, which once peaked at an annual capacity of
1.64 million tons in 1978, was reduced, by scrapping plants, to 0.71 million tons a year in 1983.30
Nippon Light Metals Co. Ltd. shut down its Tomakomai plant in Hokkaido, which had an annual
capacity of 134 thousand tons at a peak. Due to sluggish demand from the construction industry(the mainstay industrial user), together with increasing imports of steel products, especially from

Korea and Taiwan, the iron and steel industry also became stagnant in the 1980s.31 Nippon Steel,the largest producer in the world with eight iron and steel making plants, drastically reduced its ironand steelmaking capacity in the 1980s and plans to close down some of the old blast furnaces,

including one at Muroran in the Central Hokkaido Area.
On the contrary however, the performance of processing and assembling industries like electricalmachinery and passenger automobiles was quite different. Less dependent on imported raw
materials and blessed with further technological improvements, their international competitivenesshas strengthened markedly and they have made rapid advances (though they included somedepressed industries like shipbuilding). In other words, a structural change in the heavy and chemicalindustries occurred in such a way as to increase the proportion of processing and assemblingindustries. The Hokkaido economy, depending a great deal on basic materials industries, especially

27Kosai and Ogino (1984, p.60) attributed the development of heavy and chemical industries, not merely to the result of
deliberate government policies, but to the following three factors: (1) abundance of skilled labor; (2) abundance of harbors
and coastal areas suitable for the industries; and (3) relatively young capital stock which was maintained by a constant
supply of new capital equipments embodying new technologies.

28For details of the structural adjustment in the aluminum industry, see Tanaka (1988) and Sheard (1991).
29Under the Industry Stabilization Law (one of four laws within the framework of the Law on Temporary Measures for
Stabilization of Specified Depressed Industries which became effective in 1978), a total of 14 industries (including thealuminum smelting industry) were designated as depressed industries. They were shipbuilding, cardboard, open hearth andelectric furnaces, continuous nylon fibers, discontinuous acryl fibers, continuous and discontinuous polyester, urea,

ammonia, ferro-silicon, hydrous phosphoric acid, cotton spinning, worsted yarn spinning, and aluminum smelting. The
Law, aimed at suspension or scrapping of capacity in the designated industries, expired in 1983 and was replaced by the
Law on Temporary Measures for the Structural Improvement of Specified Industries (the Structural Improvement Law),
in which the shipbuilding industry was dropped in the list and replaced by the petrochemical industry. For details of theIndustry Stabilization Law and the related adjustment assistance measures, see Peck, Levin, and Goto (1987) andSekiguchi and Horiuchi (1988).

30The amount of capacity to be scrapped was decided according to the Basic Stabilization Plan prepared under the
Industry Stabilization Law. Before the Law, the Aluminum Industry Committee was established in 1975 within the
Industrial Structure Council (MIT1). The Committee prepared reports on measures to restructure the industry. In
compliance with the Plan formulated on the basis of recommendations by the Committee, most of the smelting plants wereclosed down and some smelting companies shifted their operations overseas, thereby becoming importers of ingot 1 Despite
the large-scale scrapping of capacity, however, the rate of capacity utilization declined during 1977-81 (from 73 to 58%).

This contrasts with the other designated depressed industries which experienced a rise in the rate of capacity utilization
during the same period.

3lSee, for instance, Industrial Bank of Japan (1984).

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Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

such declining industries as iron and steel, aluminum smelting, and oil refining, has thus been

affected adversely by this change. As Table 13 illustrates, the manufacturing industry recorded anegative output growth during 1980-85, and this was due to a large output decrease in the basic
industrial materials industries. Though there was a relatively high output growth in processing andassembling industries, it was not sufficient to cover the decrease.

The second factor was related to a change in the Japanese fiscal policy. Faced with revenue

shortages after the first oil crisis, the government decided in 1975 to start issuing deficit financing
bonds (Akaji Kokusai) to cover the fiscal deficit. At the same time, to recover from the recession
the government adopted a radical stimulative policy, in which national bonds (Kensetsu Kokusai)

were issued substantially to meet increased public works expenditures.32 The total amount of
national bonds issued (Akaji Kokusai plus Kensetsu Kokusai) grew rapidly and reached 10 trillion
yen in 1978 (from 2.2 trillion yen in 1974), which was more than 30% of the total government
revenue.

In order to cope with the situation, the government decided to start drastic administrative andfiscal reforms in 1981.33 In line with these reforms, which aimed at reducing the fiscal deficit andstopping the issue of deficit financing bonds by the 1984 fiscal year, public works expendituresby the central government were completely frozen.34 Highly dependent on the central government
expenditures, the Hokkaido economy has thus been affected severely by this freeze. As Table 13

illustrates, the expansion of capital formation (DD3) turned negative for 1980-85, and this is due
mostly to a radical cut in the public works expenditures. The construction industry, which relies
heavily on public works investments, stagnated during the period and experienced a negative
growth.

It should be noted that according to Table 14 private fixed capital formation also recorded anegative growth in the period (-0.55% annually), and this contrasts sharply with Japan as awhole, in which private fixed capital formation experienced a relatively high growth (4.9%

annually). Private fixed capital formation was, in fact, one of the major factors which sustained
the stable growth for 1980-85 in Japan. On the contrary, as Table 13 indicates, the stagnation ofprivate investments seems to have influenced adversely the manufacturing industry in Hokkaido(especially, industrial material industries).

4. Conclusions
The primary purpose of this study was, using Hokkaido prefecture as a case, to investigate theeffect of regional characteristics and government policies on the growth of the regional economy.

It has been found that the growth pattern of the Hokkaido economy changed conspicuously inthe 1980s and this change was brought about, to a large extent, by a shift in the central govern-

32Under the easy monetary policy to stimulate domestic economy, the official discount rate was gradually lowered in 1975
to 6.5% from 9%. In 1977, it was again lowered to 4.25% and eventually dropped to 3.5%. The easy monetary policy
was maintained until April 1979.

33In 1981, the Second Provisional Commission on Administration was established by the Suzuki cabinet to promote
administrative and fiscal reforms. The reforms were however carried out extensively by the Nakasone cabinet which wasformed in 1982.

34In the 1982 fiscal year, the zero ceiling method was introduced in the annual budget formulation to curb central
government general expenditures. Furthermore, in the following fiscal year, the minus ceiling method was adopted, inwhich general expenditures were in principle cut by 5% (10% for consumption expenditure and 5% for capital expenditurefrom the 1984 fiscal year). Despite these radical measures however, the target of terminating the issue of deficit financing
bonds by the 1984 fiscal year (set by the Suzuki cabinet) was not achieved. The Nakasone cabinet changed the target to
the 1990 fiscal year and carried out a series of privatization programs including the Japan National Railways and Nippon
Telegraph and Telephone. The ratio of national bonds to total government revenue dropped to 8.4% in 1990 from 34.7%
in 1979.

Sources of Regional Eonomic Growth in Japan

705

ment's economic policies toward a smaller government. It should be noted also that heavy relianceon such declining industries as aluminum smelting, iron and steel, cement, paper and pulp,

shipbuilding, sugar refining, and fertilizer has aggravated the economic condition in Hokkaido.
Since the first oil crisis, the Japanese economy has undergone a substantial structural change. In
order to recover from the recession, while faced with revenue shortages, the central government wasforced to issue a large amount of national bonds. But, plagued with chronic large public debt, thegovernment started to restrain its expenditure growth with administrative and fiscal reforms. Public
works expenditures were frozen in the first half of the 1980s. Dependent highly on public works

expenditures, the Hokkaido economy has thus been severely influenced by this freeze. First, theconstruction industry has been affected directly and has recorded a large output decrease. Second,

the industrial materials industries also became stagnant in Hokkaido, due in part to the sluggish
construction industry. In Japan, most of the industrial materials industries lost ground owing to the
sharp increase in energy prices and have undergone large-scale adjustments, centering on capacity

reductions. This too had a negative impact on the Hokkaido economy.
A straightforward policy implication drawn from this observation is that in order to maintain thestable growth, Hokkaido needs to reduce the weight of its public investments. There are several ways

to achieve this. First, Hokkaido should promote direct foreign trade with neighboring countries suchas China, the Soviet Union, and North and South Korea. According to the regional I-O tables,international export ratio is very low. This means that there is an ample opportunity for the
expansion of direct foreign trade. Second, it should also encourage interregional exports so as toreduce the regional balance of trade deficit, especially the large trade deficit in the manufacturingindustry. It should be reminded that a large regional balance of trade deficit necessitates a large

financial transfer from the central government. Third, it should specialize in those high-techindustries for which it has a comparative advantage domestically as well as internationally. Since
Hokkaido is relatively abundant in natural resources and has a solid industrial base for the foodprocessing industry, the bioindustry seems to be a good candidate for promotion. Fourth, it should
facilitate a favorable investment climate for those manufacturing activities which conform to thepattern of comparative advantage. Finally, it should vigorously pursue import substitution policies
for the manufacturing industry, although this should be done within the framework of comparativeadvantage. There seems to be large amount of unnecessary manufactured imports for which
regionally produced goods could be substituted.

Of course, these are not mutually exclusive, but should be carried out simultaneously. Of great

importance here is that public investments should be utilized effectively so as to encourage private
investments which are conducive to the development of Hokkaido. Blessed with an extensive
developable land area, Hokkaido needs, in this connection, to strive for an efficient spatial
allocation of its economic resources.
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