& BUSINESS2OthREPORT
ANNUAL<s[vs{'E":.2,

-ew

THE

RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS
KOBE UNIVERSITY
1973

KOBE
& BUSINESSECONOMIC
REVIEW
20th

ANNUAL REPORT

i,i ,'`IV [il"'

THE

:/,-

RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS
KOBE UNIVERSITY

1973

CONTENTS
Page
An Analysis of the Brazilian

Balance ofPayments : 1960-1972 ..................Fukuo KAwATA 1
International Money Flow and theMultinationalCorporations...........................MasahiroFuJiTA 23
Estimation of Investment Allocation

Ratios of Japanese Economy: 1960-1969 .........Hikoji KATANo 37
Available Jobs and Employment inJapaneseForeign-goingShipping ............HiromasaYAMAMoTo 51
Homomorphism and Business Incorne
Measurement ................................................IsaoNAKANo 61

Assets Choice and Optimal
International Reserves ..............,..,...............Kazuhiro IGAwA 79

AN ANALYSIS OF THE BRAZILIAN BALANCEOF PAYMENTS, 1960-1972
Fukuo KAwATA
I. Introduction

The purpose of this paper is to analyse the changing structure of Brazilianbalance of payments in the sixties and early seventies. Brazilian economy had beenstagnant in the 1960-67 period, but it has suddenly turned dynamic since 1968,
making so remarkable an expansion that it is usually called the "Brazilian economic
miracle."The annual average growth rate of real GDP in Brazil was 4.70/. (1.70/. per
capita) in the 1961-67 period, while it sprang up to 9.8O/, (6.7 O/. per capita) in theyears ranging from 1968 to 1971.(i)The essence of the Brazilian economic miracle consists in the successfu1 performance of high rate of growth, while combating with the hyper-inflation in theearly sixties. Inflation had been rampant, reaching an annual rate of over looO/.

in mid-1964 and the growth rate of GDP fell down to a very low level (1.5O/, in
1963, and 2.4 O/. in 1964), when the military coup overthrew "a crumbling and corrupt
democratic regime,"(2) and started a new drastic policy.

It is pointed out by the Economist that the Brazilian miracle is based on sevenpillars.`3' They are (1) abolition of politicians, (2) domestic stability, (3) welcoming
foreign investors, (4) high internal savings, (5) regular devaluations, (6) high tariff
walls, and (7) belief in free enterprise. These seven factors are respectively important,but, in my opinion, the abolition of politicians is most essential. "The generals
handed over the running of the economy to a young generation of technocrats, merely
instructing them to get growth and cut infiation. Brazilian ministers do not have toworry their heads about opinion polls or parliamentary debates and since they do
not have to run the economy to fit an election timetable, they can actually effect along-run economic strategy."(4) This point is also stressed by Baer. He mentions

as an important source of the high growth "the existence of a strong and stable

government which placed professional economists in key economic policy-making(1) Inter-American Development Bank, Ebonomic atid Secial Progress in Latin America, Annual

Report 1972, p. 4.
(2) The Economist, Dec. 15, 1973, p. 85.
(3) Ibid., p. 85.
(4) Ibid. p. 85.

FUKUO KAWATA

2

positions and gave them a free hand to implement their policies."(5)The oMcial counter-infiation plan is based on wage and price controls, balanced
budgets, monetary correction and the crawling peg.(6}Among them, the uniquely Brazilian policy measures are monetary correction
and the crawling peg. The aim of monetary correction is to neutralize the harmful
effects of infiation. In other words, "no one is expected to be in a worse position

because of the loss in purchasing power of money over time."(7) According to thepolicy of monetary correction, "All companies are compelled to adopt inflationaccounting. At the end of each year they must correct both their fixed assets andtheir working capital by the monetary correction coeMcient, calculated by thegovernment. Companies only have to pay tax on the real profits. The effect is that
inflation does not reduce the real return on capital as it does in so many countries."`8)

Monetary correction policy is adopted also for the purpose of readjusting thevalue of debt instruments and the interest on them in accordance with the rate of
inflation.(9)The crawling peg policy consists of "devaluing the cruzeiro at frequent, but
unpredictable, intervals. This kept the exchange rate from becoming overvalued as

inflation continued, kept speculation against the cruzeiro at a minimum, and in
effect, kept the exchange rate from being a political issue."(iO}At the time of 1964 coup, the Brazilian economy was in a state of stagnation,and the low real groWth rate of the economy continued after the change of regime
until 1968. It took four years for the new policy to take effect. This is explainedby Baer that "the contjnued stagnation in the years 1964-67 was due to a numberof factors: the stabilization measures applied in those years; the time-lag involved
before the various financial and capital market reforms could be felt, and also before
the various feasibility studies for the expansion of the country's infrastructure andits heavy industries could result in actual construction activities; and finally, thetime-lag which was necessary to convince both the domestic and the foreign (private
and oMcial) investors that the new regime and its control of the economy was stableenough to make substantial commitments."(ii)Table 1 and Figure 1 show the annual rate of growth of GDP, industry and(5) Baer, W., 7he Brazilian boom 1968-72: An explanation and interpretation, World Development, Vol.1 No. 8, Aug. 1973, p. 2.

(6) Economist,ibid.,p.86.
(7) Robock, S. H., We can live with infiation, ffarvard B"siness Review, November-Dooember,

1972, p. 30.
(8) Economist, ibid.,p. 86.
(9) Baer, W., ibid., p. 2.
(1 0) Baer, W., ibid., p. 2.
(1 1) Baer, W., ibid., p. 2.

1960-1972
OF PAYMENTS,
ANANALYSISOF THE BRAZILIAN BALANCE
Table 1 . Yearly Growth Rate of GDP, Industry, Agriculture and the Rateof Inflation in Brazil

Growth Rate (%)

GDP

Year

Industry

Agriculture

(O/e)

2.9

52

4.9
7.6
5.5
1.0
1.3

2.7

-4.7

13.8

5.1

11,7

3.0

9.3

13.2

9.0

10.8

1Ll

-3.2
5.7
1.5
6.0
5.6

412

4.8

11.2

12.2

18.1

10.4

13,9

4.1

15.7

7.8

10.3

5.7

3.7

3.9

4.0

1960

9.7

9.6

1961

10.3

10.6

1962
1963
1964
1965
1966
1967
1968
1969
l970

5.3

7.8
O.2

9.5

1971

11.3

1972
1956-62
1962-67
Source:Rate of Infiation

1.5

23.8
42.9
S5.8
80.2
86.6
45.5
24.1

24.5
24.3
20.9

Fundagao Gettilio Vargas, Conjuntura Econ6mica, Noyembro 1972.
Werner Baer, the Brazilian boom 1968-72: an explanation and interpretation,

World Development, August 1973, p. 3

Note:

Rate of Inflation is represented by the cost of Living Index in Guanabara.
Fig. 1.

Rate of Economic Growth and Rate of Infiation in Brazil

e/e

oo

86.6
-."-......-".-------

80

--

70

Rateofinflation
Growth rateof

industrialproduction

Growthrateof

GDP.-Growthrateof

agriculturalprocluction

oo
se
40
30

20

23.8

15.7
/•N..-.-/

10 9.7r-.'x-•..-.
o

-t

h•

.'

--

t"..-.t",>.L.R.<.

x-

"t.

'k1-j

'- ::':::"-':':'";'tii;A((....----

.10.4
x4.1

.

-10
-20

19606162

6364as 666768 6970 7172

aghculture and the rate of infiation in Brazil.

From the above Table 1 and Figure 1, it is made clear that in the period of hyper-

inflation, the growth rate of GDP was very low, but as the rate of inflation slowed34 FUKUO KAWATA
down, the growth rate tended to increase.

It is also noticeable, as Baer points out, that "industry has been the leading
sector in the boom that started in 1968. The extraordinary performance ofagriculture

in 1971 was mainly due to the unusual recovery of coffee from the previous year's
very poor crop."(i2)The summary of the Brazilian balance of payments in the 1960-1972 period
is shown in Table 2.
Table 2 reveals the following facts :(1) Trade balance surplus registered the highest amount of 655 mi11ion dollars
in 1965, but later it declined gradually, coming down to the deficit of 364

million dollars in 1971 owihg chiefly to the large increase of imports.
The deficit of trade balance is witnessed for the first time since 1962.

(2) The balance of services recorded deficit throughout the 1960--72 period.
The amount of deficit grew rapidly in the booming years. It was doubled

in four years between 1968 and 1972 from 574 million dollars to 1,134

mi11ion SDR units.
(3) Unrequited transfers recorded positive balance in the whole period,
registering in 1966 the peak of 79 million dollars, but thereafter it declined

to 7 mi11ion SDR units in 1972.
(4) Balance on current account throughout the 1960-1972 period was in the
red except in 1964 and 1965. The amount of deficit was more than doubled

in the 1968-72 period, from 526 million dollars to 1,346 million SDR
units.
(5) The net inflow of long-term capital was in the black in all years during

the 1960--1972 period. The positive amount increased remarkably since
1968, coming up from 315 million dollars in 1968 to 2,358 mi11ion SDR
units in 1972. The miraculous economic growth of Brazil is chiefly due
to this conspicuously huge inflow of foreign long-term capital.

(6) Basic balance of payments which is the amount of current balance plus
long-term capital balance, ,is deemed to be an appropriate indicator to
diagnose the long-term solvency of a country. It was in red in seven years
and in black in six years. In 1972, however, the basic balance recorded alarge surplus, mainly owing to an abundant inflow of long-term capital.
(7) The net inflow of priyate short-term capital increased about five fold from
114 million dollars in 1968 to 516 million dollars in 1971, but in 1972 thenet outflow of 74 mi11ion SDR units was recorded.
(8) The balance on capital account, which is the sum total of balances on long-(1 2) Baer, W., ibid., p. 2.

Table 2.

Year

Trade

Balance of

Unrequited Balanoe of Long-term

Balanoe(1)Services

Transfers(2)(3)(4)

1960

-23

l961

113

1962
1963

-89

1960-63

Account (5)-(1)+(2)+(3)Basic
Balarice

-228
-31
-131

-5

214

-39

-1oo

375

167

M8

-217
-31

245

-31

-35

55
342
299
-182

256
505

3"

353
313

24
20

191

70

192

-77

129

342

429
854
872

-1
-20
38

-98

257
6S6

140

-404

25

-350

219

-318

55
75
79
77

81
283
-31
-276

-548
-566

-470

54

14

207

221

26
318
232
-364

-574
-685
-814
-959

22

315
723
536

-221

21
13

-526
-336
-561
-1,310

53

-758

22

(average)S
1972P4.

-683

-219

-1,134

7

1968-72

-1

-833

19

1968
1969
1970
1971

1968-71

Source:31. --1,346

-816

11

-116
-15
114
131

oo
355
129

-25

291

216

as
199

1,187

-6
3

259

864

2,284

310

1,M8

4,123

1,209

"

457

1,516

1,085

336
516

1,601

665

-18

274

939

2,358

1,O12

-74

1,O03

187

204

;

$
gg.

2
a
gg

:
ts

498
349
285

387
-25
-225

g
:t

1,746
gtg

i

IMF, Balance of Payments Yearbook
IMF, International Fifiancia1 Statistics

Note:

k

-115
49
26

428
563

39
43

-"7

>

Reserves

-315
73
-317
-81

139

3M

(end of year)

10
49
-138
-76

mo
2M

15

International(1O)=(4)

192
285
273
166

81

4

Over-allErrors andBalanoe
Omissions(9) +(s)+(g)-(6)-(4)+(5)412

1964-67:ge,swak,tAi-:":.tts,,.O[,,

-406

28

(average)2

\glh•

111

112

655
438
213

Current Capital196(>-1972 (in millions of SDRS)(5)

-517
-261
-452
-171

-498
-389
-co2
-326

(average)i

1964
196S
1966
1967

Summary of Brazilian Balance, of Payments,(1) 1960-63 period is thc period before the new regime.
(2) 1964-67 period is the period of stabilization policy under the new regime.
(3) 1968-71 or 1968-72 period is the period of high rate of growth.
(4) In this table, and in the following tables, figures for 1972 are provisional.

(5) The value of U.S. $1 in terms of SDR is as follows:

U.S. $1=:1 SDR (before May 1972)
U.S. $1=O.921053 SDR (from May 1972 to February 1973)
U.S. $1=O.828948 SDR (sinoe February 1973)

tcas'esta

FUKUO KAWATA

6

term and short-term capital, registered surplus in every year of the 19601972 period, which presents a striking contrast to the balance on current
account showing deficit in almost all years in the period in question.

(9) The overall balance of payments which is the aggregate of the balanceson current and on capital account, after adjusting the amount of net errors
and omissions, was negative in five years, that is, l960, 62, 63, 67 and 68,
and positive in eight years, that is, 1961, 64, 65, 66, 69, 70, 71 and 72.

In the high growth period, the overall balance was in black every year since1969. Figure 4 represents the movement of balances of overall, basic, long-term
capital and current accounts,

II. CurrentAccoulltBalance
The current account of international transactions is composed of three items,
that is, merchandise trade, services and unrequited transfers, The merchandise tradeis the most important jtem, followed by seryjces, and the unrequited transfers arevery small both in amount and as a percentage.

Table 3 shows the relative importance of those three items in the Braziliancurrent account. The period from 1960 to 1971 (or 1972) is divided into three phases.
The first is from 1960 to 1963, four years before the new regime. The second is from1964 to 1967, the first four years under the new regime and the phase of the stabili-

zation policy. The third ranges from 1968 to 1971 or 1972, the boom phase. In thefollowing, this time division is often used to compare the situation of each phase.
Exports account for more than 85 O/. on the receipt side and imports for more than
65 O/. on the payment side. The higher percentage for exports than that for imports
is attributed to the fact that developing countries like Brazil, have Iittle to receive
and much to pay in the invisible trade owing to the lack oftheir international shipping,banking, insurance, and investment activities.

The invisible trade takes about 100/. on the receipt and 300/. on the payment
side. The unrequited transfers are far smaller in amount than the other two items,
occupying about 3 % of the current receipts and less than 2 O/. of the current payments.

The deficits of service account are largely responsible for the negative balanceof current account.

1. TradeBalance
In the 1960-63 period, the average export surplus was 28 million dollars, but
in the 1964-67 period it increased to 412 million dollars owing to the increase inexports and decrease in imports. In the 1968-71 period both exports and imports
increased, bringing the excess of exports down to 53 rnillion dollars, and in 1972,>

3gTable 3.

Year

Receipts

Export(Åío.b.)BalancePayrnents

Services Unrequited Total
Transfers"

ImportServices

Unrequited

Total

113

Average(89.4)(7.6)

1964-67
Ayerage

1,605

151

86

l,842

1,193

621

15

i,829

(87.0)

(8.2)

<4.7)

(1oo.O)<65.2)(34.0)(O.8)(1oo.O)

1968-71

2,453

329

85

2,867

2,400

1,087

63

3,550

Average(85.6)(11.5)(2.9)(1co.O)(67.6)(30.6)(1.8)(1oo.O)

1972p

3,672

518

98

4,288

91

5,634

(12.0)(2.3)(1oo.O)

3,891(69.0)

1,652

(85.e

(29.3)(1.6)(1oo.O)

2,697

367

87

2,698

1,2oo

69

3,967

(85.6)(11.6)

(2.8)

3,151
(1oo.O)(68.0)(30.2)(1.8)(1oo.O)

1968-72
Average

Souroe :ServioeUnrequited

Total

Transfers

1,3M

1,481
(1oo.O)

Trade

Transfers(f.o.b.)1960-63

(3.0)

$
:
2
s

The Composition of Brazilian Current Account(in millions of SDRs)

1,296

533

20

1,849

(70.1)(28.8)(1.1)(1oo.O)

$

z
g

28

-420

pa

-368

412

-470

71

13

g.

53

-758

22

-683

:t

-219

-1,134

7-1,346

-1

-833

18

-816

9
/ig

IMF, Balanoe of Payments Yearbook
,$•

6sl.

sl

FUKUO KAWATA

8

Fig. 2. Balance of Trade and Services (in millions of SDRs)

ionsof

SDRS
ExportTrabeiBa}ancetReceipts
Service
tofServices
Balance
--

5ooO

4seO

•---

.

---

4ooO

,Payments--- Service-

1

Import

-•

.

3seO

3672

3ooO
2500
2ooO

1500
127
1ooO
seo
.
'

165......

o-500---A-.v.

23498--- "----------

689" --"'-t--- --::--=-----

-

-219.

--N..1:"'--"-"'"'-'-"'-s---------

NNNN -.------.-----NN..- ~..

1293-.-..518----.-.----

-1ooO
-1500

--

'

-

•-••

~"N

N."'•--1134N

xNN

X-1652

..

.'

-2000

x Å~
.

'

-2scO

..

I

-3000

xxx
.
.

-3500

Å~
..x-3881

-4000

1960

61

6263

an656667 6869 707172

an import surplus of219 miliion SDR units was recorded. In the 1968-72 period, theamount of exports was almost equal to that of imports. (See Table 4, and Figure 2)
The regional distribution of trade balance points out that trade with the UnitedStates and Canada registered surplus in 1962, 1965 and 1968, and the amount of
surplus was decreasing from 75 mi11ion dollars in 1962 to 8 million dollars in 1968.

9
AN ANALYSIS OF THE BRAZILIAN BALANCE OF PAYMENTS, 1960-1972

Table 4. Trade Balance of Brazil

Period(in millions of SDRs)

Balance

Rate of Excess

ExportImport(f.o.b.)(f.o.b•)

(A)

as)

1,3M

1,296

28

2.2

1,605

1,193

412

34.6

2,453

2,400

53

2.2

3,672
2,697

3,891

-219

2,698

-1

-5.6
o.o

1960-63

Export( O/.)(C)las)(C)-=(A)-pt)(average)

1964-67(average)

1968-71(average)

1972p

1968-72(average)

Source: IMF, Balanoe of Payments Yearbook
Tabte 5. Regional Distribution of Trade Balance(in millions of SDRs)
U.S. and

Other OECD

Year

CanadaCountries

1962
1966
1967
1968
1969
1970

75
66
38
g

27
287
213
102
299
311
-106

1971

-9

-167
-233

CMEA and
Chna

Other

16
59
28

-207
26

51

-135

68

-co
17
-54

72
29

Total

Countries

-66

-89
438
213
26
318
232
-364

Source: IMF, Balance of Payments Yearbook

Since 1969, however, trade balance turned negative, the amount growing larger
from 9 million dollars to 233 million dollars, Trade balance with other OECD
countries remained positive till 1970, but in 1971 it turned negative. Trade balancewith CMEA countries and China was in black every year in the table, while thatwith other countries was in red except in 1966 and 1970. (See Table 5)

2. BalanceofServices
Balance of services was in red throughout the whole period, the deficits tending
to increase year after year. The amount of yearly negative balance was 417 million
dollars in the 1960-63 period, reaching to 758 million dollars in the 1968-71 period

and 1,234 million SDR units in 1972.
Balance of services consists of many items. They are (1) freight and insurance
on merchandise, (2) other transportation, which includes port disbursement, passenger fares, time-charter payments and so on, (3) travel, (4) investment income covering

remitted income as given in the exchange record ahd undistributed income retainedin Brazil by U.S.-owned enterprises, (5) private services, which include the com-FUKUO KAWATA

10

Table 6,Components of Balance of Services(in millions of SDRs)

Period1960-63

Freight andInsurance on

Other

Merchandise

tion

1972p

1968-72

GovemmentPrivate

IncomeServices

Services

Total

-97

12

-34

-181

-37

-67

-417

(-2.9)
28(-6.0)(8.2)(43.4)(8.9)(16.1)(1oo.O)(17.0)

1968-71

Transporta-

Investment(23.3)-80

1964-67

Travel

-21

-2S7

-45

-1oo

-470

(4.5)

(54.7)(9.6)(21.3)(1oo.O)

-65

-1oo

-89

-356

-71

-82

-758

(8.6)

(13.2)(11.7)(47.0)(9.4)(10.8)(1oo.O)-72-212- -164

-475

-124

-87

-1,234(5.8)(17.2)(13.3)(38.5)(10.0)(7.1)(1oo.O)

-66

-122

-1ou

-380

-82

-83

-853

(7.7)

(14.3)(12.2)

(".5)

(9.6)

(9.7)

(1oo.O)

Source: IMF, Balanoe of Payments Yearbook

Note:

Figures on 1972 are Provisional

Table 7. Regional Distribution of Balance of Services(in millions of SDRs)
Year

U.S. andCanada
Total
1962

-2S7

(62.5)

1966-3S9(65.0)

1967-338(59.8)

1968-329(59.7)

1969

-397

1971

Other

Countries

Countries

China

-84

-70

(17.0)-127(23.1)-134(23.7)-167(30.3)

-190

-2

(O.4)

-1

(O.1)

-2

(O.4)

-7

(1.0)

-433

-340

o

(53.2)(41.8)(o)-475(49.5)

Institutions(20.4)(27.7)(58.0)

1970

Other OECD CMEA and International-374(39.0)

-s

(O.5)

-17

(3.1)

-19

(3.4)

-13

(2.4)

-17

(2.5)

-18

(2.2)

-6

(O.6)

-45

(8.2)

-73

(12.9)

-40

(7.3)

-74

(10.8)

-78

(9.6)

-119

(12.4)

Total

-411

(1oo.O)-550(1oo.O)-565(1oo.O)-551(1oo.O)-685(1oo.O)-814(1oo.O)-959(1oo.O)Of which :Investment

Income1962-1S9(78.3)

1966-208(73.2)

1967-196(66.5)

1968-188(67.4)

1969-238(69.2)

1970-190(53.8)

1971-224(53.3)

-22

(O.5)

-50

o

(17.6)

(o)

-47

o

(15.9)-72(25,8)-81(23.5)-122(34.6)-168(40.0)-171(13.8)

(o)

-1

(O.4)

-1

(O.3)

-3

(O.8)

-5

(1.2)

Source: IMF, Balance of Payments Yearbook

(8.4)

-17

(6.0)

-19

(6.4)

-13

(4.7)

-17

(4.9)

-18

(5.0)

-6

(1.4)

-9

(3.2)

-33

(11.2)

-5

(1.8)

-7

(2.0)

-20

(5.7)

-17

(4.0)

-203

(1oo.O)-284(1oo.O)-295(1oo.O)-279(100.0)-3"(1oo.O)-353(1oo.O)-420(100.0)AN ANALYSIS OF THE BRAZILIAN BALANCE OF PAYMENTS, 1960-1972 1 1
missions and other expenses paid abroad on imports, as well as remittances throughthe free exchange market assumed to be for miscellaneous services.

Among the components of services, investment income is by far the largest,taking up about 40%. or more than 50O/. of the total invisible deficit. (See Table 6)

Regional distribution of total balance of services shows that United States andCanada accounted for more than 60% in 1962 and 1966, but later the percentage
decreased gradually to about 50 O/, in 1971, while other OECD countries occupying
about 20 % in 1962 and 1966, rose to about 40 % in 1970 and 1971.

The declining share of the United States and Canada and the increasing portionof other OECD countries form a strong contrast. The share of "other countries"(implying developing countries) is rather stagnant, remaining around the 10 O/. Ievel,

except in 1962.

The part played by CMEA countries and China is insignificant, showing lessthan 1%. (See Table 7)
The regional distribution of investment income, which is the most important
item of balance of services, indicates that the United States and Canada take a
predominant portion, although the share is decreasing from more than 70 O/. in 1962

and 1966 to about 500/. in 1970 and 1971. The portion of other OECD countries,
remaining at more or less 15"/. Ievel in 1961 and 1966, sprang up to 40 e/. in 1971.
Here also is seen the same contrast as in the case of total balance of services, thatis the declining share of the United States and Canada against the rising share of

the other OECD countries. (See Table 7)

3. UnrequitedTransfers
Private unrequited transfers cover miscellaneous transfers abroad and govern-

ment unrequited transfers mainly comprise Brazil's contributions toward theadministrative expenses of international institutions. Balance of total unrequitedtransfers was largest in the 196467 period, reaching 71 million dollars, but in later
years, it declined to 22 million dollars. Private unrequited transfers are generally

larger than that of government with the exception of 1960--63 period. (See Table 8)

Table 8. Balance of Unrequited Transfers(in rnillions of SDRs)
PeriodPrivateGovernment

Total

1960-63
1964-67
1968-71
197mp
1968-72

-2

24

40

26
32

11

11

22

4

3

10

9

7
19

Source :IMF, Balance of Payments Yearbook

71

FUKUO KAWATA

12

Table 9.

Regional Distribution of Balanoe of Unrequited Transfers(in millions of SDRs)
CMEAand International

Other

China Institutions

Countries

U.S. and

Other OECD

Year

CanadaCounuies

1962

31

3

34

{e

(1)

(-4)

(-3)

(30)

(7)

1966

74

4

(41)
(33)

(3)
(1)

{g

77

(-3)

(50)
(27)

-3

-4

22

(1)

(-)
(-3)

-15

-4

-4

31
(14)
(17)

-5

-8

21

(1)

1968

{&

51
(32)
(19)

(-23)

1969

54

50

{&

(40)
(10)

1971

36

{&

(45)
(34)

-2

(56)
(30)

1970

79

1
(1)
(-)

(-1)
(-1)

-3

86

{PG

(35)
(19)

(37)

-4

1967

{g

Total

(-5)

-22

(-17)
(2)

-16

(-18)
(2)

-17

(33)

(-20)

(3)

(3)

(-)
(-4)
(-)
(-5)

-4

(-)
(-4)

(5)

(17)

(13)
(8)

-2

Source: IMF, Balanoe of Payments Yearbook
Note: P signMes private transfers and G denotes govemment transfers

Balance of unrequited transfers with the United States and Canada keeps
always positive, taking up the predominant part of the total balance. Conversely,

the balance with other OECD Countries is almost negative with the exception of1962 and 1966. Balance with other countries is very small in amount, and thatwith CMEA countries and China is zero. (See Table 9)

The development of visible and invisible trade during the 1960-72 period isshown in Figure 2.

Ill. CapitalAccountBalance of capital account is composed of long-term capital balance and shortterm capital balance. The former registered positive balance throughout the 1960-

1972 period, while the latter recorded negative balance in 1961, 1967 and 1972,
although the total capital balance remained positive during the whole period. (SeeTable 2)

1. Balance ofLong-terrn Capital
Main components of the balance of long-term capital are (a) direct investment,(b) loans received by private non-monetary sector, (c) loans received by central

13
(11)
(2)

ANANALYSISOFTHEBRAZILIANBALANCEOFPAYMENTS,1960-1972 13
government, and (d) loans received by local government.

(a) Direct investment in Brazil: This covers net new investment in branches
and subsidiaries in Brazi1, as well as the reinvestment of undistributed

income by U.S.-owned subsidiaries. Direct investment also covers theinvestment in the form of capital goods imported by direct investment
enterprises without payment of foreign exchange.

(b) LoansreceivedbyPrivateNon-monetarySector: Thiscoversthedrawings
and repayment of loans granted by the United States, United Kingdom andother nations as well as those by the international institutions, such as

IDB, IBRD and IFC.
(c) Loans received by Central Government: This covers the drawings andrepayments of loans-granted by various countries and international

institutions. ' i' Government: This covers drawings and repay(d) Loans received by Local
ments of loans chiefiy granted by AID, Export-Import Bank, IDB and

IBRD.
In 1971, the net drawings of loans received by private non-monetary sector,
by central government and by local government were respectively 530 million dollars,
333 million dollars and 87 mi11ion dollars, while the amount of net direct investment'

was 124 million dollars. 'Table 10 indicates the relative posi'tion of the main four items of long-term
capital. In the booming period of 1968-1971, all of the four items increased as com-pared with the preceding period. Among them loans received by private sector
grew more than seven-fold and loans by central government and by local government
nearly doubled, while direct investment remaind rather stable.

This means that the high growth rate of Brazilian economy in the 1968-71
period was supported principally by long-term loans received by private nonmonetary sector and by central government.

The movement of the above four categories of long-term capital during theTable 10. Net Long-term Capital Infiow(in millions of SDRs)
PeriodDirectInvestment

Loans toLoans toPrivate Sector

CentralGovernment
1960-63
1964-67
1968-711972p
1968-72p

127
129
143
309
176

23
37
276
1,416

504

Source: IMF, Balance of Payments Yearbook

66
110
205
545
273

Loans to
Local

Govemment
-1
12
31

88

42

14 FUKUO KAWATA
196or1972 period is charted in Figure 3.

Table 11 shows that in the 1968-71 boom period, the United States was thefirst and foremost supplier of long-term loans to private non-monetary sector taking

up nearly 50% of the total. Next to the United States came the United Kingdom,'
Fig. 3. Balance of Long-term Capital Aocount (in millions of SDRs)

MillionSDR

1400-DirectInvestment

12oo---------•t

Loansto PrivateSeetor
Loansto CentralGovernrnent...Loansto

10oo

14i6

l

LocalGovernment

am/I/.M51/l./!.s>,(.(./'3co

am
400
2oo

139

o

-6...Nd-

-2oo
-4oo

.7'

fi--H---------tt-;-=--;=-:;:--

6.,tiP'S"'C;EI."L...-"-.

.".

--------..---

1960 61 62 63 M 65 es 67 68 69 70 71 72

Table 11. Net Receipt of Loans by Private Non-monetary Sector(in millions of SDRs)
Source1962-63
average

1964-67
average

1968-71
average

1970

1971

FranceWest Germany

1.5
6.5
6.5

12
23
12

5
28
7

42
27

IBRD
IDB
IFC

-3
-2
-5

Netherlands-O.5

Sweden

-1
o
1
-30

8
4
1
2

From :o

EX-IM Bank

-33

Private Lenders

15

16
3
o
1
4
-1
6
22
-30
14

Other Lenders

-3.5

Total

-17

Switzerland

U.K.
u.s.

AID

1.5

Source :

10
45
130
14
14

o
-2
6
2
3

3
1
1
3
29

21
121

139

180

10

31

103

129

-O.5

29

-14

149
130

37

276

202

530

IMF, Balance of Payments Yearbook

1

15
AN ANALYSIS OF THE BRAZILIAN BALANCE OF PAYMENTS, 1960-1972

West Germany, France and Switzerland. Beside these capital exporting countries,
the international institutions, such as IBRD, IDB and FIC made not insignificant
amount of loans to private sector, but the amount was not so large as those made to
public sector. It is to be noted that the bulk of the United States loans to private
sector was supplied by private lenders in the 1968-71 period.

Table 12 shows that in the 1968-71 period about half of the loans received bycentral government came from the United States. IDB and IBRD, coming next to
the United States, supplied more loans to the central government than to the private
sector. (Cf. Table 11)West Germany, Canada and the United Kingdom were also important suppliersof loans to the central govcrnment, although their contribution was not so large asthat of the above international institutions,Regional distribution of sources of long-term capital is given in Table 13.
From 1962 to 1969, the United States held a predominant position as a supplierof long-term capital, but in 1970 and 1971, other OECD countries surpassed theUnited States in total lending as well as in dirÅëct investment and in loans to private
sector.

International institutions, although they do not make direct investment, rank
in the third place since 1969, following the United States and Canada, and otherOECD countries. Loans made by international institutions were chiefly directed
Table 12.

Net Receipt of Loans by Central Governrnent(in miilions of SDRs)
Souroe1962-63
average

1964-67
average-1-4-4

1968-71
average

1970

1971

15
2
16
48
23

28

31

-3

4
20
43

-2

-5

-8.5

From :

CanadaFranceWest Gerrnany

9.5

IDB

11

6
69
53

IBRD

-2

Italy

3

-2
-4

Japan
U.K.

22
2

-1
-1

u.s.

12.5

AID

2.5

138
1oo
19

90

10

-6.5

9
4
68
76
2
-12

EX-IM Bank
Other Gov't
Agencies} -O.5*

13
115

-6

"

-5

-10
49
167

60
10

-7

Private Lenders
Other Lenders

10.5*

9

12

2

37
-15

2
-22

-17

Total

58

135

220

207

333

Souroe: IMF,BalanceofPaymentsYearbook* eStimated104

FUKUO KAWATA

16

Table 13.

Regioma1 Distribution of Sources of Net Long-term Capital Inflow

U.S. and

Other OECD CMEA and Internatjonal

CanadaCountries

China

136(59.9)42(18.5)-3(-1.3)

52(22.9)

95
-14
57

25
18

-3

12
62
-22

(in millions of SDRs)

From

Year
,;te2

Total %oOther

Institutions

Countries

227 (1oo.O)
132 ( 58.1)
63 ( 27.8)
35 ( 15.4)-2-1-24(-7.0)

1O(2.9)20(5.9)ID

311(91.2)
118

iP

-29

3
7

-1

27
-27
-23
-1

10
1
9

175(68.9)29(11.4)

6(2.4)

6q26.0)

71

6

-1

35
17
-22
-1

34
27
5

152(70.4)

19(8.8)15(6.9)16(7.4)

1q6.5)

80

25
27
-33

3
12

31

4
IO

131(18.3)-11(-1.5)

102(14.2)

61

-5

10

-6

52
28
22

-1

163(29.8)200(36.6)-7(-1.3)

129(23.6)62(11.3)

37
49
77

65
9
-16

9

26

5
49
8

547 (1oo.O)
107 ( 19.6)
225 ( 41.1)
204 ( 37.3)

427(40.7)438(41.7)-13(-1.2)

145(13.8)53(5.0)1,050 (1oo.O)

"

70
2
-l5

4
70

10
38
5

124 ( 11.8)
529 ( 50.4)
310 ( 29.5)

1966

iC

'
,i•l7

223

6
99
lli,:

23
50

-3 (-1.3)-1,i,a463(64.5)
143
189
129

-

D

,l?g

109

341 (1oo.O)
159 ( 46.6)

149-34 (-10.0)

1209 ( 61.3)-22(-8.7)

254 (1oo.O)
115 ( 45.3)
41 ( 16.1)
95 ( 37.4)

7( 2.1)9-16-15

3( 1,2)216 (1oo.O)
109 ( 50.4)
94 ( 43.5)

11 ( 5.1)

-18
3

oo

2

24(7.0)109

2( O.9)717 (1oo.O)
207 ( 28.9)
326 ( 45.5)
160 ( 22.3)

32(4.5)429

24 ( 3.3)

11
IE•

185
182

3oo

68

16

11 ( 2.0)71

87 ( 8.3)

Source: IMF, Balance ofPayments Yearbook'Note: D signifiesDirectInvestment
P signifies Long-term Capital to Private Sector

C signifies Central Goyernment Loans
L signines Local Government Loansto the public sector in 1970 and 1971.

"Other countries" made loans principally to private sector except in 1966,
though the amount was not so large.

CMEA countries and China which made no direct investment, but they wereANANALYSISOFTHEBRAZILIANBALANCEOFPAYMENTS,1960-1972 17
interested in loans to central government.

2. Balance ofPrivate Short-term Capital
Short-term assets and liabilities of private non-monetary sector cover (1) net
borrowing under Brazilian Instruction No. 289, (2) net borrowing under Brazilian

Law No. 4131, (3) estimated free market transactions, (4) changes in short-term
assets and liabilities of Brazilian businesses and individuals as reported by U.S.
banks and security brokers as well as other nonbanking concerns, and (5) estimatedchanges in trade credits extended to, or received from countries other than the UnitedStates. The balance ofshort-term capital in the private non-monetary sector recordeda susplus of 10 million dollars in the 196CF63 period, a deficit of 15 million dollars
in the 1964-67 period, a susplus of 274 million dollars in the 1968-71 period, a de-ficit of 74 million SDR units in 1972 (provisional) and a susplus of 205 million
SDR units in the 1968--72 period.
Regional distribution of private short-term capital is given in Table 14. UnitedStates and Canada assumed the paramount position in the supply of short-•term
capital, except in 1970, when "other countries" played the foremost part.

The United States and Canada are followed by other OECD countries as animportant lender.
International institutions have nothing to do with the trafisactions of private

short-term capital, although they have much to do with the long-term capital, to pnvate sector.
movement
CMEA countries and China made no short-term capital transactions whatever
except in 1970.

The movement of the balance of long-term and short-term capital, and of total
capital account as compared with the balance of current account is given in Figure 4.

According to Figure 4, it becomes obvious that the balance of total capitalincreased tremendously in the 1968-72 boom period, while the balance on current

Table 14. Regionai Distribution of Sources of Net Short-term Capital Inflow(in mitlions of SDRs)

From

U.S. and

Other OECDCMEA andInternational

Other

Year

CanadaCountries

China

Countries

1962
1966
l967
1968
1969
1970
1971
Source :

M

-54

169
125

137
105

-58

77

315

163

Total

M

-"

55
-19

Institutions

11
-75

-2
53
1

IMF, Balanoe of Payments Yearbeok

48
316
38

359
278
336
516

18 FUKUO KAWATA
Fig, 4. Balarioe of Current and Capital Aocount (in mi11ions of SDRs)

2358
2284

2400
Balance ofTotalCapital
Balance ofLong-termCapital
Balance ofShort'-termCapital
Balance ofCurrentAccountBalance ofServices

2200

•••

2ooO

-•-•---------•------

-----

1800
1600

1400
1200
1085

1ooO
800
600

516

/•x.

400

'

'/'.y'

Jt4

192

200

XL

111

81!--•.••
N•/''

o

.

.

-200

'N-74

si'u..'
V.'.

t-..-s.sÅ~xxNNXNX.Å~sx-----

itt

-400

tltt-tt--

-t-

-e-

- ooo

..
.x`

1,Å~:XNx:'X,Nlx:,,Xx:xx,,N-1134

- 800

-1ooO
:-t-t

-1200
----:--.---------

-1soO
.1346

-1400

1960 61 62 63 64 65 66 67 68 69 70 71 72

account declined remarkably in the same period, making sharp contrast to the
movement of the capital account balance. The startling upswing of total capitalbalance is attributed mainly to that conspicuous rise of long-term capital balance,

which is regarded as the propelling power of high rate of growth. The movement

19
AN ANALYSIS OF THE BRAZILIAN BALANCE OF PAYMENTS, 1960-1972

Fig. 5. 0vera11, Basic, Current, Long-terrn Capital Balance,and International Reserves (in millions of SDRs)

5000
4124

InternationalReserves
Balance`Overall Batance

4000

s

Long-termCapital,

3500

t-

3oob

------••--•••------•B-

Currenr Balance

.aslc

2500

2358

2ooO
1500

1248

1ooO
t,)oo

e
- soe

/"i,

l428

111tN

..---

.
-

s,

..
'

.N-.----3154'-N-'J-4e6>-.--ss/

.-

-i

r'"

-517

Å~'--'/;".

/':;;utx:r=':"-

1
'1012

s.----1

;tJ-

:--.

Xh..
~-...

'''-N

~x '

----

--t-;."

xNÅ~N

-1OOO

Nx----1346

-1soe
-2ooO
-25001960 6! 62 63 6i; 65 66 67 68 69 7e 71 72
of the long-term capital account stands in sharp contrast with that of service account ;throughout the 1960-72 period, the former registered positive balance, while theTatter negative balance every year.

Figure 5 shows that the development ofinternational reserves has a close positive

correlation with the movement of the net inflow of long-term capital throughout
the 1960-72 period, especially in the 1968-72 period, while the current balance
moved inversely to the development of international reserves as well as to the Iongterm caPital inflow.

IV. Conclusion
The high rate of Brazilian economic growth is sustained by the foreign loans

flowing into Brazil in large amounts. These loans contributed to the expansionof Brazilian economy and, in turn, the rapid growth of Brazil attracted abundantforeign capital. Growth and foreign capital infiow have become mutual causes and20

FUKUO KAWATA

effects. On the other hand, the amount offoreign debt, which was 2.9 billion dollars
in the 1960-64 period on a yearly average increased to 4.4 billio'n dollars in 1969,
5.3 billion dollars in 1970, 6.6 billion dollars in 1971, and it is estimated the amountreached 10.2 billion dollars in 1972.(i3)Brazilian authorities are reported to be unconcerned about the increasing
foreign debt above the level of 10 billion dollars. According to their opinion, theforeign net liabilities, that is 10.2 billion dollars minus 4 billion dollars of foreignexchange reserves, amount to 6.2 billion dollars. The ratio of this amount to export
is 1.56 in 1972. In 1964, the ratio was 1.89, but in later years the figure tended todecrease. When this ratio is kept below 2.0, there is nothing to worry about for theprospect of Brazilian economy.(i4} This may be true or may not be true. But it is
not good to have too heavy a foreign debt, which has Ultimately to be repayed byexports.

Thanks to the favourable conditions of international commodity market andto the Government policy for the promotion of manufacturing export, Brazil's
export increased tremendously in the early seventies, and it is estimated that in thefirst nine months of 1973, "its export rose by 57 O/, to 4.6 billion dollars, while importrose only 17 %. to 3.7 billion dollars. The oMcial forecast is for a surplus of visibleof $1 billion this year (1973), but this will be rnore than obliterated by a deficit ofover $1 billion on invisibles.(i5)As is shown in Table 6, about half the net invisible payments are made up by
the payment ofinvestment income, such as interest and dividends. Moreover, foreign
debt service of Brazil takes up a fairly large ponion of export receipts, To lighten

this burden, it is desirable that Brazil should take appropriate measures to repay
or reduce the accumulated foreign debt.
It has usually been the pattern of Brazilian balance of payments that the deficitof current account has been offset by the surplus of capital account. As long as

Brazilian economy keeps growing rapidly, this pattern may be maintained andthere is hardly any fear about the-Brazilian balance of payments. But if the prospectof Brazilian economy happens to prove less bright, then the foreign capital may
cease to flow in or may dwindle.

Accordingly, as the Brazilian economy is more and more woven into the international economic fabric through the expansion of trade and capital transactions,

it is more liable to be affected by the changes of world economic and politicalsituations, and its balance of payments may turn less favourable. This may be oneof the vulnerable points of Brazilian pattern of balance of payments which depends(13) Baer, W., ibid., p. 5.

(14) Nihon Keizai Shimbun, Sept. 9, 1973.
(15) Eeonomist, ibid., p. 89.

21
AN ANALYSIS OF THE BRAZILIAN BALANCE OF PAYMENTS, 1960-1972

too much upon foreign capital.

As Baer points out, "if export growth rates cannot be maintained, and thecurrent deficit worsens, the necessary foreign capital to counter-balance this might

not always be available and the resulting balance of payments crisis might severely
constrain the further rapid growth of the Brazilian economy."`i6'(16) Baer, W., ibid., p. 13.

INTERNATIONAL MONEY FLOW AND THE
MULTINATIONAL CORPORATIONSMasahiro FuJiTA

I. Collapse of the IMF system and the New Economic Policy by President Nixon.
This paper aims to analyze the function of multinational corporations and theinternational money market, especially the important relations between international

money flow of developed countries and less-developed countries from the vicw pointof financing of international business.

The IMF system is now collapsing, but the share of the U.S. dollar as an international transaction currency still accounts for 750/. of total transactions of thefree world. On the other hand, it is clear that the confidence in the dollar has been

weakened by the suspension of the convertibility of the dollar into gold. Rumania

joined the Fund in January 1973 and became the 127th member country. According
to recent reports Mainland China may be admitted as a member in the near future.
Thus the U.S. dollar still has preeminance in the IMF system, although a postdollar
standard (system) is now in the process of being constructed.

1. Actual Situation ofthe Dollar Crisis

The crisis of IMF system was caused by the fact that dollar as the domestic
currency in the U.S. constituted the key currency. It had been long expected, but
this fact would lead to a crisis formally because of a shortage of that key currency
and recently because of a surplus but lack of confidence in it.

This is because the dollar has the broadest acceptability as an international
currency, upon which depends the organization of the IMF system, and so the system

is very sustable to crisis. The IMF was an exchange stabilization mechanism which
depended on gold convertibility (U.S. dollar was both gold exchange and the key currency at the same time), and also depended on the adjustable peg system whose central

rate is set in terms of the dollar. This organization of international monetary cooperation compels every member nation to accept the heavy obligation of stabilizing

its exchange rate, and it supplies short-term money in return for this duty. But
on the 15th of August in 1971 the dollar standard was brought into being, forrnallyand substantially, by the Nixon New Economic Policy (NEP). The amount of overhanging dollars reached 83 billion dollars in March, 1973. Therefore it goes without

saying that the recovering of dollar confidence will be the key for reconstruction

pa

MASAHIRO FUJITAof the IMF.
Thinking of this background, it is natural that the control of overhanging
dollars will be the first problem for the re-building of the IMF. If the U.S. cannot

satisfy the requirement of gold convertibility by the countries which keep dollars

as major reserve assets, the countries cannot help submitting to "benign neglect"or sharing in the cost of supporting the dollar by the realignment of foreign exchange
rates, especially by revaluation. For the sake accomplishing the NEP, it is universally

expected that the U.S. has to strictly maintain balance of payments discipline

and at the same time monetary discipline. Nixon New Economic Policy made a
big contribution to the recovery of business conditions; for example, it pulled up
the real rate of growth to 7.40/,: pressed down the GNP defiator to 2.9O/. (the con-sumers' goods deflator to 2.7%), and reduced the rate of unemployment to 5,2%.
On the external balance, the amount of deficit was 29.8 billion dollars in 1971,
but decreased to 10.1 billion dollars in 1972, but the figures above did not realize
the hoped levels.

2. Contribution by MNCs to the basic balance
The change of balance of payments in the U.S. after 1966 shows that the advanceof MNCs makes much more contribution to the balance ofpayrnents than the private
non-MNCs do. That is, although the current balance worsened by 1.6 billion dollars
from 1966 to 1970, the amount of surplus was 5.6 billion dollars. Moreover, according

to the report by the Committee on Finance of the U.S. Senate in 1973 most of thesurplus depends upon MNCs, the amount of surplus contributed by the MNCs
being 8.5 billion dollars.

The current balance by MNCs improved from zero to 2 billion dollars from1966 to 1970 while the current balance by non-MNCs worsened by 3.6 billion dollars.
The 2 billion dollars' surplus by the MNCs in 1970 would be expected to contributeto an overall surplus, but this overall surplus decreased from 1.7 billion dollars

in 1969 to zero in 1970. As for the service balance in 1970, the surplus by
MNCs was 6.4 billion dollars and in the case of non-MNCs, the deficit was 2 billion
dollars.

Considering the contribution to the basic balance, the net outfiow ofinternational

long-term capital from the U.S. is very large, therefore the influence on the basicbalance is not so big as the influence to the current balance, and the surplus on thebasic balanoe decreased from 4.2 billion dollars in 1966 to 3.7 billion dollars in 1971.

The U.S. basic balance was improved by 2.8 billion dollars by the contribution of
MNCs, and this amount consists of 2 billion dollars' improvement on current balance
and 8oo million dollars' improvement on capital balance. This is because the outflow

oflong-term capital decreased and the surplus on current balance become character-INTERNATIONAL MONEY FLOW AND THE 25

MULTINATIONAL CORPORATIONS

istic. An effective policy for the recdvery of dollar confidence could be to concentrateon the improvement in capital account, for example, by the Interest Equalization
Tax (IET). The dollar outfiow is severly restricted by the Interest Equalization Tax

enforced in July 1963, by the Voluntary Foreign Credit Restraint Program (VCFR)
enforced in February 1965, and by the Voluntary Restraint of Direct Investment
Abroad in December 1965. Therefore, the U.S. dollar, which formerly fiowed out
to the rest of the world as international long or middle-term capital changed toshort-term capital which cannot be easily regulated. As a result, it is natural that

U.S. dollars flow out to the Euro-market.

President Nixon attempted to adopt a Dollar Defence Policy which is very
different from that of the Kennedy or Johnson administrations. By switching to thefloating exchange rate system, the U.S. dollar is now floating against gold, and sogold reserves are unnecessary. The tendency to give too much importance to thedollar in the composition of international money was weakened and a trend to be
used internationally emerged for the powerful surplus country's currencies.

The NEP, expected two effects, firstly that surplus country currencies would
share in the burden of being covertible currencies, and secondly that the shortageof these would help relief the U.S. dollar of its burden as the sole key currency.

II. MNCs and 268 bithon dollars' assets
Basic currency should keep every country's confidence so that the international
money will circulate smoothly. Here we define international money as internationalmonetary purchasing power. This definition means that even if dollar are trasferedinto a country, they cannot be regarded as international money unless they, in fact,

are converted to monetary purchasing power.
1. The Multiplier effect of international money (international currency multi lier)

Let Y be national income, M imports, E exports, I investment, C consumption,
c average propensity to consume, s average propensity to save, m marginal propensity to import.

The basic Keynsian multiplier may be derived as:

AY 1

A(I+E) s+m
Now we shall incorporate this expression into the effect of expansion of thevolume of international money. That is, as international moncy is expanded thereceipts of exporters will increase, causing domestic bank deposits to rise and thus
having an overall expansionary effect via the bank credit multiplier.

If L is the volume of international liquidity which enters a country as a result

MASAHIRO FUJITA

26

of a balance of payments surplus, then, if this is deposited in domestic banks andused for credit expansion, the effect on national income (i.e. the international cur•rency multiplier) will be represented by the following expression.

Ll
AY==:
s+m• s+m
Denoting International Currency Multiplier(f);f= i i l's M (s t m )For the dollar, for instance, this multiplier is effective only in the dollar circu-

lating area. But when we look at the reality of international money flows, we findthe dollar area, in fact, consists of dollar preference countries which keep relatively

low levels of foreign currencies and they have not enough gold to respond to thedemand for gold convertibility. Japan has only a little gold though her international

reserves (gold and dollar reserves) are greater than that of the U.S. On the other

hand, West Germany has a high gold ratio, 25%. In other words, the actual amountof Japan's gold holdings amounted to only 870 million dollars, and the gold holdingsof West Germany were 6 billion dollars at the end of 1973. West Germany demands
strong gold convertibility for its foreign reserve holdings, so it does not belong to

the dollar area. But we should take note ofthe fact that nevertheless West Germany

has a rather strong dollar preference. The developing countries belong generally
to the dollar area.

2. The Present State of the Dollar in International Money Flow
The dollar fiow area is very wide, though the U.S. dollar has weakened in its
role as a basic currency. We are going to talk about the financing needs of MNCs,
dollar availability and the distribution of its international money flows.

The amount of deficit in the U.S. basic balance becomes dollar outflow.
Moreover, because of the easy money policy, U.S. comercial banks repayed their
Euro dollar debts, taking advantage of the difference between domestic and Euro
interest rates. And the money flowed out of the U.S. to other countries, especiallyto Western Europe. Even after these countries paid back their oMcial debts, thedollar capital still flowed into the Euro-dollar market, to the extent of one hundredbillion dollars. This is because U.S. MNCs are increasingly narrowing the capitalfrom host countries, even despite the Department of Commerce restrictions on theoutflow from the U.S. Thus U.S. dollar plays very important role in the international

money flows.
After the World War II, the U.S. promoted direct investments and it was the
only source of supply of international money. The reason is that in the U.S. profit

rates were decreasing because of upward pressure of labor costs, and the U.S. wasINTERNATIONAL MONEY FLOW AND THE
MULTINATIONAL CORPORATIONS
looking for cheaper labor. Also export industries of high technical level sought for

greater oppotunities for investment abroad.

As mentioned before, the increase of private direct investment has brought
about the surplus in the balance of payments due remittance of profits to the U.S.
The U.S. profit from international direct investment abroad amounted to 2.9 billion
dollars in 1960, 5.2 billion dollars in 1965, 7 billion dollars in 1970, and 9 billion

4oo mi11ion dollars in 1971.

MNCs are urged to remit their profits to the U.S. by strict Department ofCommerce regualtions. The host country governments urge the MNCs to reinvest
the profits. Especially the MNCs in weak and soft currency countries tend not
to accumulate internal reserves but send profit or revenues back to the native countries

as soon as possible, while in turn the parent company may lend capital back to theforeign subsidiaries that are operating in the weak currency countries. The subsidiaries

may also attempt to send.
The capital and profits out of the country to more secure locations and try tochoose more profitable opportunities for investment. This tendency in the field ofinternational money brought about the specualtion against the German Mark in February
1973, and also brought about gold specualtion. In 1971, when the amount of deficit
in balance of payments was estimated at 30 billion dollars, even the former Secretaryofthe Treasury, Thomas T. Connally stated that if the total amount of profits of
MNCs is remitted to the U.S., the devaluation of the dollar would not be necessary.

To illustrate the significance of the dollar in the World Monetary System, we

Fig. 1

Dollar fiows in 1971
collection ofmvestmetltfut)dsales$s3binionbylMF

goldbyforeigncoutitries

DollaroutflowfromtJ.

s.

SDRsalesgoldpurchases

fromIMF

outflowofshorttermcapiial

SDR

pvreliasesfromIMIL'$10.2billion

IMFposition(dollar

Euro-dollarmarket
100billion

recyclingflow
ofshort-termbalance)$7billion

capitaldeficitinbasicbalanceofU.S.
repaymentfromforeigncountrytoU.S.

IMFmetibercountries
dollarfunds'position

ofexc]udingU.S.
outflowofoflicialfunds$lorJrbiNion

drawingcredit

tranchedyU.S.and
dollardrawingby
othercountries

27

MASAHIRO FUJITA

28

present a fiow chart of the world dollar circulation in 1971.

At the end of 1971, total book-value of the short-term liquid assets in the private

sector of American international business, or the total amount of MNCs' funds, was
268 billion dollars. This amount is 8.5 times as much as the 32 billion dollars in

1960. Under these circumstances, if only a one percent movement of MNCs' capitaloccurs, it would bring about a severe international currency crisis. This 268 billion
dollars all managed by private persons and traded in private markets virtually uncontrolled by oMcial institutions anywhere, was more than twice the total of all international reserves held by all central banks and international monetary institutions in theworld at the end of 1972. The total amount of international liquidity at the samedate is estimated to be about 15.5 billion dollars. These are the reserves with whichcentral banks fight to defend their exchange rates. The resources of the private sector

outclass them. Because 268 billion dollars is such an immense number, it is clearthat only a small fraction ofthe assets which it measures needs to move in order
for a genuine crisis to develop. The international money market, possessing such amasse de manouevre as well as an eMcency and flexibility unknown in the past,can focus with telling effect on a crisis-prone situation..., some weak currency
which repels funds and some strong one which attracts them.

Because such a small proportion of the resources of the MNCs is needed to
produce monetary explosions, it appears appropriate to conclude that destructive,
predatory motivations do not characterize the sophisticated international financial

activities of most MNCs, even though much of the funds which flow internationallyduring the crisis doubtlessly is of MNC origin.

In the controversy over reforming the international monetary system, international liquidity has been discussed in relation to the amount of trade, especiallythe amount of imports, and also optimum level of international liquidity has

constituted one of the most important debating problems. Compared with theforeign reserves held by the central banks, the assets of MNCs are much greater.
Considering this fact, the Central Bank always has to keep adequate liquidity toovercome international monetary crises.

III. The Multinationalization of Banks and the rapid growth of Euro-market

Next, we consider the structure of Euro-market which has become to be used
as a source of financing by multinational corporation.

The U.S. banks have advanced into Europe, supplying short-term dollar funds
and issuing bonds.

1. The integration of the international money market and the movement of funds

INTERNATIONAL MONEY FLOW AND THE
MULTINATIONAL CORPORATIONS

29

Overseas enterprises should pay much more to raise finance in New York, if
the Interest Equalization Tax is effective, Therefore they seek to raise the long-term

funds in the Euro-bond market. Restraints on external credits have begun to be

Table 1.

Estimated short-term asset and liability positions of principale institutionsin International Money Markets, 1969-71(in Billion of U.S. dollars)Holder of assets

Denominated in

Denominated in

Dollars

foriegn currencies

Total

or liabilities

Assets Liabilities

Assets Liabilities

AssetsLiabilities

1969

8.9
10.1

28.1
21.8
15.8

O.5
O.6
O.9

O.2
O.2
O.2

9.4

70
71

10.7
13.0

28.3
22.0
16.0

1.7

O.4
O.5
O.4

4 2

2.1

4 2

22

O.7
O.6
O.5

5 2

2.7
2.6

".3

52.3
31.7
38.3

10.7
5.8
8.4

10.6
5.8
8.2

75.6
48.8
52.7

63.0
37.5
46.5

4.9
10.0
10.7

na
na
na

O.4
2.8
8.0

na
na
na

5 3

12 8
18 7

na
na
na

1969

7.3

70
71

7.6
6.8

6.2
9.4
11.4

na
na
na

na
na
na

7 3
7 6
6 8

6.2
9.4
11.4

na
na
na

na
na
na

na
na
na

na
na
na

59.9
80.6
110.0

34.9
46.9
63,O

na
47.4
61.5

United States banks

12,1

United State nonbanks

1969

3.5
3.6
4.7

70
71

2.2

Forien banks

1969

64.9
43.0

70
71
Foreign Governments
Central banks andInternational Organization

1969

70
71
Foreign Banks

Foreign affiliates of

U.S. Nonbanks
1969

70
71
Foreign branches of
U.S. banks

1969

na

na

70
71

34.6
40.2

36.1
42.1

1969

89.5
108.9
118.8

88.3
101.2
109.8

na

na

na

12.7

21.2

11.3
19.4

47.3
61.4

12.3
22.5
39.0

11.2
17.8
28.2

161.7
212.0
267.8

Total

70
71
Sources :Federal Reserve Bulletin, Sept. 1972
U.S. Treasury Bulletin, Sept. 1972
Foriegn Direct Investment Program, Selected Statistics,

July 1971

134.5
165.9

201.0

30

MASAHIRO FUJITA

strengthened since February 1965, and so American business abroad has come toseek finance in Euro-Money Markets. The deficit in the balance of payments of the
U.S. continues, despite the dollar-defence measures. The total amount of accumulated deficit in the net liquidity balance from 1960 to 1970 was 35 billion dollars.
The increase of the deficit in the oMcial balance was 14 billion dollars over 10 years(from 1960 to 1970). So we can say that overseas corporations had the use of 21
billion dollars as funds in the international money market. In 1971, newly issued
money in the international bond market was 5.2 billion dollars, and the total amountof assets in Euro-currency market was 71 billion dollars, of which Euro-dollars were
54 billion dollars.

As a result of the integration between the Euro-currency market and the Eurobond market, the long-term rate of interest have been equilibrated, and the international money has been able to easily and smoothly.
With advancing integration, it would be diMcult for the central bank authorities

to behave against the movement of international money market, as has been shownby the experience of the Mark speculation in 1971. That is, the rate of interest in

the U.S. decreased and the large amount of American capital flowed into Europe,so that the dollar funds rushed into West Germany which was promoting a highinterest rate policy. Therefore, German Mark was eventually revalued.
With the strengthening of the function of international money markets, imperfections of the markets are being eliminated, and a more stable investment environ-ment is being brought about. Needless to say, this is the reason why there is thenecessity for internationalization of banking.

2. RecentFeaturesofMNCs'Financing
We will examine the character of financing in MNCs. Firstly, as the subsidiaries
overseas generally have obtained high profits up to now, internal funds or internal
reserves have been used to supply financial needs.

But today in addition to internal funds, they finance by borrowing from thefinancial institutions in host countries and by issuing Euro bonds. Taking U.S.
MNCs, the share of internal reserve financing was 32.2% and that of local financing
was 51.40/. over the period from 1968 to 1970.

Secondly, the primary investment money was supplied by the parent company,
but often the large amount of capital demanded afterward was supplied byconsolidated bank groups, so called consortium banks. These consortium banks
not only supply investment money but also investigate the link up or theamalgamation ofenterprises. Furthermore they are practicing the internationalizationof money and finance, just as manufacturing is being internationalized. As for local

financing of the U.S., MNCs, borrowing from financial intermediaries is 520/.,

INTERNATIONAL MONEY FLOW AND THE
MULTINATIONAL CORPORATIONS
comprising short-term borrowing of 20.20/., and middle and long-term borrowingof 31.90/.. The issuing of debentures is 21.90/., and that of convertible debentures
is 24.2 O/., making a total of 45 O/, loan financing. Local financing enables the parent

company to obtain low interst rate money.
Thirdly, the share of financing by Euro-bonds is 46 O/.. After the foreign credit
restraint in the U.S. in 1965, this tendency was undoutedly strengthened. The issuingof Euro-Bonds by private companies is 60 %, 61 O/, of this on a dollar base and 21 O/.

of it on a German Mark base. The huge amount of international capital demandof MNCs, so much that it is impossibly to mobilize their needs in the money marketof any single country, is still increasing rapidly, so the scale of the Euro-Bond market

is expanding greatly.

hFourthly, we will discuss the method hedging against the risk of exchange.
This risk comes from the realignment of foreign exchange rates which seems to bc
a barrier against securing of the stable supplies of funds. Method of hedging include

the maintenance of a square position in short-term liquid assets and short-term
liquid liabilities, the buying and selling of forward exchange, the manipulation ofleads and lags, the adjustment of remittance dates, iocal borrowing, the time adjustment of the increase of capital to the subsidiaries, and so on.

3. MultinationalizationofBanks
The characteristics of the MNCs of money raising is that they finance basicallyin cooperation with banks abroad.

This characteristic naturally promotes the internationalization of banks andthe multinationalization of finance. The first reason is that they cannot raise all thefinance that they need merely from banks.

The second reason is that Euro currency market made a rapid growth because
it is an eMcient supplier of international money.

As a matter of fact, the number of foreign branches of the U.S. banks was
244 in 1966, but in 1970 the number increased to 536. 0ver the same period, thetotal amount of assets of the branches all over the world increased fourfold. And
three-fourths of total assets we held by the branches in Europe. 365 billion dollars,

which is equal to 900/. of the total deposits in the foreign branches of Americanbanks, is time deposits. But even though cash balances and make up only leO/. in
absolute value they are very large.

The reasons for, the expansion of Euro-rnarket are as follows. Firstly, the U.S.

subsidiaries overseas reinvested the profits in the Euro-market and limited theremittance as much as possible. Secondly, accumulated money in oil producing

countries fiowed in to the Euro-market. And lastly, money moved to the Euro
market for better return because the rate of interest in the U.S. was low due to31

MASAHIRO FUJITA

32"Regulation e."

On the other hand, the demand for international funds has been determinedby two factors. Firstly, because ofthe tight-money policy and the "Restraint External

Credit" in the U.S., MNCs have launched into Europe in order to try to finance inthe Euro-market.

Secondly, the U.S. banks borrowed Euro-dollars through the head oMce inEurope in order to cover the lack of funds caused by the tight money policy.

Multinationalization of banks came to be necessary because the demand forlong and middle-term money increased from American corporations abroad. Multinationalization of banks enables the spreading of risks.

Euro-currency, for example the Euro-dollar, has become stabilized in quality
and quantity as middle and long-term money, and has even taken the character of
an international currency. These are the reasons ofthe establishment ofmultinationalbanks.

Methods of financing have been further diversified due to the advance abroad
togather of related corporations, Thus the multinationalization was strenghtened
through the international cooperation of financial intermedies and the establishment
ofinvestment banks whose scales are very large internationally.

IV. DominantpositionofEuro-dollar
So for we have discussed the function of the Euro-money market. There are
two points to consider for improving the U.S. balance of payment. Firstly it isnecessary to combat the problem of the overhanging dollars. Secondly, it is necessary to control the domestic infiation.

To control the domestic inflation the U.S. Government should take a tightmoney policy.
If U.S. money rates rise more than the Euro-money rates, overhanging dollars
will return to the U.S. from the Euro-dollars market.

If the European economic and currency integration proceeds suocessfu11y, theEuro-dollars may be expected to remain thcre, and even further inflows to occur
due to the stabilized investment opportunity.

Actually EC countries have four times as much gold as the U.S. surplus country
currencies, for example the German Mark, are superior to the U.S. dollar.

V. The Role of Japanese MNCs in the World Economy"Multinational Corporation" is the hottest economic topic today, and at thesame time it is the most diMcult one. Some Japanese companies have declared theyJapanese Overseas Investment as of December 31, 1972

Table 2.

Loans

DirectNo. of Vol. of

Investment Investments

Establishmentof Branches

Other types ofInvestment

Investment

No. ofVol. ofNo. ofVol. ofNo. ofVol. ofNo. ofVol. ofInvestment

Investment

Investment

Investment

Investment

Investment

Investment

Investment

(W)*s

(z)*e

(X).i (Y)*2
Asia
Latin

America
Near East

North
America
EuropeAfricaTotal (B)

am

48

15

258

26

2,658

1,273

(25.7)(14.9)(3.2)(53.2)(9.0)(42.4)(20.4)

285

342

38

6

14

2

777

853

(29.2)(14.7)(11.8)

(1.3)

(2.9)

(O.7)

(12.4)

(13S

11
(O.3)

6

218

co

(79.4)(1.2)(7S.4)

(O.6)

599
(g.a

s•s

(-)

2
(o.o

370

(-)

856

201

433

191

71

12

23

1,695

1,384

,gi

(27.0)(20.ol(18.6)(59.1)<15.2)(25.2)(8.0)(27.0)(22.1)

30

3

71

17

665

1,592

(9.3)

(o.ol

(14.6)(5.9)(10.6)(25.5)

2,O15

632

337

(44.9)*s(20.0)*4(34.5)

mo

502

(9.8)

(15.9)

32
(O.7)

1,181
(26.3)

493

1,oo3

71

570

(11.0)(31.7)(7.3)(24.4)

117

52

28

81

3

o

9

1

157

135

(2.6)

(1.6)

(2.9)

(3,5)

(O.9)

(o)

(1.9)

(O.3)

(2.5)

(2.2)

Oceania

214

189

54

307

1

5

419

(3.4)

(5.5)

(13.2)

(O.2)

(1.0)

3
(1.0)

284

(4.8)

11
(3.4)

4,492

3,166

970

2,334

323

466

485

289

(4.5)
'6,276(6.D' Total (A)A(71.ol(50.6)(15.ol(37.3)

(5.1)

(7.5)

(7.7)

(4.6)

C

*1 Representsnumberofinvestment"2 millionUSdollars'3 lli %e

Source:

(C)

6,255
(C)

(1oo.O)(1oo.O)

s•

2•g•

E:,
2/;g

2•fi•

Ministry of Finance, Statistical Report, monthly 1973

,4 X%
'5 !"/.

*6 go/.

8

MASAHIRO FUJITA

sc

Table 3.

Estimated EuroÅíurrency Market Size(billions of U.S. dollars)

1969

1970

1971

4.1

4.5
24.0

6.1

6. 9

17.6

31.5

47. 9

21.7

28.5

37.6

54.8

10.7
11.6

15.0
13.5

18. 2
15. 2

16.4
19.8

Total

22.3

28.5

33.4

36.2

Grand total

".o

57.0

71.0

91.0

Outside area
United States
Rest of World

16.8
12.0

13.1

19.0

8. 3
29. 1

43.1

Total

28.8

32.1

37.4

52.7

7.1
8.1

9.8
15.1

14.5
19.1

20.8

Total

15.2

24.9

33.6

38.3

Grand total

".o

57.0

71.0

91.0

1972

Sources :Outside area
United States
Rest of World
Total
Inside area

Banks
Non-banks

Uses :

9.6

Inside area

Banks
Non-banks

Source :17.5

BIS, Annual Report, Basle, June 1972

would multinationalize themselves or they must do so in order to achieve further
progress. It is quite doubtfu1 if they have detailed plans for rnultinationalization
or not, but it is a fact that they know of multinational spread of U.S. business, andfeel that it is necessary to have a gloval point of view in their management.

Such a company is. "Mitsubishi Trading Corporation," a typical Japanesetrading company, which we usually call "Sogo-Shosha," "Sogo-Shosha" is a trading
company, but their activities are not confined to just "Trading." They are playing
a very important role in the internationalization of the Japanese economy.

As.long as "Growth" is the most important principle of enterprise, especiaily"Sogo-Shosha," it is very natural that they always try to expand into new fieldsof business; that is to become a "Conglomerate" and also try to extend their market
abroad when their domestic market is filled. Whether they prefer direct investment
from export, is apt to be subject to the condition of the domestic market. When thedomestic market is still growing, business in foreign countries will be regarded as anadditional revenue source, and they prefer export to direct investment because
direct jnyestment involves various risks.

We would point out the remarkable contribution by Japanese export in theINTERNATIONAL MONEY FLOW AND THE 35

MULTINATIONAL CORPORATIONS

rapid growth of G.N.P. In 1969, the portion of G.N.P. growth contributed byexpansion of exports was 4 O/. in United States, 9.6 O/. in Japan, 1.1 O/. in France, 1.5 O/.

in England, and 1,8 O/. in West Germany.

The rapid growth ofJapan in 1960's did not depend on foreign market so much.
The role of exports was just to cover the import of resources which were necessary

to produce goods for the domestic market. However since 1971, the situation haschanged. Growth rate of our G.N,P. is decreasing. The expansion of our domestic
market is coming close to the limit. In the l960's companies were busy in supplying
for domestic markets, and considered foreign markets as merely an additional market.

But recently they have found that their domestic market was not enough to cover
their growth. They began to re-estimate foreign markets, to consider foreign markets

as one of the major supports of their development. And at the same time, they know

well the success of U.S. enterprises by multinationalization, or quality of theirproducts is enough to do so. As for management skills, it might be an obstacle formultinationalization because of big differentiation of cultures. Though as they
overcome this diMcult problem, the next ten years will be characterized by multinationalization of Japanese firms.

Then, they are two major characteristics of MNCs which must be consideredespecially in the case of analysis of the multinationalization of Japanese firms.
Firstly, we would like to consider the matter of extraterritorial jurisdiction; thisrefers to the situation where a sovereign state loses some control over its legal citizens.

When the economy is in a suMciently expansionary phrase, the government
will usually take a tight money policy fearing an excessive boom. But a subsidiaryofa multinational might not follow this policy, and continue to invest funds suppliedby its parent company. Another case is where the government hopes to export thesubsidiary's product, but the subsidiary does not follow the policy if the parent

company does not agree with it. Further, if the government tries to appropriate
the subsidiary's profits for the benefit of its domestic economy, "transfer price"
manipulation by the MNCs might make the efforts ineffective. Then the host country's

government will feel dissatisfied. The attitude of Andes Common Market expresses
this uneasiness. In order to recover sovereignty all parent companies are requested
to fade out of the stock holding of the subsidiary within fifteen years. This is a newtendency, but it seems to indicate some pattern of direct investment in the future.

Secondly, the other important characteristic of the Multinational Corporation isthat they are often oligopolistic. It is very clear that today's multinational corporations here come from oligopolistic industries. If multinationalization is continued

international oligopolization of the world economy should lead to the optimum
division of resources, but it appears that the demerits of oligopoly would be big
enough to cancel out the economic merits of multinationals. We cannot control the36

MASAHIRO FUJITA

world wide oligopoly or rnonopoly by individual nations' anti-monopoly laws.
Therefore, it is necessary to establish an international organization to control multi-

nationals. Of course it will be very diMcult to establish such an organization. But
we have to recall the fact that the economic principle liberalization of goods andcapital transaction was promoted only step by step. GATT, IMF and some otherinternational organizations were established in order to promote this principle. As
the result of liberalization of capital, foreign capital inflow into Japan is increasing

rapidly, and so it will be necessary to apply controls to it. At the same time since
the advance of Japanese enterprise abroad is increasing as well, it will be necessary
to apply restrictions on its behavior abroad.

Industrial Classification Japanese Private Investment Abroad

Table 4.
-s---x FiscalIndustries X'
Food Stuffs

year

1951-1957

Å~ No.

Aoct.

1959

1958

No.

Acct.

No.

Acct.

1960

No.

5

712

1

83

10

4 ,339Textile11

10 ,698

3

1 ,8735

3 ,422

Pulp & Wooden

3

15 ,5561

22 ,693o

10 ,598

ChemicalIron & Metal
Machinery

4

157

1

95

3

122

2
6

1 ,878

o

2,133

3

3 ,7873

6 ,4231991

4

2 ,2204Electric Appliances

1

24

4

117

3

189

3

4

13 ,288

1

12
9

Acct.

1962

1961

No.

10 ,980

13
7

1

1 ,397o

8736
2 ,571

Aoct.

No.

Acct.

Acct.

No.

Acct.

No.

Acct.

No.

No.

3 ,583

5
15

1,618

]2

6 ,877

7

6 ,23330

15 ,785135

11 ,370

16 ,664

31

IS ,120

34 ,040

46

49 ,898259

9 ,0372

1O ,347

1

3 ,9375

36 ,419

20
4

14
52

4,167

5 ,5492 ,3605

17 ,280

6

3 ,315

14

78 ,815

7

927

15

631

20

4,178

12

9 ,104

3 ,34517

4 ,956

6 ,28640

25 ,467

11

2 ,8978

15 ,494

5

4 ,432

6

6 ,O138

10 ,241

1 ,142

3 ,185

6

3 ,0745

3 ,294

2 ,7"

20

5,102

3

20 ,5715

14 ,106

5

1 ,368

3 ,810
3 ,141

1 ,862
5 ,858

14

2
14

6
7
7

3

16
9
19
21

8

3 ,5299

1 ,37823

2 ,97819

47

20 ,75684

47 ,111M

55 ,935

81

49 ,557

97

89 ,684

125

4 ,834
1 ,050o2

4

27 ,157

3

3oo
927
616

1 ,1763642

3

1 ,045495

8

1 ,3089

2 ,2351

2 ,4053

3 ,052

5

8 ,8387

6 ,555

2

2,119

7

44 ,1817

42

36 ,75923

42 ,42734

25 ,34648

27 ,877

42

Agriculture-Forestry

1 ,319o

1 ,149o3oo

6

1 ,633

3

1 ,9192670

6

7 ,216

5

538
429

3

2

250
234

o

1 ,463

5

961

2

484

3

659

4

1 ,3175

13 ,1484

11 ,510

2 ,13044 ,630

1 ,082

17 ,1767
10

6

Mining71225

5104 ,086

12

34 ,3663

25 ,5344

20 ,91612

33 ,6642
10
17

Sub-Total

ca

19 ,9587

13 ,6329

12 ,47720

47 ,90811

105 ,468

23

36 ,9618

27 ,9379

22 ,24522

42 ,197

1

3

938

4 ,4973

3 ,7971

8 ,228

19 ,724

9

3 ,87824
23

38 ,241

13

9,110

99

6 ,95419

5 ,14119

9 ,37337

15 ,629138

6 ,09629

6 ,5794,311

3 ,48453

5 ,175

6 ,89243
4
77

21 ,88S

1

39
2
50

21 ,960

11 ,996

2 ,85021 ,754

206
43
292

189 ,798
212 ,454
59 ,632
137 ,926
67 ,236
70 ,890
102 ,530
61 ,492

77 ,5oo171

68 ,668229

135 ,705

304

241 ,193

1,391

962 ,699

10 ,625

23

12 ,oo9

8

4 ,90431

297 ,301

234 ,95S

94
96
195

57 ,693
27 ,218

158 ,681

18
16
38

9 ,566

1 ,533

1 ,126 ,743

170 ,840

62

314 ,21672

252 ,974

385

1 ,211 ,654

5

7 ,O042oo
9

54 ,995

63

111 ,840

10
253
30
99

277

217 ,659

392

419 ,281

2,159

1 ,421 ,935

3 ,935

3 ,596 ,306

8

5 ,665

2,518

72,14710
14

58 ,625

16
6
15

29

78 ,032

32

66 ,80937

6 ,2692

1 ,330

1

725

19 ,559

115

48 ,O18124

119 ,358

20 ,8653

46 ,045

49 ,769
147 ,813
317 ,663

Commerce

231

13 ,120

4 ,21651

10 ,930

59

11 ,71645

66

14 ,148

4
88

13 ,50579

11 ,206

Finance-Insurance
Others1040

4 ,289

25
4

12
5,142

1 ,8435

1 ,7692

2 ,6543

3 ,458

6

4,517

8

6 ,6517

14 ,51368
6

23 ,050
29 ,596

288
9

4 ,42819

2 ,52024

2 ,53522

2 ,57031

6 ,54634

22 ,10631

26 ,27531

12 ,591

31

4,112

28

12 ,59829

35 ,166

13
38

Sub-Total

281

21 ,837

48

8 ,57980

15 ,234

83

16 ,94080

15,158

109

41 ,709131

50 ,929120

42 ,107106

64 ,986127

59 ,292149

130 ,561

176

Source:

(1)
(2)
(3)

53 ,062151

92 ,729133

164 ,811

Acct.

16

Sub-Total

123

No.

10

5

64,640Acct.

3 ,568

1 ,15478

No.

13 ,5048

78 ,554

Acct.

2

1 ,311

367

No.

19

10

Grand Total

Aoct.

6 ,706

2 ,803

Construction

Acet.

7 ,655

2 ,619

9OthersFisheries

No.

Cumulative total

10
16
2

4

6,317
3oo
298

15
654

Transport Machinery

Aoct.

1970

1969

1968

1967

1966

1965

60 ,841

2 ,988

1 ,562

1964

1963

No.

(in thousand of US dollars)

179

99 ,425223

125 ,977

Toyo Keizai Tokeigeppo (Toyo Keizai's Statistics Monthly) Vol. 33 No. 5 (Tokyo: Toyo Keizai Shinposha, May 1973).
MITI, Keizai-Kyoryoku no Genjo to Mondaiten (Present State and Problems of International Economic Cooperation in Japan,
JETRO, PVagakuni Kaigai Toshi no Genjo (Present State of Japanese Overseas Investments 1972, 1973).

193

120 ,291

1972).

209

156 ,739

253

227 ,oo8306

274 ,867

384

557 ,174568

11 ,430

43 ,821667 ,579

768

8 ,453"175

5 ,oo332

37 ,805

54 ,141

1 ,492

403 ,105

92 ,099115

321 ,889

258 ,038520

659 ,137

918 ,449

ESTIMATION OF INVESTMENT ALLOCATION RATIOSOF JAPANESE ECONOMY: 1960-1969(i)Hikoji KATANO

1. For analysing the changes of industrial structure of Japanese economy, one of
the most essential indicators is allocation ratios ofinvestrnent to individual industrial

sectors. However, no available data of this sort are in our hands. In this paper, we

will estimate the investment allocation ratios of Japanese economy for period from1960 to 1969.
2. Notations and the data sources, used in our analysis, are as follows:

Notations Descriptions References DataSources(2}B+E=[bij+eij] : capital coeMcient matrix (Table l) UISIERI/EPA
B=[bij] : fixed capital coeMcient matrix (Table 3) to be calculated
E=[eij] : inventory capital coeMcient matrix (Table 2) T6kei KenkyUkai

I" :investment by commodity (Table 6) UEAIPBIEPA
I :investment by industry (Table 12) to be estimated

X :output by industry (Table 4-a) UEA/PBIEPA
XT :trend value of output by industry (Table 7-a) to be estimated
3. The original rnatrices of capital coeMcient and inventory capital coeMcient arecomposed of 56 industrial sectors. However, we will aggregate this classification to
12 sector classification in this analysis. The followings are used for the aggregation.

12 sectors sectors in 56 sector classification to beaggregated upto 12 sectors

1. Foodstuffs 1, 4, 6, 12•v17

2. Raw Materials 2, 3, 5, 8, 9, 11, 24"

3. Petrolium and Gas 10, 46

4. 0ther Fuels 7, 31, 45

5. Chemicals 28N30,32

6. Textile Products 18, 19, 20

7. Iron and Steel 34, 35(1) The author is indebted to Mr. H. Nagata at Economic Research Institute of Economic
Planning Agency, by whom the computer processing has been done.

(2) EPA: Economic Plarming Agency; ERI: Economic Research Institute; UIS: Unit ofIndustrial Structure; PB: Planning Bureau; UEA: Unit ofEconometric Analysis.

HIKOJI KATANO

38

8. 0thermanufacturingProducts

21•v23, 24", 25-v27, 33, 36, 37

9. Non-ElectricalMachineries38

10. Electrical Machineries

39

11. Transport Equipments

40

12. 0thers

43, 44, 47--56

4. The aggregated matrices are shown by Table 1 and 2; capital coeMcient matrix(B+E) by Table 1 and inventory capital coeMcient matrix (E) by Table 2. By using
these matrices, we calculate the fixed capital coeMcient matrix (B) (Table 3).

5. When the fixed capital coeMcients are stable for a certain time horizon, investment by industry can be calculated by relation of

Ij == Xb,jdXi .
For making this sort of calculation feasible, we have to examine stability of the
fixed capital coeMcient matrix. As checking data for the examination, we wi11 use
the figures of investment by commodity, which are only data to be available for our

purpose.
Here we compare the following two sets of time series data:

Ii*(t): actual value of investment by commodity,Ti"(t) = XjbijdXj : calculated value of investment by commodity.
We may consider that the fixed capital coeMcients are kept in stable for a certain
time horizon, if divergence between these two time series in small.

6. Examinationl
At first, we will use the actual value of output for calculating increment of output

dX. These values are shown by Table 4. And the resulting "calculated values ofinvestment by commodity" are shown by Table 5. Correspondingly, the actual valuesof investment by commodity are shown by Table 6.
The comparison of these two sets of time series are shown by Figure 1 (a-h).
As shown in these Figures, there are large divergences between the actual values andthe calculated values of investment by commodity, We consider that the maincause of this divergence may be due to the acttial value of output to be used. The
actual value of output may reflect the changing degree of utilization of production
capacities in each industrial sector. And this changing degree of utilization may cause

the divergence between two time series.

7. Examinationll* 20 0/. of 24th sector in the original matrix is to be included in our 2nd sector, and the rest

goes to our 8th sector.

ESTIMATION OF INVESTMENT ALLOCATION RATIOS 39
OF JAPANESE ECONOMY: 1960-1969

Considering the results of examination II, we wili use the trend value of output
for calculating increment of output in our second examination.

The trend value are estimated by

XT (t) = eae+ait,
where ao and ai are estimated by the relationlog X(t) == ao + ait+u(t).
The estimated trend value of output and the increment value are shown by Table 7.
Using these value, we calculate

Ti** = xjbijaxTj .
The results are shown by Table 8.

Comparision of this results to the actual investment by commodity shows that
there are still divergences between these two time series.

See Figure 1 (a-h). The reason of this divergence, we consider, is due to theinsuMcient modification ofcoeMcients in the original fixed capital coeMcient matrix.

In the original matrix, certain modification of coethcients has been performed,
considering the degree of utilization of production capacities at the years when thematrix is based.(3' But this modification is not generalized for a certain time horizon;for 1960-1969 in our analysis.

8. ExaminationllI
We have no information for the generalized modification of fixed capital coefficient for a certain time horizon. Then, here we use the deflator

T,** (196s)di ==I, (1965)
for the modification (Table 9). The modified fixed capital coeMcients arebij' =bijdi . (Table lO)
Using this modified coeMcients and the trend values of output, we calculate

Ti*** = .xjb*ijdxTj .
The results are shown by Table 11.

Comparison of this results to the actual investment by commodity shows that
there are still divergences between these two time series but the divergences are notso large. So we will use this modified coeMcient matrix, together with the trend
value of output, for calculating the investment by industry.

9. The investment by industry can be calculated by

Ij == .Xibij*AXTi
The results are shown by Table 12. This results can directly produce the investment(3) Cf. J. Tsukui et al., "Showa 40 nen . 56 Bumon Shihonkeisa GyOretsu no Suikei to KinkO
SeichO Keiro no Shisan," Keizai Bunseki, No. 35 (Dec. 1971) pp. 1-39.

HIKOJI KATANO

coallocation ratios, that are shown by Table 13 and Figure 2.

10. The estimated results indicate:(1) Weights of investment to sector 1 (foodstuffs), sector 2 (raw materials),
sector 3 (petroleum and gas), and sector 6 (textile products) have been lost

through the 1960's.
(2) Increases ofweights ofinvestment have been realized in sector 5 (chemicals),

sector 7 (iron and steel), sector 8 (other manufacturing products), sector
9 (non-electrical machineries), sector 10 (electrical machineries) and sector

11 (transport equipments).

(3) In sector 12 (others: construction, tranportation and communication,commerce and services), which absorbs about a half of total domestic
fixed capital formation, weight of investment has been decreased as a whole.
These results show the typical patterns of changes in industrial structure of Japanese

economy through the 1960's.

I

40

I

ll

E

m
' Actual
60

30mActual40

20

Sector 1

20

Sector 6

10

oo

65
Figure 1-a.

70

60

-

65
Figure 1-b.

70

ESTIMATION OF INVESTMENT ALLOCATION RATIOSOF JAPANESE ECONOMY: 1960-1969

41

4 ,Ooo3 ,OOOI

5oo

Actualll

Sector 9

2 ,OOO

Actual

m

ll

1,OOO

I

Sector 8

60

65

60

70

Figure 1-c.

65

70

Figure 1-d.

1,500

3,Ooo

Aetual

1 ,OooActualm

Sector 11

2,Ooo

Sector 10
ll

m
5oo
1,OOO
I

ll

I

60

65

Figure IL-e.

70

oo

65

Figure 1-f.

70

HIKOJI KATANO

42

Actual15, OOOmSector 12

5,OOO

lo, ooe
ll

5,OOO

I

60

65

65

60

70

Figure 1-h.

Figure 1-g.

1 .0

12

O.5

N2E!!==IC=-g
8t't-s"---'N--'-"-----'t=======k==========.=Ns-s

4,,{i!EiEEEEi$E!!

60

iiiE!Ei g

65
Figure 2.

70

70

Table 1:

1

2
3

4
5

6
7
8

9
10
11

12

B+E

1

2

O.112637
O.OO0751
O.OOOO08
O.OO1952
O.O08481
O.OO1289
o.oO.O14587
O.095735
O.045610
O.1oo155
O.618714

O.107745
O.Ol5655
O.OOOO06
O.O04312
O.O04687
O.OO0915
O.Oco215
O.020624
O.185665
O.088975
O.1OOO1O
1.055130

4

3

5

6

O.OO0588 O.OO0389 O.co2714
O.oo1834
O.OOoo03 O.OOOI69 O.oo2940
O.oo5645
O.oo7968
O.O06878 O.OO0339 O.OOOOIO
O.O09694 O.oo6501
O.oo1682
O.OO0756
O.oo5913
O.OOOO14 O.OOOso2 O.044827
O.oo1921
O.oo2491
O.05l313
O.oo2065
o.o
O.OOO113 O.OOOO03 O.OOoo04
O.068490
O.048695
O.029667
O.063725
O.288405
O.193294
O.755439
O.702134
O.361897
O.336339
O.092532
O.138219
O.041233
O.024817
O.O13688 O.O16230
1.600073
1.567054
O.336279
O.259399

7

8

9

10

O.OOO049
O.oo2319
O.OOOOI8
O.oo1424
O.oo1944
O.oo1238
O.052926
O.025829
O.195363
O.093448
O.Ol0221
O.193995

O.OO0628
O.O04183
O.OOO032
O.OO1385
O.oo2506
O.O04253
O.oo1629
O.080476
O.182612
O.087369
O.028595
O.257918

o.o
O.OOoo28
O.OOO055
O.OO0741
O.OO0383
O.oo1320
O.O06695
O.021719
O.092711
O.035414
O.oo8221
O.093246

o.o
O.OOoo92
O.OO0209
O.oo1153
O.oo1747
O.oo3454
O.O06095
O.056571
O.081249
O.077579
O.oo613S
O.160612

11

12

o.o
O.oo6852
O.OOOOl2 O.oo1593
O.OOO169 O.OOO058
O.OO0975 O.O06943
O.oo1028
O.OO0574
O.O04091
O.ooso24
O.oo8799
O.oo2114
O.063965
O.069558
O.181670
O.05691O
O.085492
O.028643
O.OS8793 O.132270
O.268416
O.673496

l
5.

8E
i2
rks

gs•

Table2: E
1

2
3

4
5
6
7
8

9
10
11

12

1

2

3

O.on6333
O.OO07ou
O.OOOO08
O.oo1952
O.oo8481
O.oo0709
o.oO.oo2679
O.OO05S9
O.OOoo31
O.Ooo236
O.oo9948

O.oo1093
O.Ol5598
O.OOOoo6
O.O04312
O.O(M687
O.OO0339
O.OO0215
O.oo3255
O.oo1239
O.OO0655

o.o
O.OOco03
O.O07968
O.oo1682
O.OOOO14o.oo.o
O.OO0387
O.OOO318
O.OO0272
O.OOO036
O.oo2077

O.OO(>454

O.oo8884

4

o.o

5

O.oo2710
O.oo2940
O.oo6878
O.co0339
O.co6501
O.oo9694
O.OOOso2 O.044827
o.o
O.OOO065
O.OOO113 O.OOOO03
O.OO0459 O.oo5684
O.Ooo190 O.OO0698
o.ooolg4
O.OO0439
O.OOO038 O.OOoo86
O.Ol1967
O.oo1809
O.O(X)169

6

7

o.o
O.co18ooO.O(12319
e.oo5645
O.OOOO1O O.OOOO18
O.OO07S6 O.oo1424
O.co5913
e.co1944
O.049693
O.OOOO02
O.OOOO04 O.052926
O.OO0886 O.OO0948
O.OO0216 O.OO0436
O.ooO068 O.OOO098
O.OOO027 O.OOO088
O.oo3605
O.oo3828

8

9

10

O.OO0384
O.O04183
O.OOO032
O.oo1385
O.oo2506
O.oo1733
O.oo1629
O.042991
O.co0331

o.o
O.OOO028
O.Ooo055
O.OO0741
O.Ooo383
O.OOO073
O.oo6695
O.O04588
O.025611
O.oo3280
O.OOO152
O.oo6556

o.o
O.OOO092
O.OO0209
O.oo1153
O.oo1747
O.oo0315
O.oo6095
O.Ol8953
O.oo1687
O.039477
O.OOO096
O.O12302

O.OO(X>76

O.OOO058
O.060798

11

12

o.o
O.OOOM8O.OOOO12 O.oo1589
O.(X)O169
O.coO058
O.OO0975 O.oo6943
O.oo1028
O.OO0574
O.OO0233 O.OO0336
O.oo8799
O.co2114
O.O13092 O.O17254
O.oo8493
O.oo1oo2
O.ool869
O.oo2559
O.039563
O.O04258
O.045697
O.O09219

s>
KY
-r
Ep2s
s2
3•

8

Table3: B
1

2
3

4
5

6
7
8

9
10
11

12

s

1

2

3

4

5

6

O.086304
O,OOO047
o.o
o.o
o.o
O.OO0580
o.o
O.Ol1908
O.095176
O.045579
O.099919
O.608766

O.106652
O.OOO057
o.o
o.o
e.o
O.OO0576
o.o
O.O17369
O.184425
O.088320
O.099557

O.Ooo588
o.o
o.o
o.o
o.o
O.oo2065
o.oO.068103
O.755121
O.361625
O.041197
1.597996

O.OO0389
o.o
o.o
o.o
o.o
O.oo1921
o.oO.063266
O.701944
O.336155
O.024779
1.565245

O.OOOO04
o.o
o.o
o.o
o.o
O.oo2426
o.oO.043010
O.287708
O.137781
O.O13602
O.324311

O.OOO034
o.o
o.o
o.o
o.o
O.oo1620
o.oO.028781
O.193078
O.oo2464
O.O16203
O.255570

1 . 046M6

7

8

O.OOO049 O.OO0243
o.o
o.o
o.o
o.o
o.o
o.o
o.o
o.o
O.oo1235
O.oo2519
o.oo.oO.037484
O.024881
O.194927
O.182280
O.093350
O.087293
O.OIO133
O.028537
O.190390
O.252430

9

10

11

12

o.o
o.o
o.o
o.o
o.o
O.oo1247
o.oO.O17131
O.0671ooO.032134
O.oo8069
O.086690

o.o
o.o
o.o
o.o
o.o
O.oo3139o.oO.037618
O.079562
O.038102
O.oo6039
O.148310

o.o
o.o
o.o
o.o
o.o
O.oo3858
o.oO.050873
O.173177
O.082933
O.O19230
O.259197

O.oo6604
O.OOoo04
o.o
o.o
o.o
O.O04688
o.oe.0523ou
O.055908
O.026774
O.128013
O.627799

m
fi

g
I:i

Table4-a: X
1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

8033.61296.98225.11316.28665.21360.29188.61406.8'9520.99763.41475.210449.01522.211047.511560.2

1438.51560.91600.512113.6
1656.1

12

7S95.01257.3100.41309.817oo.62105.52640.65041.01662.21029.31566.617443.6

T43451.9

1

2
3

4
5

6
7
8

9
10
11

112.8

121.4

133.7

148.5

157.5

172.6

191,8

215.1

237.4

261.3

1535.1

1851.52047.62271.53314.76171.42196.61479.02069.5
19993.8

1640.72179.42342.13343.66598.02231.6
1586.92207.521756.92472.7
373S.57540.32460.7
1900.92549.524052.0

2111.22906.32656.84287.88819.92870.82344.03064.2
27166.8

2234.032oo.32809.54058.29313.52721.42405.63154.228649.4

2528.33615.22938.25036.710471.5
3230.13022.63745.031422.1

2906.44263.33144.05828.73788.75694.93577.58377.84280.66548.53807.09541.04044.53822.04537.635321.7

33S2.14992.93378.27244.314190.4
5034.25oo8.25582.940232.4

16127.7
6008.36230.36515.844996.2

18138.87284.47630.07516.849543.950522.553549.4

59221.3

66971.8

69663.077420.988207.3

101839.4

114715.3

128322.1

M99.1

12176.1gg

Table4-b: dX
1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1

438.6

191.5

440.1

523.4

685.6

598.5

512.7

553.4

39.6
12.4

19.3
8.6

".o

36.7

12.3

46.6
14.8

47.0
19.2

38.7
23.3

39.6
22.3

55.6
23.9

225.3
347.0
166.0

I05.6
131.8

210.8
319.7
130.6
391.9
942.3
229.1
314.0
342.0
2295.1

259.7
407.2
184.1
552.3
1279.6
410.1
443.1
514.7
3114.8

332.3
31.7
9.0
122.8
294.0
152.7

242.5

2

378.1
648.1
205.8

445.7
729.6
234.2
1415.62014.3
989.7

436.6
702.0
199.3

491.9
853.6
229.5
1163.2
2011.1

3

4
5

6
7
8

9
10
11

12

674.1
1130.4
S34.4
449.7
502.9
2550.2

70.6
28.9
426.6

3S.O
107.9
138.0
1763.1

A229 . 6493.6
Al49.461.6
90.0
1482.6

15.1
294.3
414.9
128.7
978.5
1158.0
508.7
617.0
590.8
2772.7792.0
1704.6
814.4
799.4
792.6
3899.6

1186.51045.34910.71133.5
1937.3974.1
1221.8932.94763.8

1970

s
i
9E
}2
$g

1276.11399.7
1oo1.04547.7s•i
Table 5: ri*(.XjbijAXj)
1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

59.3
O.03

25.2
O.Ol

58.1
O.03

71.2
O.04

42.0
O.02

43.6
O.02

90.6
O.05

89.0
O.05

80.7
O.05

84.5
O.05

5

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

6

21.5

11.0

17.9

24.5

9.7

23.9

33.2

42.3

40.5

41.5

7

o

o

o

o

o

o

o

o

o

o

8

137.5
365.0
174.8

'3346.3

439.9
1518.6727.3
678.0
4775.7558.0
1909.2
914.3
825.1
5829.8531.9
1784.4854.5
789.5
5554.2551.33595.1

124.6
383.1
183.5
248.7
1607.5319.51134.4543.3
460.6

1614.9

235.9
8oo.5
383.4
395.5
2708.9321.8
1071.6
513.1
529.2

12

284.9
987.2
472.8
443.5
3093.9926.2
778.6
57oo.5T

5363.22591.14600.46126.62599.15871.78263.310167.79635.7

1oo16.8

1

2
3

4

9
10
11

262.7

1970

l-:•

gi.

:

1934.1agTable6: Ii'
1960

1961

1962

1963

1964

".2
A3.5

54.2

52.3

A2.2

AO.1

o
o
Q

o
o
o

o
o
o

1

27.2

38.1

40.8

2

A5.7

A6.3

A4.9

3

o

o

4
5

o
o

o
o

o
o
o

6
7

3.1
A45.9

6.0

8

76.5

110.2

1073.51136.3

12

52.0
816.4
324.6
555.8
2607.4436.8
782.4
3340.0T

4334.95686.9

9
10
11

A60.1

o
o

1965

1966

1967

1968

1969

1970

52.4

58.4

AO.1

64.6
AO.1

66.5
AO.1

63.3

AO.1

o
o
o

o
o
o

o
o
o
27.4

o
o
o
o

o
11.9

l6.5

18.3

19.3

21.3

25.1

A67.7

A77.6

A73.3

A82.2

A97.1

A146.1169.9
1376.4615.6
1168.03555.5185.41293.0619.31131.74586.2212.3
1441.6715.2
1368.25121.9237.91809.6878.2
1646.05892.6364.4

27.7
A164.5405.1

2277.7478.6
876.5
3714.6135.61191.8521.8
968.9
4035.2

A123.2307.0
2056.37037.42749.01520.92365.78130.83357.91836.02594.19092.76296.76838.27876.37842.88848.610446.812846.3

15078.5

17212.3

9.0
A54.4

1201.3:xo.
I:iTable7-a: XT
1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

7658.11255.61oo.71310.01699.28304.91326.1121.5
1652.12216.02360.23332.66643.92171.51563.12194.721642.2

8699.81362.8133.5
1855.32530.72502.93767.87523.22487.91890.02551.423966.7

9113.51400.5146.72083.52890.12654.34259.88518.92850.52284.32966.I
26540.99546.91439.2161.1
2399.833co.52814.84816.29646.33265.92761.53448.229391.6

1OOOO.8
1479.1
177.0
2627.63769.22985.05445.210923.03741.93338.44008.7
32M8 .4

10476.4
1520.0194.02950.84304.43165.56156.312368.6
4287.24035.74660.236044.4

10974.5
1562.111496.4
1605.3

213.6

234.7

3313.84915.73356.96960.3
14oo5.6
4912.04878.85417.639915.8

3721.35613.73560.07869.315859.2
5627.95897.96298.244203.1

12043.0
1649.7257.94179.1641O.93775.18897.017958.1
6448.17129.97321.848950.853528.8

59272.065709.1

72932.081044.3

90164.0

1O0426.7

111987.0

125021.4

62098.77122607.15181.61654.21069.6
1623.917647.6

T43906.3

48400.4

2
3

4
5

8

9
10
11

:

1960

7927.91290.3110.6
1471.2
1940.52225.62947.65867.4
1895.31293.01887.919543.1

1(Value in billion yen)g

Table 7-b :

dXT

1960

1961

1

269.8

2

34.7
9.9

3

4
5

6
7
8

9
10
11

12

161.2
241.3
126.9
340.5
685.8
241.1
223.4
264.0
1895.5

377.0
35.8
10.9
180.9
27S.5
134.6
385.0
776.5
276.2
270.1
306.8
2099.1

1962

394.9
36.7
12.0
203.2
314.7
142.7
435.2
879.3
316.4
326.9
356.7
2324.5

1963

413.7

37.7
132
228.2
359.4
151.4
492.0
995.7
362.6
394.3
414.7
2574.2

1968

1969

521.9

546.6

1965

1966

1967

433.4
38.7
14.4
256.3
410.4
160.5
556.4

453.9
39.9
15.9
287.8
468.7
170.2
629.0

475.6

498.1

40.9

42.1

43.2

23.2

1276.7
476.0
576.9
560.5
3156.8

19.1
363.0
611.3
191.4
804.0
1637.0
624.8
843.1
757.4
3871.421.1

1127.4
415.4
477.2
482.1
2850.7

17.5
323.2
535.2
180.5
711.1
1445.6
545.3
697.3
651.5
3496.0

407.5
698.0
203.1
909.0
1853.6
715.9

457.8
797.2
215.1
1027.72098.9820.2
1232.01023.64747.7

1964

1019.1880.6
4287.3

1970

".4

s

E
9E
ge8
Eg•

:s
Table s: fi**(xjbtjaxTj)

g.E>

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1

39.8

O.02

50.5
O.03

53.7
O.03

57.1
O.03

60.8
O.03

64.7
O.04

69.0
o.ou

73.6
O.04

78.6
O.04

84.0
O.05

lg>.

2
3

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

o
o
o

86
wo z

6
7

14.4

16.1

18.1

20.3

22.8

25.6

28.8

32.5

36.6

41.2

o

o

o

o

o

o

o

o

o

o

8

211.9
710.0
340.0
356.6
2421.9

237.9
798.2
382.3
393.7

480.5
3314.6337.41139.0545.5
531.3
3685.4379.7
1284.2614.9
587.7
41oo.5427.52687.1

267.1
897.9
430.0
434.8
2983.33oo.1
1010.9
484.1

12

188.0
623.7
298.7
3i4.2
2129.8693.9
650.3
4565.4481.8
1636.0783.5
720.0
5086.7543.3
1848.6885.3
797.5
5671.6T

3608.44107.34570.95090.75673.86329.07064.97892.38823.39871.6

4
5

9
10
11

1448.9pa:.

!tiTable 9:

Deflater (Ti" (1965)/Ii" (1965))•.ib,

1.237oo
1.00000

1

2(1.00000)(1.00000)(1.00000)

3

4
5

6

1.398oo7(1.00000)

8

1.819ooO.88000
O.88000
O.46900
O.803oo

9
10
11

12

TablelO: B'
1

2

3

4

1 O.069769 O.086218 O.OO0475 O.OO0314
o.o
2 0.000047 O.OOO057 O.O

o.o
3 0.0 O.O O.O
o.o
4 0.0 O.O O.Oo.o
5 0.0 O.O O.O
6 0.000415 O.OO0412 O.oo1477 O.co1374
o.o7
0.0 O.O O.O
8 O.oo6546 O.O09549 O.037440 O.034781

5

6

O.OOOO03
o.o
o.o
o.o
o.o
O.oo1735
o.oO.023645
O.326941
O.156569
O.029oo2
O.403874

O.(XX)027

9 0.108155 O.209574 O.858092 O.797664
O.381994
10 0.051794 O.1oo364 O.410938
11 O.213047 O.212275 O.087840 O.052834
1.949247
12 0.758115 1.302922 1.99oo32
bi 1.207888 1.921370 3.386294 3.218207 O.941770

o.o
o.o
o.o
o.o
O.oo1159
o.o
O.O15822
O.219407
O.105073
O.034548
O.318269

7

8

O.OOO040 O.OOO196
o.o
o.o
o.o
o.o
o.o
o.o
o.o
o.o
O.Ooo883 O.oo1802o.oo.oO.O13678
O.020607
O.207136
O.221508
O.co9197
O.106080
O.021606
O.060846
O.237098
O.314359

O.694305 O.600893

O.704143

9

10

11

12

o.o
o.o
o.o
o.o
o.o
O.OO0892
o.oO.oo9418
O.076250
O.036516
O.O17205
O.107958

o.o
o.o
o.o
o.o
o.o
O.oo2245
o.oO.020681
O.090411
O.043298
O.O12876
O.184695

o.o
o.o
o.o
o.o
o.o
O.oo2760
o.oO,027968
O.196792
O.094242
O.041oo2
O.322786

O.oo5339
O.ooOO04
o.o
o.o
o.o
O.oo3353
o.oO.028754
O.063532
O.030425
O.272949
O.781817

O.248238

O.354206

O.685549

1.186173

:
x
8
5
:

g

1

2
3

4
5

6
7

Table 11:

Tt*** (.XjB,j*dxTj)

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

32.1
O.02

40.8
O.03
o.o
o.o
o.o
11.5
o.o

43.4
O.03
o.o
o.o
o.o
13.0
o.o

46.2
O.03
o.o
o.o
o.o
14.5
o.o

49.1
O.03
o.o
o.o
o.o
16.3
o.o

52.3
O.04
o.o
o.o
o.o
18.3
o.o

55.8
O.04
o.o
o.o
o.o
20.6
o.o

59.5
O.04
o.o
o.o
o.o
23.2
o.o

63.6
O.04
o.o
o.o
o.o
26.1
o.o

67.9
O.05
o.o
o.o
o.o
29.5
o.o

116.5
806.9
386.4

146.8
1020.4488.7
927.2
3715.2164.9
1148.7

185.5

235.0
1646.5788.51386.65685.5264.9
1859.1
890.3
153S.26334.7298.7
21oo.7
1oo6.017oo.47062.9

o.o
o.o
o.o
10.2
o.o

12

103.4
708.7
339.4
669.9
2656.33016.1

130.8
907.1
434.4
839.4
3346.3

T

4516.15138.75714.3

1962

8

9
10
11

760.4

Table 12:

Ij (Stbij*dXTj)

1960

1961

550.1

619.9

10M.6
4127.71132.84589.6208.71459.3698.9
1253.05106.56358.97081.67892.78802.99824.910973.9

12266.3

1963

1964

1965

1966

1967

1968

1969

1294.3

1

325.9

455.4

476.9

499.7

523.5

548.3

574.5

601.6

630.4

660.2

66.7
33.5

68.8
36.9

70.5
40.6

72.4

74.3
48.8

76.7
53.8

78.6
59.3

80.9
64.6

83.0
71.5

8S.4
78.5

582.2
259.5

653.9
296.4

6

88.1

93.5

99.1

7
8

204.6
482.9

231.3
546.8

261.5
619.2

734.4
338.5
105.1
295.6

9
10

59.8
79.1

68.5
95.6

78.5

oo.o

115.8

504.0
125.3
427.3
1017.9
135.4
246.9

12

181.0
2248.4210.3
2489.92757.3139.7
284.3
3053.4

926.2
441.4
118.2
377.9
898.9
118.2
204.3

11

824.8
386.5
111.4
334.3
793.9
103.1
169.0
330.5
3381.41040.1

5

518.8
227.2

384.3
3744.54146.91168.2
575.7
132.9
483.1
1152.7
155.1
298.6
519.2
4592.11311.4
657.4
141.0
546.2
1305.2
177.7
360.9
603.7
5085.51473.3
750.8
149.3
617.5
1477.9
203.6
436.4
701.7
5631.6

T

4516.15138.75714.36358.97081.67892.78802.998M.910973.9

12266.3

3

E•

E
gE
ge2
i•s

;•E

iE

2

4

1970

2".5

".7

701.1

"6.6

1970

li,

l.

$

Table 13:

8

Investment Allocation Ratios
1961

1962

1963

1964

1965

1966

1967

1968

1969

11 O.0401
12 O.4979

O.0886
O.O134
O.oo72
O.1133
O.0505
O.O182
O.0450O.1064
O.O133
O.O186
O.0409O.484S

O.0835
O.O123
O.oo71
O.1144
O.0519
O.O173
O.0458
O.1084
O.O137O.0203
O.0428O.4825

O.0786
O.Oli4
O.oo70O.1155
O.0532
O.O165
O.0465
O.1103
O.O142
O.0220O.0447
O,4802

O.0739O.OI05
O.oo69O.116S
O.0546
O.O157
O.0472
O.1121
O.O146
O.0239O.0467
O.4775

O.0695
O.O097
O.oo68
O.1173
O.0559O.Ol50O.0479
O.1139
O.O150O.02S9
O.0487

O.47"

O.0653
O.oo89O.oo67
O.1182
O.0573
O.O142
O.0485
O.1156
O.O154
O.0280O.0507
O.4711

O.0612
O.oo82
O.oo66
O.1189O.0586
O.O135
O.0492
O.1173
O.Ol58O.0304
O.0528
O.4674

O.0574
O.oo76
O.oo65
O.1195
O.0599
O.O128
O.0498O.1189
O.O162
O.0329O.0550O.4634

O.0538
O.oo70O.oo64O.1201
O.0612
O.Ol22
O.0503O,1205
O.O166
O.0356
O.0572
O.4591T 1.0000

1,OOOO

1.0ooO

1.00001.00001.00001.00001.00001.0ooO

1.00001960

1 O.0722
2 O.O148
3 O.oo74
4 O.1149
5 O.0503
6 O.O195
7 O.0453
8 O.1069
9 O.O132
10 O.O175

1970

:
N
T
o
:
x
>
H
>
Z
o

AVAILABLE JOBS AND EMPLOYMENTIN JAPANESE FOREIGN-GOING SHIPPING
Hiromasa YAMAMOTO

I. Reduction of the Manning Seale on Japanese Foreign-going Vessels.
Complements on Japanese foreign-going ships has decreased steadily sinceApril 1961 when a new formula for determining the manning scale was agreed between

the All Japan Seamen's Union and shipping companies. Until then the manning
scale was to be determined aocording to uniform standards such as gross tonnage,horse power of main engine and the trade areas in which the ship would operate,
without any regard to the individual requirements for work or the degree of mecha•-nisation of ships. Therefore under the old manning clause it was impossible for
employers to reduce the number of crew through the application of labour saving
devices.

The new manning clause of 1961 defined that each company might decideunilaterally the complement in consideration of the volume of ship's work under
the premise of eight hour work day, preventing daily overtime work, if the captainof the ship concerned consented with it. In deciding the complement negotiationor consultation with the union was not required of the company, though it wasnecessary to give immediate notice to the union after the decision had been made.
Conflicts concerning the manning scale were to be dealt with according to the ordinary

grievance procedures. These changes of the manning clause gave shipping companies
the incentive to reform the work relationships of the crew and to adopt automationand mechanisation of ships for the purpose of reducing the crew costs.

In addition there were revisions of the Seamen's Act and the Ship OMcers'
Act in October 1962 and in March 1963 respectively. By those revisions shipping
companies were no longer required to have a surgeon on foreign-going ships except
those running on several specified trade routes. They were also able to reduce thenumber of radio oMcers on foreign-going ships from three to one so long as thegovernment regulation concerned, though the actual manning scale had to be determined by negotiation with the union.

After the revisions of the manning clause of 1961 shipping companies began
to reduce the complements of their fleets through the reform of the working system

and meghanisation on board ships. Accompanying the abolition and decrease ofwork on board by transfer ofjobs to shoreside, reorganisation of the working system

HIROMASA YAMAMOTO

52

resulted in reclassification of jobs among ratings within each department. For
example, deck department jobs of carpenter, store-keeper and quartermaster are
integrated into that of senior deck rating, and ratings are classified as boatswain,

senior deck rating and deck hand which includes able seaman and ordinary seaman.

Under the new working system there were fewer day workers than the old systembecause volume of maintenance and repair work was reduced. Similar changes
occurred in engine-room and steward departments.
However, as we will describe later, integration ofjobs beyond the traditional

division of departments and co-operation between different departments such as
general purpose crew and interchangeability of crew have not been realizied yet.

The new manning clause enabled the reduction of the complements of newlyconstructed vessels considerably. The first ship which adopted automation ofengine-room in Japan is the Kinkazan-maru, a cargo liner of 10,OOO deadweight tons. She

completed her maiden voyage in December 1961 with a tentative complement offorty, but after the test voyage period the complement was reduced to thirty-seven.

In May 1964 the manning scale of the Mississipi-maru, an automated cargo liner of
9,050 gross tons was determined as twenty-eight which was twenty less than that ofan ordinary ship of similar size. Most of Japanese foreign-going ships which werelaunched after 1961 introduced various type of automated or mechanised apparatus
so as to reduce their complements. In 1969 the Japan Magnolia, an ore/oil-carrierof 94,415 deadweight tons was built as the first Japanese MO class ship of the Nihon

Kaijikyokai (N.K.) which does not need watch-keeping in the engine-room at night.
The number of her crew was at first thirty-three which was reduced to thirty after-wards. In 1970 the complement ofa container ship of 24,OOO gross tons wasdetermined as twenty-five.

II. Trends in Merchant Meet, Available Jobs and Productiyity of Labour
As we have described in the previous section, rationalization has proceeded
at a rapid pace in Japanese foreign-going shipping after the revision of the manningclause of 1961. Now we will look at the trend of available jobs on the Japanese
foreigr1-going fieet.

During the twelve years of 196CF1971 gross tonnage of the Japanese foreigngoing fleet increased 450 per cent, while the number ofjobs in the fleet did not increaseso impressively, but showed an increase of 137 per cent. In addition the available
jobs decreased slightly in 1970 in spite of the fact that the number of vessels andgross tonnage increased. Though in 1971 the number ofjobs showed an increaseagain, it was only enough to recover the level of 1969. These facts seem to suggest
a declining or stagnant trend of available jobs on the Japanese foreign-going vessels

AVAILABLE JOBS AND EMPLOYMENT IN JAPANESEFOREIGN-GOING SHIPPING
Table 1.

53

Trend of Japanese Foreign-going Fleet, Number of
Available Jobs and Volume of Cargo Carried

Foreign-going Vessels<i)

Number of availa-

Number Gross tonnage
of

Year

Vessels(1,ooo g.t.)

1960

641

1961

683
726
760
767
803
876
963

5,021
5,489
6,052
6,986
7,432
8,304
10,317l2,447
14,88917,616
20,04022,588

1962
1963
1964
1965
1966
1967
1968
1969
1970

1,160
1,233

1971

1,262

1,053

ble(2) jobs on foreign-

going Vessels

1oo
109
121

139
148
165
205
248
297
351
399

450

29,771
28,82429,491
30,27629,95030,76033,02835,48037,16540,42939,232
40,776

1oo
97
99
102
101

103
111

119
125
136
132
137

Cargo carried by
Japanese foreign-

Cargo carried
per head ofgoing vessels

crew(1,OOO k.t.)(1,Ooo k.t.)

52,542
57,634
68,954
81,662
90,181
99,832
120,788
148,033
176,447

211,136
243,586
266,787

1oo
110
131
151

172
190
230
282
336
402

464
508

1,765

2,OOO
2,338
2,697
3,O13
3,264
3,657
4,172
4,748
5,222
6,208
6,543

Souroe: MinistryofTransport(1)(2)

Vessels of 3,OOO gross tons and over.
Figures on the 1st of April.
Table 2.

Year

Figures at the end of March of every year.

Size of Foreign-going Vessels and Complement
Average size of
foreign-going

Average numberof complement

vessels (g.t.)

1960

1964
1965
1966
1967
1968
1969
1970

7,833
8,037
8,336
9,192
9,690
10,341
11,777
12,92514,14015,186
16,253

1971

17,899

1961
1962
1963

46.4
42.2
40.6
39.8
39.0
38.3
37.7
36.8
35.3
34.9
31.8
32.3

Averaged gross
tonnage per headof crew
169
190
205
231
248

270
312
351

401
435
511

554

Calculated from table 1

in near future. When considering circumstances of the Japanese shipping, there
is likely to be support for this inference.

In the first palce, the productivity of seafaring labour has increased rapidly

since 1960 due to the automation and mechanisation on board ship and also dueto the larger size of ships. This is indicated by the increase of gross tonnage per headof crew. In addition other factors have also contributed to higher productivity oflabour. In 1960 the average speed of the Japanese cargo liners was seventeen knots,

1oo
113
133
153
171

184
207
236
269
296
352
371

HIROMASA YAMAMOTO

54

but container ships launched in 1970 can run with the speed of twenty-five knots.
Time of cargo handling has also improved in the latest ten years. Consequently, even

if the demand for the Japanese foreign-going vessels would increase, the number ofJapanese vessels would not increase in proportion to the increase of volume of cargo,
and available jobs on board ships would increase with a smaller rate of increase thanthat of the number of vessels.

However, it should be pointed out here that in order to increase the productivityof labour still further, it becomes necessary to introduce general purpose crew.

In Japan the tripartite committee is organized by the government, employers apd
labour to study new working systems and the related problems such as the revisionof the Ship OMcers' Act and vocational education. At present time they have failed

to attain mutual consent as to how and when the duties of deck and engine-room
department should be intergrated.
In the second place, it is unlikely that the tonnage of Japanese foreign-going
fleet will grow at the similar rate as before. Here attention should be paid to the factthat Japanese shipping companies have chartered foreign vessels on a large scale
since 1970. In 1971 almost all of foreign vessels were chartered under time charterover six months. Concerning these facts several different explanations might bepossible. However, as a plausible explanation it might be said that some Japanese
shipowners began to prefer chartering foreign vessels to new construction of company

vessels due to the increasing wage costs of Japanese vessels. Though it is quite
diMcult to make a cost comparison between Japanese vessels and foreign vessels, it
is often said in Japanese shipping circles that ships which were built before 1961
Table 3.

Foreign Vessels Chartered by Japanese Shipping Companies(1,OOO gross tons)
Year

Total foreign-going tonnage
operated by Japanese shipplng companles(A)

Foreign vessels
chartered by

B/A

Japanese shipping(o/o)

companles

(B)

1960
1961

5,579
6,144
6,677
7,348

1962
1963
1964
1965
1966
1967
1968
1969
1970
1971

11,77813,64016,464
19,181
24,58930,527

Source :Japanese Shipoweners' Association

8,239
9,511

502

6.8

1,165
1,552
2,oo6
2,346
2,850
3,228
6,489
9,881

14.1

16.3
17.0
17.2
17.3
16.8

26.4
32.4

AVAILABLE JOBS AND EMPLOYMENT IN JAPANESE 55
FOREIGN-GOING SHIPPING

were becorning increasingly uneconomieal because of their large complements andwage costs. In addition, in 1970 and 1971 Japanese vessels which were sold out toforeign countries amounted to more than a mi11ion gross tons respectively in com-

parison with 626,Ooo gross tons of 1969. After seamen's strike of 1972 Japanese
shipowners sold out their vessels of2.3 million gross tons to foreign countries.(i)In summing up, observations and several indications suggest that the declineof availablejobs on Japanese foreign-going vessels in 1969 should not be considered

as a temporary fiuctuation, but as a turning point toward a stagnant or declining
trend.

llI. Employment of Seafarers on Japanese Foreign-going Vessels
In Japan the number of availablejobs on foreign-going vessels does not indicate

the correct volume of employment of seafarers who work on foreign-going vessels.

Japanese shipping companies employ oMoers and seamen as permanent employees.
Consequently companies have to employ more seafarers than the number of available
jobs so as to give paid vacations to crew members.

Since 1965 the Ministry of Transport has rnade public the annual report on
employment of seafarers.C2) Concerning the employment of seafarers who work on
foreign-going vessels data is available in the report on the number of seafarers whoare employed by the companies belonging to the two main bargaining units, theGaiko Romu Kyokai and the Gaiko Chusho Senshu Romu Kyokai. In 1970 thefieets of those companies amounted to more than ninety per cent of the Japanese

foreign-going vessels. However, the number of companies which are represented
by those two bargaining units varied year to year. Therefore, if we cornpile thetime series ofemployment from those figures, it might lead us to incorrect conclusions.

Here, as a more reliable indicator of seafarers' employment we will make useof the ratio of reserve crew members to the available jobs on board ships in com-panies belonging to the above mentioned two bargaining units. In case of oMcers
the ratio changed from 27.8 per cent in 1966 to 43.1 per cent in 1971. In case of
ratings the ratio changed from 28.3 per cent of 1966 to 35.1 per cent of 1971. The

optimal ratio of reserve crew members is said to be roughly at the level of 25-30
per cent, though it differs by job and by company depending on the size of fleet andthe numbers of seamen belonging to the same job classification. Therefore, theincrease of the ratio during 1966-1971 indicates that those companies had to employ
disproportionately large numbers of reserve seafarers relative to the available jobs

within t.the company. At the same time it shows that the effort of companies for(1) Based on the data of the Ministry of Transport.
(2) Bureau ofSeafarers, the Ministry ofTransport, Sen-in Juk7u SOgo ChOsa Kekka Hokokusho.

HIROMASA YAMAMOTO

56

Table 4.

Year
1966
1967
1968
1969
1970
1971

The Ratio of Reserve Crew Members arnong the Total of Seafarers Employed.(Companies Represented by the G.R.K. and the C.R.K.)

1

OMcersDeck Engine-room Radio
33.0
32.6
36.1
35.6

38.4
44.9

27.9
29.2
31.5

332
34.8
44.1

22.9
22.4
46.7
35.8
34.2
37.3

Ratings

Total i Deck Engine-room Steward

Total

26.6

28.3
26.9

28.7
28.9
36.2
34.7
36.2
43.1

27.7
26.9
26.2
26.1

29.6
33.8

30.0
27.9
26.6
27.5
31.7
36.8

2S.1

25.0
26.0
31.7
35.0

26.1

26.6
30.8
35.1

Source: MinistryofTransport

reducing the manning scale on board did not necessarily cause the decrease of seafar-

ing employees.

Employment of surplus seafarers by companies was due to the atmosphere of
the labour-management relations in Japan where dismissal often leads to severe
strikes. The seamen's union did not consent to dismissal, though it cooperated withshipping companies to reduce the manning scale. For example, the union andemployers concluded a new agreement in December 1967 concerning the manning
scale of radio oMcers which allowed the reduction of degree the number of radio
oMcers from three to two or one according to the degree of introduction of automatedapparatus on foreign-going vessels. This agreement was accompanied by the under-

standing that companies did not dismiss the radio oMcers who became surplus,
and it caused the rapid increase ofthe ratio ofreserve radio oMcers in 1968.

Shipping companies made use of a part of surplus seafarers as relievers-in-port
and other shoreside work including desk work. However, these devices do not absorb

the whole of the surplus•workers, and some of them were put on stand-by at home
for future duties with the allowance equal to a third of wages on board.

If the tonnage and available jobs in the company fieets will increase in near
future, the surplus will disappear and the ratio of reserved members will go down
to the normal level again. But this is unlikely to occur, as we have described in theprevious section. Then, in order to balance demand and supply of seafarers shipping
companies have to stop or refrain from hiring new entrants in the industry for several
years. In fact, it is reported that in 1973 only a part of graduates from the Mercantile

Marine Colleges and the Seamen's Training Schools found their posts in foreigngoing shipping companies. If available jobs will decrease from the present level,

security of employment seems to become the most important problem between
labour and management. In relation to it, general purpose crew on board will haveto be negotiated for a long time to be realized.

AVAILABLE JOBS AND EMPLOYMENT IN JAPANESEFOREIGN-GOING SHIPPING
IV. Changes of Cemposition of Seafaring Labour by Age--The Impact
of Technological Development on Board Ships
It is considered that the technological development on board ship has infiuenced

the composition of seafaring labour through the changes of the working system,in addition to its effect upon employment. Here, we will investigate this problem.
In Table 5 the average age, years of service as a seafarer and years of service

within the present company are shown for each job for those who worked in thecompanies belonging to the Gaiko Romu Kyokai. The Gaiko Romu Kyokai represents twenty-one big foreign-going shipping companies including the big six.

From Table 5 the following points become clear; for the senior rating in theengine-room department the average age and years of service increased considerably
during the period of 1962-1970, and similar situation is also found in case of thedeck senior rating; in case of the lowest grade of oMcers and ratings of each depart-

ment the averaged age and years of service fell, and in case ofjobs other than theabove-mentioned the age and years of service stayed at more or less constant levels.

The same findings are also hold for employees ofthe companies which are represented

by the Gaiko Chusho Senshu Romu Kyokai, though we do not present the figures
here.

These findings suggest the following pqints. The fact that in many jobs theaveraged age and years of service remained at similar level during the period of ourcomparison was due in part to the increase of the number of company vessels from

457 in 1962 to 589 in 1970 which countervailed the decrease of complement onboard. It was also due to the moving out of considerable number of seafarers fromforeign-going shipping during the same period.`3}

Next, the increase of age and years of service in engine-room and deck senior

ratings means that workers in these jobs have had their promotion to upper jobs
defferred to a greater degree than before. This is considered to be related to the

reduction of manning scale on board. As is well known, automation on board ship
has developed intensively in the engine-room, and over all rationalisation has
decreased the jobs of ratings in all departments on board. Finally, the decrease of

averaged age in the lowest grades indicates that companies continued to hire newentrants during the period.

From the above observations we may conclude that in Japanese foreign-goingshipping technological development has not changed the composition of labour(3) We have compared the composition of those seafaring labour by age in 1962, 1967 andl970. In case of oMcers a considerable flow out from foreign-going shipping and wastage
was found in the age group of 25-30. In case of ratings the same phemomenon was foundin the age group of 21-25.

57

HIROMASA YAMAMOTO

58

to a great extent. However, if our expectations on the available jobs in future arecorrect, the management and labour in the industry will have to face diMcult em-

ployment problems, including determjnation of systems of employment, promotion
and payment of wages.
Table 5. Age and Years of Service(cornpanies represented by the G.R.K.)

Job
Chief

Year

Age

Years ofYears ofService asa seafarer

the present company

Service in

1962
1967
1970

36.0
35.9
35,6

14.2
13.5
13.4

12.3
12.7
12.6

1962
1967
1970

30.4
30.0
29.5

8.0
7.9
7.4

7.5
7.4
6.9

1962
1967
1970

25.2
24.6
24.4

3.2
2.7
2.7

3.0
2.6
2.5

1962
1967
1970

36.3
36.6
36.3

14.8
14.7
14.6

12.3
13.2
13.4

1962
1967
1970

312
30.5
30.0

8.9
8.7
8.0

7.6
8.0
7.3

1962
1967
1970

26.0
24.5
24.5

4.2
2.7
2.8

2.6

1962
1967
1970

41.8
43.9

19.9
21.7
22.6

16.0
18.9
19.8

1962
1967
1970

31.6
31.9
31.8

10.0
10.3
9.9

8.7
8.7
8.6

1962
1967
1970

24.9
24.3
24.3

3.9
3.0
3.4

3.4
2.6

Bos'n

1962
1967
1970

48.7
48.9
49.1

29.8
31.5
32.1

21.6
25.3
26.8

Deck
SeniorRating

1962
1967
1970

34.8
35.7
36.6

17.2
18.3
19.2

14.5
16.4
17.3

Deck
Ordinary
Rating

1962
1967
1970

23.3
22.2
21.6

5.6

5.3

4.7

4.5

3.8

3.5

OMcer
Second

OMcer
Third

OthcerFirst

Enginoer
SecondEngineer
Third

Engineer
Chief

Radio

OMcer
Second

Radio

OMcer
Third

Radio

OMcer

43.1

3.8
2.7

3.3

AVAILABLE JOBS AND EMPLOYMENT IN JAPANESEFOREIGNGOING SHIPPING
Table 5.
Years of

Job

Year

Chief

MechanicEngine-room

SeniorRatingEngine-room

Ordinary
RatingChief

Steward
StewardSeniorRatingStewardOrdinary
RatingSource:AgeYears ofService as

Service in the

A seafarer

present company

1962
1967
1970

49.5
49.0
49.3

29.1
29.9
30.6

21.5
24.4
25.8

1962
1967
1970

34.4
36.5
37.6

15.5
17.9

13.4
16.2
17.4

1962
1967
1970

24.0
22.4
21.5

4.1

1962
1967
1970

47.9
47.7
47.8

28.0
29.8
30.0

20.1
23.4

1962
1967
1970

35.5
34.8
34.8

17.2

14.5
15.7
15.9

1962
1967
1970

23.9

6.0
4.7

All Japan Seamen's Union

22.1
21.5

19.1

5.0
3.6

17.1
17.1

4.1

4.8
4.0
3.4

24.6

5.8
4.5
3.7

59

HOMOMORPHISM AND BUSINESSINCOME MEASUREMENT
Isao NAKANO

I. introduction

In a previous paper(i) I have elaborated on the "homomorphism" concept.
And I tried to show its usefulness as a requirement for accurate accounting measure-ment.

The homomorphism concept is a variant of the "isomorphism" concept. And
this latter concept may be roughly described as follows.`2) Suppose that a relation

R has been defined among any two elernents of a set A of measurement objects andthat this relation is the principal to be isolated by the measurement (i.e., the objectof the representation). Next, we stipulate a set B of numbers (e.g., measured income

values) which are to be assigned to each measurement object (i.e., to each elementof the set A). Among these elements we define a relation S. Then, a necessary
condition for a proper measurement is that when the relation S is found between
two measurement figures there must always exist the relation R (and not any other)between the corresponding measurement objects, because only in this case one canbe sure of the existence of the principal relation R on the basis of the surrogate
relationship S. This condition is called "isomorphism."

However, the isomorphism concept is too stringent for accounting applicationin that it restricts number assignment in such a way that any one number is allowed

to correspond to one object only. In real accounting (and other) measurements it
is possible and proper to assign a single number to plural objects in the same situation.

Hence, we must rather adopt a modified concept, "homomorphism." This stillrequires the proper representation of a principal relation R by a surrogate relation
S but allows any one number to relate to plural objects.

We are going to apply this concept to business income measurement. And to
facilitate this application, we must clearly distinguish between the "income as anumerical expression" (i.e., an income number), that is, "surrogate-income" (e.g.,
an income of \200), and the "income as a substantive object of aocounting measurement", which we describe as "principal-income" (e.g., a net increase in total service(1) Isao Nakano, "Aecounting Measurement and Homomorphism," Kobe Economic & Business
Review, 1972, pp. 43-54.
(2) A more precise definition appears in the above article, pp. 51-52.

ISAO NAKANO

62

potential of an enterprise in a time period). But this principal-income cannot becompared with the surrogate-income directly, because the former is something not

yet represented by numbers, A comparison must rather be made between a given
surrogate measure and another surrogate measure that one knows or acknowledges
in advance to be true. So, we are led to introduce a concept, "ideal surrogate-income"as a true and proper numerical representation of the principal income, whereas theterm "real surrogate-income" may be given to that surrogate-income which has
resulted from an actual accounting measurement under the conventional and technicalrestrictions of current accounting practice. In actual situations, it would be impossible for a real surrogate-income to equal to the ideal except as a mere coincidence.

Our problem is this: what specific relation must exist between ideal surroga'te-income numbers and the corresponding real ones so that one can conclude that theperiodic income is correct? The requirement for a correct income measurement
will follow using the homomorphism concept as defined above.

We denote the ideal surrogate-income in period i as Pi and the corresponding
real surrogate-income as P'i. And a set of the ideal surrogate-income figures fromperiod 1 through n shall be P and a set of the real surrogate-income figures during
the same time-periods P'. That is,

P= {Pi, P2, ••••••, Pn},P'= {P'i, P'2, ••••••, P'n}•

The homomorphism concept requires that in order for an income measurement
to be proper, "a certain relation" among the elements Pis in the set P be homomorphically represented by "some relation" among the P'ts in set P'. Then, whatis the relation to be represented in this way?

Our conclusion in the previous paper is that "homomorphism on ratio scale"should be satisfied. And this concept is further devided into two subconcepts, "homo-morphism of interperiod-ratio" and "homomorphism of unit-ratio". The former
means a homorphic representation of ratios between ideal surrogate-income numbers
for different periods by the ratios between the corresponding real surrogate-income
figures. Then, it follows that when a series ofideal surrogate-incomes are

Pn = 1oo, Pn-i = 90, Pn-2 == 80, Pn-3 = 60,
the corresponding real surrogate-incomes could be, for example,

P"n = 10, P"n-1 == 9, P"n-2 = 8, P"nm3 == 6•
The latter concept of "hornomorphism of unit-ratio" can be explained as follows.

Let us conceive of a set n consisting of ideal surrogate-incomes of the periods 1
through n, i.e., Pi, P2, ..., P. as well as of the numeral 1 (as the unit of the numericalexpression of income).
n = {1, Pl, P2, ••-,••, Pn}•

Further, we define another set n' composed of real surrogate-incomes P'i, P'2,

63
HOMOMORPHISM AND BUSINESS INCOME MEASUREMENT•••, P'. and the numeral 1.
n' = {1, P'b P'2, .••..•, P'n}•

Then, the homomorphism of unit-ratio requires that the ratio between each.. . Pi' 1 (i=1, 2, ...,umtn) 1 m n, viz
ideal surrogate-income Pi and the measurement
be homomorphically represented by the ratio between each corresponding real

. P'lsurrogate-income P'i and the measurement unit 1 in n', that is, 1 .

P, P',

1M 1'.•. P, == P'i.

In short, this kind of homomorphism requires that the amount of each ideal
surrogate-income be equal to the amount of the corresponding real surrogate-income.
It will be clear that an income measurement coming up to the standard of the "homo-morphism of interperiod-ratio" does not necessarily suMce the "homomorphism ofunit-ratio", but that a measurement fu1fi1ling the latter never fails to assure theformer requirement.

These two kinds of ratio-homormorphism concepts will be subjected to further
consideration in the following sections. Our problem is: which one is the better
criterion forjudging the propriety of an accounting income measurement?

ll. The Viewpoint of Prefening the Interperiod-Ratio

Homomorphism to the Unit-Ratio Homomorphism
Without concerning ourselves with the problem of which income concept
is best for the principal-income, we will start by assuming some principal-income

as given and merely consider a formal problem of which homomorphism concept
should be preferred as the predominant standard for judging the validity of any
measurement of a real surrogate-income series as an expression of the given principal-

income sequence. There are three logically possible alternative viewpoints on thisproblem : (1) the viewpoint of preferring the interperiod-ratio homomorphism to theunit-ratio homomorphism; (2) that of considering both homomorphism concepts
as equal!y important; and (3) that of preferring the unit-ratio-homomorphism to
the interperiod-ratio-homomorphism. The ultimate purpose of this inquiry is toinvestigate which of these three models will best explain the current conventional

measurement of accounting income.
It may be argued that the superiority of the unit-ratio-homomorphism is self-

evident since a measurement suMcing this standard always meets the interperiodratio-homomorphism but not vice-versa. But we note that the future is so uncertain"

ISAO NAKANO

that no income measurement can attain the unit-ratio-homomorphism "perfectly"
and that therefore a problem necessarily arises of which of the two standards should
be preferred in the process of accounting measurement, especially when each standard
requires different accounting procedures.

The first viewpoint is that of considering the interperiod-ratio-homomorphism
to be more important than the unit-ratio-homomorphism; that is, that of attempting

to realize to the maximum extent the interperiod-ratio homomorphism between asequence of ideal surrogate-incomes and a sequence of real surrogate-incomes atthe cost of disturbing the unit-ratio-homomorphism, if necessary. Such a patternof thought is evident in the proposition that the most important problem inaccounting income measurement lies in correctly showing not an absolute amountof income for each period but the trend of a series of periodic incomes.(3} Given
the current emphasis upon the importance of "trends" as accounting information,(3)one might be seduced into believing that this model (and not others) underlies thecurrent generally accepted accounting principles. We will try to prove the falsity ofthis belieÅí

One interesting logical consequence of this viewpoint is that in some cases theassurance of the interperiod-ratio-homomorphism as the exclusive standard forincome measurement would require a deliberate disturbance of the unit-ratio-homomorphism. Look at the following figure.

realsurrogate
income

l
l
l
l
l
i
l

ka/a:b/error} error

kb

}

ideal

surrogate
income&-•---a:b-------b

ldeal

real

surrogate
incomesurrogate
incornetperio{l t'period tl-•--•a:b------- ---. . •.-.-I(3) Cf. "The presentation of comparative financial statements in annual and other reports
enhanoes the usefulness of such reports and brings out more clearly the nature and trendsof current changes affecting the enterprise. Such presentation emphasizes the fact thatstatements for a series of periods are far inore significant than those for a single period andthat the accounts for one period are but an instalment of what is essentially a continuous
history. ... It is neoessary that prior-year figures shown for comparative purposes be in factcomparable with those shown for the most recent period, or that any exceptions to comparability be clearly brought out." (Accounting Research and Terminology Bulletins,
Final Edition, American Institute of Certified Public Aocountants 1961, Chapter 2, Section
A, p. 15). "Because the effective use of financial statements involves interperiod and inter-company comparisons, comparability of data over time and among companies is important."(Aocounting and Reporting Standards for Corporate Financial Statements, 1957 Revision,
in: Accounting and Reporting Standards for Corporate Financial Statements and Preceding
Statements and Supplement, American Aocounting Association, p. 9).

65
HOMOMORPHISM AND BUSINESS INCOME MEASUREMENT

This figure serves to show that so far as the real surrogate-income for periodt has turned out to contain error, the ratio between the real surrogate-income for
period t and that for period t' (t<t') is equal to the ratio between the ideal surrogate-

incomes for the corresponding periods when and only when the ratio between theerrors for these periods equals the ratio between the corresponding ideal surrogate-

incomes. In other words, in an income measurement model with the utmost emphasis

on interperiod-ratio-homomorphism rather than on unit-ratio-homomorphism, it
is required to deliberately introduce error dt' into the real surrogate-income for
period t', i.e., P't., when the real surrogate-income for a previous period t, i.e. P't,
has proven to contain some error dt, that is,P', P,+d, P,

P',. - P,,+d,. - P,. '(where Pt denotes the ideal surrogate income for period t and Pt., that for t').

In accounting practice such a deliberate introduction of error would have to
be made as in the following examples.
Ex. 1. Assume a plant asset with total depreciable cost 1,ooO,ooO yen and total
useful life of 5 years, which is being depreciated by the straight-line method.

i
Depreciation charge
200,ooO

accumulated depreciation 200,ooO

But in the 4th year of its use it is found that the correct total useful life of theasset is 10 years and hence the correct annual depreciation charge 100,OOO yen(==1,OOO,ooOÅÄ10), so that we have continued an excessive depreciation charge of

1oo,ooO yen (==200,OOO yen - 1oo,ooO yen) for three years. An interesting pointis that under the income measurement model assumed here it is prohibited to charge
the correct depreciation expense of 100,ooO yen for the remaining 7 years.
The requirement of this model rather is that assuming, say, the ideal surrogate-

income (which we assume for convenience is equal to an income figure resulting
from the proper depreciation charge of 1oo,OOO yen) for each of the lst, 2nd and3rd periods is 5oo,OOO yen and the ideal surrogate-income for the 4th year 800,OOO
yen, an error must be deliberately introduced into the depreciation charge for thecurrent (i.e. 4th) period such that the ratio between both ideal surrogate-incomes

8oo,Ooo 8

soo,ooo = s MaY equal to the ratio between the errors in depreciation charge forboth periods. That is, denoting the required error in depreciation charge for the
4th period as x,x8

100,OOO 5.'. x == 160,OOO yen
Therefore, the depreciation charge for period 4th must be 260,OOO yen as a result

ISAO NAKANO

66

of deliberate introduction of error by 160,OOO yen.`4' The entry would be,

Depreciation Charge 260,OOO
Accumulated depreciation 1oo,Ooo
Adjustment for Interperiod

Comparison-Depreciation 160,OOO
The account "Adjustment for Interperiod Comparison" will have the natureof a sort of aperiodic income.

Ex. 2. Suppose that the principal-income, therefore the ideal surrogate-income
is such as to require a periodic allocation of inventory acquisition costs refiecting

the movement of the physical objects as nearly as possible. We further assume that

although the actual fiow of physical goods conforms to the weighted-average assumption, the fifo method has been applied for some reason (e.g., due to ignoranceof the actual movement). The current acquisition price of the goods has been rising,so that the cost of sales for this period computed by the fifo method happens to beless than that by the periodic average method, This means the real surrogate-income
contains a positive error when compared with the ideal surrogate profit. A detailed
example is as follows:(Period 1)

Quantity Unit Price Total Price

Opening lnventory 100 units 1oo yen 10,OOO yen

The lst Purchase 2co 110 22,ooO
The 2nd Purchase 1co 120 12,OOO

The lst Sale 1oo
The 2nd Sale 150
Accordingly,(1) The unit cost by the periodic average method

10,OOO + 22,ooO + 12,OOO

4oo

1oo (yen)

The cost of saies by the same method== 250 Å~ 110 = 27,5oo (yen)(2) The cost of sales by the fifo method

1oo Units
150

10,OOO yen
16,5oo26,5oo yen
Therefore, the real surrogate-income for this period contains a positive errorof 1,Ooo yen (=27,5oo-26,5oo).
(4) It is assumed that in this example the total annual depreciation expense for each year is
directly charged to the year's revenue. If some of the charge goes to the closing inventory,
the calculation of the required error must be adjusted aocordingly.

67
HOMOMORPHISM AND BUSINESS INCOME MEASUREMENT

It is supposed to be at the beginning of the next period that the physical move-

ment of the inventory really is found to follow a weighted average pattern.(5' But

under the income measurement model with the utmost emphasis upon the interperiod-ratio homomorphism one is not allowed to charge the correct cost of sale(by the average method) to this period.
Let the data for period 2 be as follows.

(Period 2)
Quantity
Unit Price
The Beginning Inventory
150

Total Price

Weighted

Average 16,500yen

Fifo 17,5oo

The lst Purchase 150 110
The 2nd Purchase 200 90

16,5oo18,OooSale 3ooHence,

the unit cost by the periodic average method

16,500 + 16,500 + 18,ooO- soo 102 (yen),

the cost of sales by the periodic average method== 3oo Å~ 102 = 30,600 (yen).
If the ratio of the ideal surrogate-income for the lst period to that for the 2nd
period is 1:1.5, the error y to be introduced into the cost of sales for the 2nd period
is calculated as

1 1,Ooo

1.5 y.'. y= 1,5oo (yen).'. the cost of sales for the 2nd period== 30,6oo - 1,5oo == 29,1oo (yen).

The necessary entry would be
Cost of Sales

29,1ooAdjustment for Interperiod

Comparison-Inventory
Purchases
The account "Adjustment for Interperiod

1,500

30,600Comparison" may be regarded as asort of aperiodic charge.

The above examples have shown the logical necessity of a deliberate introduction(5) This may be the case when it is found for the first time that current goods delivered for sale

are being taken from a well-mixed pool of all the goods received up to the time of delivery(like petrolium for sale at a gas station).

ISAO NAKANO

68

of an error under the accounting measurement model preferring the interperiod-

ratio-homomorphism to the unit-ratio-homomorphism. Then, do we find such an
accounting procedure in the realm of the generally accepted accounting principles
governing the accounting practice today? The answer is evidently "no." For instance,
the allowable alternative accounting procedures in a case where the initial estimateof the usefu1 life of a plant asset has turned out to be false are, according to current

accounting textbooks,{6) as follows:(1) To adjust the accumulated depreciation to the amount which would havebeen reached if the depreciation had been based from the beginning, on the estimatedusefu1 life currently believed to be true and to calculate depreciation charges hereafteron that estimate.

An application of this method to Ex. 1 above would result in a following entry :Accumulated Depreciation 300,OOO
Excess Depreciation Charged

in Prior Years 300,OOO
And the depreciation charges in and after the 4th year will be the adjusted correct

amount, 100,OOO yen.

Depreciation Charge 100,OOO

Accumulated Depreciation 100,OOO.

(2) To calculate the depreciation charges hereafter by allocating the uncorrected
remaining plant cost over the remaining (corrected) usefuI life, without changing thecurrent balance in the accumulated depreciation account.

If one applies this procedure to Ex. 1, the following entry will be required.

The depreciation charges until the 3rd year total 2oo,OOO yenx3=6oo,Ooo yen,hence the remaining depreciable cost at the close of the 4th year (before depreciation)

is 1,ooO,ooO-600,Ooo==400,OOO (yen), so that, by dividing it by the remaining usefu1
life of 7 years, the annual depreciation charge hereafter is 4oo,OOO17#57,142 (yen).

Depreciation charge 57,142

accumulated depreciation 57,142

There exists no unanimous agreement as to which is the more proper method.
The proponents of the former method (1) assert that any accounting error requires
both retroactive and future corrections. "Failure to make prior corrections.,.leads
to compensating errors in future periods with the result that the operating resultsof both past and future accounting periods are distorted."`7) Adherents to the latter(6) H. A. Finney and Herbert E. Miller, Princi les of Financial Accounting, A Conceptual
Approach, Englewood Cliffs, N. J. 1968, pp. 206-208; R. W. Schattke, H. G. Jensen and
V. L. Bean, Accounting, Concepts atid Uses, Boston 1969, pp. 327-328; Rufus Wixon (ed.)
Aocountants' Handbook, New York 1956, pp. 17. 37-17. 38.
(7) Rufus Wixon (ed.), op. cit,, p. 17. 37. Also Paton expressed the same view in: W. A. Patonand W. A. Paton, Jr., Asset Accounting, New York 19S2, pp. 301-302.

69
HOMOMORPHISM AND BUSINESS INCOME MEASUREMENT

method (2) hold that "costs once identified and absorbed through amonization or
depreciation charges are not considered to be subject to further accounting."`8' Thereis also a practical consideration that alternative (1) is not aoceptable for federal income

tax purposes (in the United States of America).

As to the accounting methods for inventories, we cannot find any accounting
literature which refer to the "deliberate introduction of errors" which should be

required by the income measurement model preferring the interperiod-ratiohomomorphism to the unit-ratio-homomorphism.
What are the implications ofthese facts? It seems that the fact that in accounting

practice or writings no one has ever recommended for the introduction of errors aswould be required by the income measurement with explicit emphasis on interperiodratio-homomorphism and the fact that there are rather the contrary efforts Qf making

retroactive and (or) future corrections of errors currently found will mean the
predominance of the unit-ratio-homomorphism over the current accounting practicerather than that of the interperiod-ratio-homomorphism. Therefore, we have cometo the conclusion that an income measurement model preferring the interperiod-

ratio-homomorphism to unit-ratio-homomorphism does not concur with the actual
structure of accounting measurement practice.

The following objections would probably be possible against this conclusion,

however. The first would be that the currently stressed accounting principle of"consistency" has the objective of being "able to visualize trends in the significant

components of the accounting entity, (being) able to measure differences in them,and ... knowing that the trends or differences are real (i.e., reflecting actual economic

or business events) and are not an illusion"`9'-that is, the objective of consciously

pursuing the "interperiod-ratio-homomorphism" in our terms-, so that the inter-

period-ratio-homomorphism must still be regarded as ranking higher than theunit-ratio-homomorphism as accounting standards. But our views are (i) that
this emphasis upon the consistency principle per se does not necessarily suggest the

preponderance of the interperiod-ratio-homornorphism alone in accounting measurement because "consistency" is also required for the purpose of assuring achievementof maximum unit-ratio-homomorphism so far as the most proper accounting
methods'N
possible have been adopted and the circumstances thereafter have not yet
conclusively proven the impropriety ofthese methods. (E.g., Consider'that with respect to a plant asset the straight-line method which has been believed to be the mostappropriate is changed to the declining-balance method without any reason. Ceterisparibus this change must have caused a decreased probability of attaining the unit-

ratio-homomorphism as well as a disturbance of the interperiod-ratio-homo(8) Ibid., p. 208.
(9) Maurice Moonitz, The Basic Postulates ofAccounting, New York 1961, p. 44.

70

ISAO NAKANO

morphism). (2) "Consistency" should not be broken "except to make the measurement more accurate than before."`iO) This is to say, even the "consistency" principle

does not preclude a substitution of a more accurate accounting method (accurate in
the sense of an absolute measure). The viewpoint of preferring the interperiod-ratiohomomorphism will not successfully justify such a substitution. It seems this justi-

fication will rather require the other viewpoint of emphasizing the unit-ratiohomomorphism as the highest accounting standard.
The second possible objection against our case for the unit-ratio-homomorphism
will stress the fact that in the current accounting practice no generally accepted ruleis available as to which accounting method should be applied in a specific situation,and that this decision is left to the accountant's judgement. It will be insisted that

this fact proves that the accountants have given up the pursuit of the unit-ratio-

homomorphism from the beginning, their only effort perceived lying in approaching
the interperiod-ratio-homomorphism with observance of the interperiod consistencyof accounting methods. But we think (1) that the initial adoption of an arbitrary
and possibly inappropriate accounting method would, in spite of its consistent application from period to period, exclude the possibility of achieving the interperiod-

ratio-homomorphism as well as the unit-ratio-homomorphism. (E.g., Consider thatthe declining balancc depreciation method is applied to a plant asset, given its ex-pected constant output of service in quality and quantity each period. "Although
the company has applied the same depreciation method consistently, the net incomesare not comparable because the depreciation charges have decreased each year."(ii)This is to say, the prevalence of the consistency alone would not necessarily lead tothe existence of the interperiod-ratio-homomorphism in accounting practice. (2)Dynamic changes in the business structure as well as in the economic and social
environments would tend to decrease the probability of approaching the interperiod-

ratio-homomorphism even when one observes the consistency principle. Assume
that the same depreciation method is being applied to a machine. But the quantityof the products from the use of the machine for this period have changed greatly
from that for the previous period. In this case we could scarcely expect the existenceof the interperiod-ratio-homomorphism between the depreciation expenses for both
periods and also between the income figures. All these considerations will suggest

there will probably be a low degree of the interperiod-ratio-homomorphism in thecurrent accounting practice, admitting on the other hand, of course, that the unitratio-homomorphism is also possible oniy to a small extent, even when the consistency
principle is assumed to be widely observed.
(1 0) Ibid. p. 43.

(11) Norton M. Bedford and Toshio Iino, "Consistency Reexamined," the Acgounting Review,
July 1968, p. 454.

71
HOMOMORPHISM AND BUSINESS INCOME MEASUREMENT

Therefore, when one is going to study the relationship between the unit-ratio-

homomorphism and the interperiod-ratio-homomorphism which is to be perceived
in the accounting practice, we must attend to what accounting procedure will bemade in a situation where both standards, hence the accounting procedures to berequired by each standard confict with each other. Considering that the deliberate

introduction of errors into accounting measurement is not required, we are led toconclude that the current accounting practice is based on the standpoint of ranking

the unit-ratio-homomorphism higher than the interperiod-ratio-homomorphism,
and not on the viewpoint of preferring the latter to the former.

III. The Viewpoint of Putting Equal Emphasis on the Unit-Ratio-

Homomorphism and en the interperiod-Ratio-Homomorphism
Before giving the final conclusion, however, we will have to turn to the second
possible point-of-view as expressed by the above title of this section. This standpointis that of requiring both unit-ratio--homomorphism and interperiod-ratio-homomorphism to exist at the same time between the ideal surrogate-income series andthe corresponding real surrogate-income series. The logically required accounting
procedure from this viewpoint would consist of the following. (1) The emphasis on
the interperiod-ratio-homomorphism between the income figures under this viewpoint

would inevitably require, when an error in the income figure for some previous
period has been discovered in this period, a deliberate introduction of error into theaccounting income figure for the current period to the extent that the correct inter-

period-homomorphism will hold for the income figures for both periods. (Theaccounting procedure for this has been explained in the previous section.) (2) Since

the real surrogate-income with maximum unit-ratio-homomorphism is also required,however, one would have to measure and disclose the income figure before
introducing the error referred to in (1) at the same time. In short, this point-of-view

regarding the homomorphism will make it necessary to measure and disclose
separately the income figure before introducing the deliberate error (this unadjusted

income is assumed here to have the maximum unit-ratio-homomorphism) and theincome figure with the introduced error, (the income figure iogically required to assure

the maximum interperiod-ratio-homomorphism.)
E.g. Combining Ex. 1 and Ex. 2 in the previous section, assume that a positive
error of 160,OOO yen for depreciation (whose correct figure is 100,ooO yen) and anegative error of 1,5oo yen for cost of sales (whose accurate figure is 30,600 yen)

are to be introduced to achieve interperiod-ratio-homomorphism. We assume
further that the sales (revenue) for the current period is 3oo,OOO yen and that there

occur no other expenses. In this case an income statement like the following will

ISAO NAKANO

72

have to be prepared under this second model of income measurement.

Income Statement

Sales 300,ooO

Cost of sales 30,600

Excess of sales 269,4oo. over costpnce
of goods sold

Depreciation 1oo,OOO
expenses

Net income 169,400(unit-ratio-homomorphic)

Adjustment forinterperiod

homomorphism 158,5oo"

Net income 10,900(interperiod-

homomorphic)*1oo,OOO-1,5oo=158,5oo
Are such forms of income statement prepared in current accounting practice?
The answer is clearly "no". Therefore we must conclude that an income measurement
model with equal emphasis on the unit-ratio-homomorphism and on the interperiodratio-homomorphism does not fit the structure of the current conventional income

measurement.
But one might object against this conclusion and point out that in current ac-

counting practice in the case of the substitution of a more accurate accounting
method than before, "adequate disclosure is required. For example, if the methodof computing depreciation is changed at the beginning of 1968, the accountant
would compute depreciation for 1968 by the old and new methods."('2' Thus bothincome measurements are reported, approaching an expression of both forms ofhomomorphism. The amount computed under the new method would be recordedin the books and reported in the statements. And the change in depreciation method

and the effect on net income, if the difference between the amounts computed by
the two mehtods is significant, are disclosed as a footnote to the financial statements.

That is, the readers of the statements are informed of the interperiod-homomorphic

income (by the footnote) as well as of the unit-ratio-homomorphic income so thatthe same emphasis is being placed, one might contend, on both kinds of homo(12) H. A. Finnery and H. E. Miller, op. cit., p. 242.

73
HOMOMORPHISM AND BUSINESS INCOME MEASUREMENT

morphism, even though the "forms" of reporting may differ (i.e., reporting by theformal statements vs. reporting by a footnote),
This objection is not convincing, however. First, it seems that the fact that theinterperiod-ratio-homomorphic income is being reported only by a "footnote" does

indicate the preponderance of,the unit-ratio-homomorphism over the interperiodratio-homomorphism in the current accounting practice. Second, the information
provided by the conventional "footnote" in the above-mentioned case of a change
in an accounting method relates to the old accounting method and the income figure
computed under this method, which have proven not to satisfy the interperiod-ratio-

homorphism in the light of the current knowledge. The income figure required forcorrect interperiod comparison in the state of knowledge in this period is not thisincome under the old accounting method but that income figure which would haveresulted from deliberately introducing an error into the unit-ratio-homomorphic
income for this year such that the resulting income figure for this period becomesreally comparable (in the sense ofinterperiod-ratio-homomorphism) with the income
for a previous period which has been discovered to contain an error. This deliberately

manipulated income for the current period may be different from the income figure
computed by the old accounting method. (E.g., Referring to Ex. 1 in the previous
section, the depreciation expense for the current period on the basis of the old estimateof the usefu1 life is 200,OOO yen, whereas the depreciation expense which would
lead to the income figure with interperiod-ratio-homomorphism is 260,Ooo yen).
So, we have come back to the conclusion that the current conventional measurementof accounting income does not place equal emphasis on the unit-ratio-homomorphismand on the interperiod-ratio-homomorphism.

IV. The Viewpoint of Preferring the Unit-Ratio-Homomorphism to theInterperiod-Ratio-Homomorphism and Consistency Principle
The foregoing discussion has asserted that the accounting income measurementin current accounting practice is based neither on the standpoint of preferring theinterperiod-ratio-homomorphism to the unit-ratio-homomorphism nor on the
viewpoint of regarding them as equally important, so that we can negatively inferthat the point-of-view governing the current income measurement is no other thanthat of ranking the unit-ratio-homomorphism higher than the interperiod-ratio-

homomorphism.
But one may wonder whether it makes any sense to try to use the unit-ratio-

homomorphism as the standard for judging the propriety of income measurement
since no accounting measurement can satisfy this requirement completely, and further

no one can even tell whether and to what extent an accounting measurement has

ISAO NAKANO

74

satisfied it. Just as the metaphysical statement "there is god" has no meaning fromthe standpoint of empirical sciences, so is not the proposition" an income measurement possesses (or does not possess) unit-ratio-homomorphism" utterly meaningless?
A philosopher of logical positivism A. J. Ayer says that to test the genuinenessof a sentence concerning empirical matters of fact "the criterion of verifiability" isto be applied. "We say that a sentence is factually significant to any given person,
if and only if, he knows how to verify the proposition which it purports to express-

that is, if he knows what observations would lead him, under certain conditions,to accept the proposition as being true, or reject it as being false. It, on the other
hand, the putative proposition is of such a character that the assumption of its truth,or falsehood, is consistent with any assumption whatsoever concerning the natureof his future experience, then, as far as he is concerned, it is, if not a tautology, amere pseudo-proposition."`i3) Then, what does he mean by the term "verifiable"or "verifiability"?

According to Ayer, "a statement is `directly verifiable' if it is either itself anobservation-statement [i.e., a statement acceptable Qr refutable on the basis of anobservation], or is such that in conjunction with one or more observation-statements
it entails at least one observation-statement which is not deducible from these otherpremises alone; and...a statement is `indirectly verifiable' if it satisfies the following

conditions: first, that in conjunction with certain other premises it entails one ormore directly verifiable statements which are not deducible from these other premisesalone; and secondly, that these other premises do not include any statement that is
not either analytic, or directly verifiable, or capable of being independently established
as indirectly verifiable."`'4' And "the principle ofverification" is defined as requiringthat a (not analytic) statement should be either directly or indirectly verifiable, in theforegoing sense."{i5)In the light of this requirement, it becomes clear that the meaningfulness,therefore verifiability of the statement "an income figure possesses unit-ratiohomomorphism" does not necessarily require a direct verification of this statement
per se, which is evidently impossible; rather, all that is necessary is, as far as its

verification is concerned, that a statement deducible from a conjunction of thisstatement with other premises can be verified on the basis of an observation.

So consider the following statements.

(a) The statement to be verified: "a periodic income (real surrogate-income)figure possesses the (maximum) unit-ratio-homomorphism."(13) Alfred Jules Ayer, Language, Truth and Logic, New Ybrk (Dover Publications Inc.),

p. 35.
(14) Ibid., p. 13.
(15) Ibid. p. 13.

75
HOMOMORPHISM AND BUSINESS INCOME MEASUREMENT(b) Premises to be added: (1) "Such accounting methods as would represent
the given business activity with maximum unit-ratio-homomorphism were adopted
at the beginning: (2) No events or changes in circumstances have thereafter takenplace which would have disturbed the propriety of these accounting methods: (3)No new accounting methods have since been devised which would achieve as muchunit-ratio-homomorphism as those in use.
Clearly, the conjunction of all these four statements (by "and") would necessarily

result in a statement, "The accounting methods initially adopted are being consistently applied", for, if any of these methods has been changed the degree of actuallyachieved unit-ratio-homorphism is expected to decrease. And this fact denotes the(direct) verifiability of the statement, "a periodic income figure prossesses the (maxi-mum) unit-ratio-homomorphism" in the foregoing sense of the logical positivism,

hence it proves the meaningfulness of using the unit-ratio-homomorphism as astandard forjudging the periodic income measurement. And the criterion for testing
the existence of this homomorphism is whether or not the "consistency" (consistentuse) of once adopted accounting rnethods is being observed. Accordingly, the consis-

tency principle is understood to aim at unit-ratio-homomorphism (on the basis of
the foregoing premises (1), (2) and (3)), and hence to serve as a partial criterion for

judging the existence of unit-ratio-homorphism, i.e., as a necessary condition for its.
emstence.

One might question, however, that the observance of "consistency" will leadto the (maximum) unit-ratio-homomorphism of income measurement only when theabove mentioned premises (1), (2) and (3) hold good in the given actual situation,and one might argue that this condition will rarely be satisfied in actual accounting

practice. Our answer to this is that accounting theories as well as the generally
aecepted accounting principles are at least "making efforts" to realize those premisesin accounting practlce.

Ex. 1. From among various methods of inventory cost allocation such as "fifo,
average methods, lifo, the identified cost method, etc."{i6) "each firm should selectone method with the valid calculation, of periodic income as the guiding principle
and also taking the characteristics of the business, the nature and kinds of inventory

involved, the movement of physical goods, cost accounting methods adopted, etc.
into account."(!7) As for the selection of a depreciation method, "time should be
the basis of cost allocation in case the depreciation is expected to accrue mainly due(16) Opinion Series on Reconciliation of the Business Accounting Principles with Relative

Laws and Regulations, No. 4, "On Inventory Valuation", Sec. 1-2 (The Council on
Business Accounting, Japan, 1962).
(17) Opinion Series on Reconciliation of the Business Accounting Principles with Relative
Laws and Regulations, No. 3, "On Depreciation of Tangible Fixed Assets," Sec. 1-5(The Council on Business Aocounting, Japan, 1960).

ISAO NAKANO

76

to the passage of time [i.e., the straightline method, the declining-balance method,

the sum-of-years' digit's method, sinking fund method etc.]. On the other hand,when the depreciation aocrues in proportion to the use of the fixed asset concerned,
it is reasonable to use the products from it as the basis for cost allocation [i.e., theproduction method]."(i7) These rules for the selection of appropriate accounting
methods at least show "the existence ofefforts" to specify for selection such a method
which will most accurately reflect the actual accrual of expenses, that is, which will

efiable a measurement with the maximum unit-ratio-homomorphism, even though,of course, the specification does not seem so workable as to identify a single appropriate accounting method in each conceivable situation.
Ex. 2. In actual application ofthe consistency principle to aecounting methods,a change in any accounting method is only permitted when the alteration will leadto a more accurate measurement, and "when the changes are introduced they will
be disclosed in suMcient detail to make the reports comparable."(i8) In this context

the case where the change would lead to a more accurate measurement will probably
mean a case where an event or situation has arisen which tends to destroy the ap-

propriateness of the accounting methods hitherto applied andlor the case when a
new accounting method has been devised which could result in a higher degree ofthe unit-ratio-homomorphism than before. And the fact that consistency is to bebroken only in these cases will mean that the accountant is supposed to be constantly

checking whether any one of these situations is not actually the case with the firm
concerned, that is, whether the foregoing premises (b)-(2) and (b)--(3) for verificationof the unit-ratio-homomorphism in the sense of logical positivism are being staisfied

in practice. When he finds any of these premises is not satisfied, the observance ofthe consistency principle does not necessarily assure the unit-ratio-homomorphism,

so that a substitution for another accounting method is made to recover the unit-

ratio-homomorphism.
Our explanation hitherto has shown, we hope, that the conventional income
measurement under the generally accepted accounting system is based on the view-

point of placing greater emphasis on the "unit-ratio-homomorphism" than on theinterperiod-ratio-homomorphism." The verification of existence of unit-ratiohomomorphism (in the sense of logical positivism) depends on showing that theconsistency principle is being observed and that the premises necessary for successfu11y

judging the existence of unit-ratio-homomorphism from the angle of consistency
hold good in the actual situation.

V. ConcludingRemark
Although the current periodic income measurement for external reporting is(18) Maurice Moorvitz, op. cit., p. 43.

77
HOMOMORPHISM AND BUSINESS I! COME MEASUREMENT

based on the standpoint of preferring the unit-ratio-homomorphism to the interperiod-ratio-homomorphism, the actually achieved degree of unit-ratio-homomorphism is probably small. The reasons are: (1) that it is not yet specified which accounting method is best for each possible situation for attaining maximum unit-ratio-

homomorphism; (2) that it remains ambiguous as to when the hitherto used accounting methods should be changed; (3) that enough effort has not been directed
towards developing, and spreading the use of, new accounting methods which would
result in a greater degree of unit-ratio-homomorphism than before.
Therefore, when we turn to the political problem of how to enhance the actuallyattainable degree of unit-ratio-homomorphism, it seems necessary for this purpose(1) to identify which accounting method will provide maximum unit-ratio-homomorphism for each possible situation, (2) to specify in what situations the already adopted

accounting methods should be altered, and (3) to devise new accounting methods

which would achieve a greater degree of unit-ratio-homomorphism. We will haveto leave it to another occasion to consider how to solve these problems.

ASSETS CHOICE AND OPTIMAL
INTERNATIONAL RESERVES
Kazuhiro IGAwA

introduction*
In his pioneering paper [8], H. R. Heller investigated the optimal foreign reserves,considering the opportunity cost to hold them. Following his works, Clark [4].[5]and Kelly [11] extended them to fit general equilibrium frameworks of the macro
economics. In this paper, I also follow these trends and extend them in some respects
by using the theory of portfolio choice.

The wealth of one country can be considered to be composed of three assets,
real capital, net holdings of foreign securities and foreign reserves. We would liketo make clear the optimal composition ofthe wealth, using the social welfare function.

I. Domestic Policies and the Properties of Assets

First, we make clear the behavior of the policy makers (authorities)`i} and theproperties of each asset, which are basic for the model building in section 2.

We assume that the economic authorities have some measure to evaluate thesocial welfare level. This is evaluated by the level of the disposable-income (especially,mean and standard deviation of it) and the value of the liquidity assets (which represents the convenience yield(2'). The objective ofthe economicpolicy is to maximizesocial welfare level.

In our paper, we consider economic policies of two types. One is usual macro
economic policies such as fiscal and monetary policies, and the other is the policies
to determine the compositions of the wealth. The policies ofthe first type are assumed

as followed. There are two policies. One is the policy aimed at increasing the meanlevel of the real disposable-income by the adjustment of the mean level of the govern-

ment expenditure which we call "the effective demand policy". The other is thepolicy aimed at decreasing the standard deviation of the disposable-income by* I am indebted to Professor Y. Matsunaga (Nagoya City Univ.) for helpfu1 comments on aprevious draft of this paper. Atl responsibility for errors rests with me.

(1) It is important to clarify the policies when we consider the problem of the optimum foreign
reserves. See Clark, P. B. [4] p. 359, [5] p. 580. Hamada, K. [7] p. 23 and Kelly, M. G.

[1ll pp. 655-656.
(2) See Amano, A. [1] p. 69.

KAZUHIRO IGAWA

80

carefully changing the value of the government expenditure, corresponding to theexogenous disturbances, which we call "the stabilization policy". But, exogenous
disturbances may not be offset perfectly, because of the constraint`3' that the level ofthe foreign reserves cannot be negative, which we call "the balance of payments
constraint".

By these two policies, the relations of three assets to the mean and standard
deviation of the level of the disposable-income will be determined. If a large shareof wealth is held as real capital, the level of the domestic output will be high and thevariations of disposable-income may be large because of the balance of payments
constraint. On the contrary, holding a relatively large share of foreign reserves in
the wealth, the level of the disposable-income will be low because the foreign reserves

produce small income. Fluctuations of disposable-income will be small due to thestabilization policy and convenience yield will be large. Holding foreign securities,

we can get interest and some improvements of the balance of payments, the former
increasing the level of disposable income and the latter bringing stability to it.

Economic authorities choose the compositions of the assets, taking account ofthese properties with the objective of maximizing social welfare level. This is thesecond type policy above mentioned.
In section 2, we construct a simple model, and relations between stabilization
policy and the balance of payments constraint are clarified in section 3. In section

4, using the social welfare function, we get the optimal conditions and using thoseconditions, we investigate the propenies of the demand functions for assets.

II. Model Construction
By using a simple macro model, we determine the effective demand policy andthe stabilization policy. The model may be called, in short, a Keynsian short-run
open model under the fixed exchange rate system. By the assumption that in foreigncountries, the level of the disposable-income and the rate of interest of foreign
securities are constant, the properties of a small country model are retained.
It is convenient to list the notations which will be used.

rv: the total value of the wealth
K: the quantity (value) of the real capital
A: the net holdings ofthe foreign securities

R: the net holdings offoreign reserves

Yd: disposable-income (net national product)
C: private expenditure(3) See Clark, P. B. [4] pp. 362-364 and Hamada, K. [7] pp. 26-29.

81
ASSETS CHOICE AND OPTIMAL INTERNATIONAL RESERVES

G: the mean level ofthe government expenditure

I: Exports
M: imports
e: exogenous disturbances of the balance of trades

g: variation of G

B: the balance of payments
r: rate of interest of foreign securities

Y: the quantity of the domestic products
p: the price Ievel of products (unity at full-employment)s: marginal propensity to holdm: marginal propensity to import
PR2: the critical level of the probability of the foreign reserves becoming

negative{4)U: the Ievel of the social welfare

E: operator to calculate mean value
a: operator to calculate standard deviation
Assuming that the foreign reserves yield no interest, the disposable-income is

Yd ==p Y+ rA (1)Equilibrium equation in money term is

Yd-C(Yd)+G+I-M(Yd)+e+g (2)where the left hand side is notpY, assuming that the interest is paid in the form ofgoods. If X, e are given and government expenditure G, g are detemined, equilib-

rium disposable-income Yd will be determined. Other policies are not considered
explicitly, but will be referred to in a latter section.

To detemine the effective demand policy, G, we must specify the phases ofinflation and deflation. We assume that there is a unique relation between the pricelevel and the level of unemployment. In this paper, we only analyze a special casewhere the price level is constant and the quantity of the domestic output changes
corresponding to the change of effective demand level in defiation (unemployment),
and, on a contrary, the output level is constant and the price level changes corresponding to the effective demand level in inflation (over employment).(5) If otherthings are equal, it is reasonable that the economic authorities manage to attainfu11 employment. So, G will be determined to attain fu11 employment when there is

no exogenous disturbance.
The mean of the real disposable income is(4) The authorities behave so as to reduce the probability of reserves becoming negative below

this level.
(5) The Åëase that Yandp move simulateously can be analized in the similar way.

KAZUHIROIGAWA

82

Ey- Y(K)+rA (3)where, Y(K) is the domestic output level when real capital K is fu11y utilized. Substitute Ey for Yd in equation (2) the level of G is

G--Ey-C(Ey)+M(Ey)-X
Next, assuming the following behavioral rule to determine g, we investigate thestandard deviations of the disposable-income and the balance of payments. The
economic authorities behave so as to diminish the effects of the exogenous disturbances on the level of the disposable-income. We assume that the behavioral
rule can be expressed asg-(a-1)e (4)If the authorities can make a zero, exogenous disturbances are fully offset and ay

become zero. But, a may not be made zero because of the balance of payments
restraints, as mentioned above. Postponing the determination ofa to the next section,

we express the standard deviations of Yd and B, using a.

Assuming the linearity of the expenditure function and the import function,
we get from equation (4), (2)Yd-Ey=ae/(s+m)
so, we get

ay==kaae (5)k =- 11(s+m)

where k is the foreign trade multiplier. Similarly for the balance of payments, we get

B-Eb=(1-mka)e

ab=(1-mka)ae (6)If parameter a is determined, oy, ab will be determined, assuming a. is given.

III. Stabilization Policy and the Balance of Payments Constraint
As already stated, the level of the foreign reserves cannot be negative. Notethat the probability of reserves becoming negative due to exogenous disturbance,
may not be zero. It is reasonable for the economic authorities to set the rule thatthe probability that reserves may become negative must be smaller than some positive

percent.`6' The percentage may depend on the standpoint of the authorities whether- --- -

-optimistic
or pessirmstic, on the mternational monetary systems and on the international cooperation systems.
(6) In a similar way we can analyze the case that the probability of reserves becoming notnegative but smaller than some positive level, must be smaller than some positive percent.

ASSETS CHOICE AND OPTIMAL INTERNATIONAL RESERVES 83
This balance of payments constraint is formulated as followed.`"abs{gPR(R+Eb) (7)where, (R+Eb) is the mean of the foreign reserves at the end of the period and thestandard deviation of them is ab, which is also the standard deviation of B. This
relation can be deduced, applying eebyYsev's inequality theory to the probability
distribution of (R+B), which is the level of the foreign reserves at the end of theterm. These restraints mean that given (R+Eb) and PR2, ab must be controlled bystabilization policy to satisfy them.

The authorities determine a(g) so as to minimize a, subject to the constraint(7). When there are enough foreign reserves, i.e.

aegPR(R+Eb)
then, the balance of payment constraint is not effective and a can be made zero ando, will be zero. But, whefi there are not enough foreign reserves, i.e.

ae>PR(R+Eb)
then, the balance of payments constraint is effective andab == PR(R+Eb) (8)Taking account of equations (6), (8)a= {ae - llPR(R + Eb)} lmkffe'
c. == {ae-PR(R+Eb)}/m (9)'IV. OptimumConditions
The economic authorities determine the composition of wealth so as to maximize
the social welfare level. Those policies ofthe second type are formulated as followed.

The social welfare function is 'U== U(Ept, o., R) (10)where R shows the convenience yields. U is a continuous and differentiable function.

U, and UR are positive and U. is negative, whereUe iiiOUIOEy, UR iEOU/aR, U. iii!OU/Offy
The wealth constraint is

PV==K+A+R (11)assuming that the domestic currency is not an international currency, the net foreign
reserves and the gross foreign reserves are equal.

If we maximize U subject to the wealth constraint, we get the following necessary(7) See Clark, P. B. [4] pp. 362-363.

KAZUHIRO IGAWA

84

conditions. The equations (3), (9), (11) andU.Yk+U}PRYk-Z==O (Yk=dY/dK) (12)Uer+ U2R(1 -- 1/m)-Z= :O (13)UR-U}P.lm-Z==O (14)where R is the Lagrange multiplier. These mean that the marginal utility of each
asset must be equal in the optimum situation. Defining the matrix D asDii

( Ue+ UePR) Yick

O (UeR+UeRPR)Yk,-1, (Uee+UaePR)Yic,( Uea+ UeePR) YicoO (UeR+UaRPR)r '1, (Uee+UeePR)r

Uec+ Uce'PR)r- U.RPRrlm,d UeePRr/M, .

- UeaPRrlM

O --U.RPRIm+URR,-1, -UaePR/M+URR,- UaePRIM

o

-1
-Yk

-1

-1

o

o

-r

o

o

1

o

PRr/m

P.lm

o

-PR

+URo
o
o
1

We can express the suMcient conditions as

A<O

(15)

d,,>O (i=1, 2, 3)(16)

where d is the determinantof Dminer-determinants
and dii are the
of D.

The

Using necessary conditions,
we can value of K, A, R.
get the equilibrium
demand functions for assets can be expressed abstractly as

K=:K(W, X, a., PR, r)
A=A(W, X, Oe, PR, r)
R==R(PPr, X, c,, PR, r)

V. Properties of the Demand Functions
The properties of those demand functions can be investigate by differentiating
the necessary conditions.

D dK == OdM+ O dX+odae+ oo- UePR + UcPR /M

o

o

o

o

o

A

1/m

-PRA/m

dA
dR OO
OO

dEy
o
dav O o-PRImdPR

dr+ -U.Yic- Uar+ Uer/m
U elM

o
o
-(R+Eb)/m

We get following relations.

OK/O M= (- 1)d4i/,(17)

aAlarv==(-1)d421,
OR/OJV=(-1)d431,

(18)
(19)

85
ASSETS CHOICE AND OPTIMAL INTERNATIONAL RESERVES

OK/OX=(-P,/m)A6il, (20)OAIOX==(-PRIm)d62/, (21)aRlaX=(-P./m)A63/, (22)
OKIOo,==(1/m)"6il, (23)
OA/Oa.==(11m)"621, (24)
OR/Oo,=(1/m)"63/, (25)aK/ar == (- U.PR+ U.PR!m)"2 '1,+A,si/,-(P.A/m)"6 il, (26)OAIOr==(' U.PR+ U}PR/m)d221d+A,s2/d rm(P.Afm)"62/, (27)
OR/Or=(- U.PR+ U.PR/M)"23/a+Aas3/d-(PRA/M)"63/d (28)OK/OPR=(-UcYk)"`i/d+(-Uer+Uer/M)"2'ld+(U.IM)"3i!d-{(R+Eb)IM}`6i/d (29)OAIOPR=('UeYk)d'2/d+(-Ul+U.r/M)"221`+(U./M)d321dne{(R+Eb)/M}d62/d (30)aRIOPR=(-U.Yk')"'31d+(-U.r+U.rlm)d231d+(U.lm)d33dl'{(R+Eb)/m}`63/] (31)
In determining the signs of equations (17)N(31), we use some or all of the following

assumptions, (A-1).v(A-3).

(A-1) Ue.(U.e), UeR(URe), U.R(UR.) are negligibly small. This means thatmarginal utility of the elements of U have little dependence each other.

(A-2) Ue,, U.., URR are negative. -This means that the marginal utility (disutility) of the element of U decreases (increases) as the size ofthe elementincreases.

(A-3) IU,,l is suMciently smaller thanIU..I andlURR1

There is some type of risk aversion behavior and the marginal utility of R
rapidly decreases when R increases.

(1) Effects of va
When PV increases the demand for the assets will change correspondingly.
We call these effects "Wealth effects". By the wealth constraint

OK/O Wr+ OAIO JV+ ORIO PV= 1

Then, some or all of OK/OM, OAIOM, OR/aPV must be positive. Normally, we can
expect these to be positive. Those are positive when A4iNd43 are positive, because
li is negative.

By assumptions (A-1)N(A-3), OKIOW, OA/OM are positive. By assumptions(A-1), (A-2) and the assumption that (Ue,r2) is approximately equal to (U..PR2(1-1/m) r/m), aRIOMis positive. These assumptions are not over-restrictive when
the social welfare function consists of only three elements. So, we can normally
expect that the demand for each asset increases when the wealth increase.

(2) Effects ofXand ae
We call these effects as "risk effects", because o, is directly affected by thechange of oe and X. The signs of the effects of X on any assets are opposite to thecase of oe.

KAZUHIRO IGAWA

86

When the standard deviation of the exogenous disturbance becomes large, theauthorities will increase the foreign reserves because of the balance of payments
restraints. Taking account of the wealth constraint, either (or both) of the assets
K and A must be decreased. That is to say, A63 is negative and either (or both) of
d6i and A62 must be positive.

Using assumptions (A-1) and (A-2), OKIOo. is negative and also assuming(A-3), ORIac, is positive.

The sign of OAIOa, cannot be determined without further assumptions.

Using similar reasoning, we can expect that the demand for R decreases anddemand for K increases when X increases.

(3) Effects ofr 'When the rate of interest of the foreign securities increases, we can expect thatthe demand for them increases and the demand for other assets decreases due tosubstitution of assets.

Using the following relations, which can be deduced by expanding thedeterminant d.

-dsi+(PR!m)d6i=(1/r)A4i-ds2+(PR/m)d62==(11r) (d42+d)-As3+(PR/m)d63= (11r)d43
We can rewrite the equations (26)N(28) as
OKIOr == (- U}]PR+ U.PRIm)d2i/d -A(11r)d4i/dOA/Or== (- U. PR+ U.PRIM)a221"-A(11') (d42+A)/d

ORIOr==(-U.PR+U.PR/M)d231i-A(1/r)a431A
By the suMcient conditions d22 is positive. By assumptions (A-1) and (A-2),
A2i and d23 are negative. By the wealth effect, d4itvd42 may be expected to bepositive and smaller than (-d) and A may be positive, negative or zero. So, we cansay that if A is negative or wealth effects multiplied by A is suMciently small, OK/Or,

OR!Or are negative and OAIOr is positive.

(4) Effects of PR

We cannot determine the signs OK/aPR, aAIOPR, ORIOPR without further assumptions, though the sign of aij (i,j--1,2,3) can be determined by the suMcientconditions and assumptions (A-1), (A-2).
If we can assume that the effects through risk effects d6ilA (i=1, 2, 3), multipliedby (R+E)/m are dominant we can expect that OKIaPR>O and OR/OPR<O as (R+E)
is positive. As PR2 increases, it is better to increase K and decrease R, taking accountof the balance of payment restrictions.

87
ASSETS CHOICE AND OPTIMAL INTERNATIONAL RESERVESVL ConcludingRemarks
We must note that the analysis above depend on the specifications of the social
welfare function and the government policies.(8)Here, we must mention about other policies, such as monetary policy and theforeign exchange rate policy, which might be used for the balance of payments
adjustment. When the balance of payments is adjusted perfectly, the stabilization
policy can be applied without restraint and o, is zero. But, balance of payments
is adjusted only partly for some reason, the analysis in this paper will be applicable.

Considering the optimum foreign reserves ofjust one country is not suMcient,taking account of the present international financial system. It is necessary to adjust

the volume of the existing international liquidity to equate the total sum of the
optimum foreign reserves of all the countries. Changing either the price level or thevolume of the international liquidity are alternative way to accomplish this.

Furthermore, it might be important to extend the analysis to a long-run framework where the time schedules of the accumulation of the real capital, the foreign
reserves and the foreign securities are made explicit.

REFERENCES[1] Amano, A., "Econometric Study of International Short-term Capital Movement : A Survey,"
Kokumin-Keizai Zasshi, Vol. CXXIII, No, 6, June 1971.
[2] Bierwag, G. C. & Grove, M. A., "Slutsky Equations for Assets,' J. P. E., Vol. 76, 1968.

[3] Britto, R. & Heller, H. R., "International Adjustment and Optimal Reserves," LE.R., Vol.

14, Feb. 1973.
[41 Clark, P. B., "Optimum International Reserves and the Speed of Adjustmet," J.P.E., Vol.

78, March/April 1970.
[5] , "Demand for lnternational Reserves: A Cross-Country Analysis," Canadian LE.,
Vol. 3, Nov. 1970.
[a Grubel,H.G.,"TheDemandforInternationalReserves:ACriticalReviewoftheLiterature,"
J.E Literature, Vol. IX, 1971.
[7] Hamada, K., "International Reserves and Stabilization Policy," The Journal of Economics,(Tokyo Univ.), Vol. 35, No. 3, Oct. 1969.
[81 Heller, H.R., "Optimal International Reserves," E.J., Vol. 76, June 1966.
[91 International Monetary Fund, International reserves and liquidity, Washington, D. C., IMF,

1958.
[10] , International reserves: Needs and availability, Washington, D. C., IMF, 1970.
[11] Kelly, M. G., "The Demand for International Reserves," A.E.R., Vol. LX, Sept. 1970.
[121 Machlup, F., "The Need for Monetary Reserves," Banca NazionaledelLavoro, Quart. Rev..
Vol. 47, Sept. 1966.
[13] Matsunaga, Y., International Reserves and Economic Growth, Tokyo, Diamond, 1967.
{14] Royama, S. & Hamada, K., "Substitution and Complementarity in the Choice of Risky(8) Effective demand policy G(stabilization policy, g) is one of the many policies which can beused to attain fu11 employment (stability).

88 KAZUHIRO IGAWA
Assets," in Hester, D. D. & Tobin, J. eds., Risk Aversion and Portfolio Choice. Cowles

Foundation, 1967.
[l5] Sandmo, A., "The Effect of Uncertainty on Saving Decisions," R.E.S.. Vol. XXXVII (3),J.uly 1970.

REVIEW
KOBEECONOMIC & BUSINESSCONTENTS
NO. 15 (1968)
Characteristic Approach for Regional Developrnent in Western Europe
and U.S.A.-Relating to the Case in Japan.....................MinoruBeika
Export Patterns of Leading Industrial Countries.................................Fukuo Kawata
The Early Development of Kobe Port...................................................Sei'i Sasaki

Rise of Modern Shipbuilding in Japan and Promoters........................Tadakatsu Inoue
A Note on the Redistribution of Profits...................................................Nobuko Nose

International Liquidity Controversy in Japan (2)..............................MasahiroFuJ'ita
Factors to Determine the Relative Share: The Case of India.....................Hikoji Katano
Maintenance of Capital Based on Eaming Power..........................................Jiro Ono

Recent Changes in Japan's Trade with Latin America and Brazil...... Yoshiaki Nishimukai
Some Inventory Accounting Problems......................................................Isao Nakano

Organizational Slack and Adaptive Behaviour in the Firm,.................Hideki Yoshihara

NO. 16 (1969)
The Change of Regional Characteristics of Industries inFunctions of Screen Account ....................................

On Mr. Stoleru's Optimal Policy for Economic Growth.
A Note on Shorter Working Hours for Seamen.............

Japan. ..............Minoru Beika.

---------.

---------.

Objectivity Reexamined ..........................................:.

A Note on the Behavioral Theory of Innovation ...........

---------------l-.

---------..............Nobuko IVose.............Hikoji Katano....Hiromasa Yamamoto...............Isao Nakano.........Hideki Yoshihara

NO. 17 (1970)
An Outline from OMoe Management to MIS in Japan...........................Minoru Beika
Japanese Economic Growth since the Meiji Restoration:
A Social Aocounting Approach .......................................Nobuko Nose
EMciency of Optimal Growth Policies for Development...........................Hikoii Katano

Decasualization of Dock Labour-Experiences at the Port of Kobe---.....,...............Hiromasa Yamamoto
The Characteristics of Recent Corporate Mergers in Japan..............................Jiro Ono
Estudos Brasileiros no Japio ..,...................,......................... YoshiakiNishimukai

A Note on the Integration of Economic Theory
and Organization Theory ........,................................. Hideki Yoshihara

NO. 18 (1971) .
Environmental Pollution Problems from theView Point of Business Management ....................
Patterns of the Japanese Engineering Trade (1951-1970) .............
Optimal Process of Economic Development ............................
Wage and Behaviour Difference in Collective--------------t---------. .Minoru Beika

Fukuo Kawata
flrikoii Katano

Wage Bargainings of Japanese Shipping Companies-A Case Study of the Japanese Shipping Industry--------------------------------On Aocounting Communication ...............................................

.Hiromasa Yamamoto.......... Isao Nakano

NO. 19 (1972)
Patterns of Export Trade of Argentina and Brazil :• A Comparative Study ............................................. FukuoKAwATA
Entrepreneurship in Arnerica ................................................... Tadakatsu INouE
Generalization of Two-Gap Theory ..........,..................................... Hikoji KATANo
Aocounting Measurement and Homomorphism .................................... Isao NAKANo

An Interpretation of Two Stage Least Squares
Estimators as Indirect Least Squares
Estimators in the Overidentified Case ..................... HiroshiSADAMicHi
A Note on the One-dimensional Random Search ........................... Komavuki ITow
Exchange Rate Systems and Distribution of
Seigniorage ......................................................... KazuhiroIGAWAKOBE UNIVERSITY ECONOMIC REVIEW 18, 1972
Edited by Faculty of Economics,
Kobe University, Kobe, JapanCONTENTS
A Formal Proof of Marx's Two Theorems.,..,..................................... Nobuo Okishio

Drastic Revision of Medical Insurance

Laws and Policies of Medica1 Care
Cost in Japan ......................................,............ Mtzsafumi Nakamura

Towards a New Look on the Analysis of Devaluation ........................ Kiyoshi Ikemoto
Silk Production in Medieval Japan ................................................... Tetsuo Kamiki

Wage Adjustment and the Expectations Hypothesis :Some Empirical Evidence for Japan ..............................Toshihisa Toyoda

Optical Investment Policy and Growth
Equilibrium ..............',..,.......................................... MataruFukuda.illllTlet.".,,--tlMtli.'h,,v,ilMllli.",,-i,.itltlllt-,",,,,.,ttlfiltJ,"hb,v.ilnlltP,.",,ir.,1111t"th`tt,,t.,1{11tltei"e-`).,llltllll-+"h,t[,ttlllltlt,.,,,,t.,itllllllibJth,t,,lllllMb.i

THE ANNALS OF THE SCHOOL OF
BUSINESS ADMINISTRATIONKOBE UNIVERSITY 1973
Edited by the School of Business Administration,

Kobe University, Kobe, JapanCONTENTS
Entwicklung und Aufgaben der Arbeits6konomie in der
Deutschen Demokratischen Republik ........................ EkkehardSachse
The Characteristics and Trends of Domestic Market for the
Products of Small Businesses in Japan ........................ YukichiArakawa
The Internal Rate of Interest and the Rate of Profit........................Kazuhisa Matsuda
Relationship of EMciency of Investment to Growth Rateof Capital .................................................................. TakashiIga
Requirements for Auditing Theory ................................................ Masaatsu Taktida,tllllllll-",,r,-1111111P"i',nyiTdlllllllePh"-,,'.illllltl),'t'",tt',tlllllt)""',ir'etlllell)""b-,t',llttSlee"""",ltlll111p'ti'i,i'dlUIItll,•tk,i,',(llllUl-'"-vttltllltbbti'"i',ftltlTIP-ti

KOBE UNIVERSITY LAW REVIEWInternational Edition No. 9, 1973
Edited by Faculty of Lavv
Kobe University, Kobe, JapanCONTENTS
Age and the Judiciary in Japan (1) ................................................ Takeo Hayakawa
Takashi Hara and China .........................,.....,..............,............. Tsuyoshi Masudo

THE RESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTRATION, KOBE UNIVERSIT'Y

HISTORICAL SKETCH
In 1919, a research organization named the Institute for Commerce wasfounded in Kobe Higher Commercial School, one of the chief predecessors ofKobe University, with a gift made by F. Kanematsu & Company, a leading
mercantile firm in Kobe. The organization was designed to carry on and facilitate integrated research on business and commerce and to formulate andpublish the results of these studies and investigations in such form as to makethem available to the business community.

With the founding of Kobe University of Commerce, successor of Kobe
Higher Commercial School, in 1929, the Institute extended its research ac-

tivities by adding several divisions. One was the famous Latin-American
Library, which soon became the center of research in this field in Japan. A
room for statistics equipped with various computing machines was establishedand began publication of Juyo Keizai Tokei monthly and Sekai Boeki Tokeiannually. A filing room was prepared to deposit press clipping files systematicallyarranged by topics and dates. Another room was designed to become the centerof all possible original records and data having to do with the beginning andprogress of Japanese business.

On the campus of Kobe University of Commerce, another organization
named the Institute for Business Mechanization was founded in 1941 utilizing

business machines donated by the IBM Corporation and others. With Professor

Yasutaro Hirai as its head a broad and forvvard-looking plan for businessmechanization in Japan was developed.

In 1944, Kobe University of Commerce changed its name to Kobe University of Economics. After the war, however, the University was consolidated with three other colleges in Hyogo Prefecture to become Kobe University.

With this development, the two Institutes were also amalgamated into the

Research Institute for Economics and Business Administration, Kobe University. At present, the Institute, with its twenty one fu11-time professional staff

members, carries on studies and investigations in international economy, businessadministration, and information systems in Japan.

LOCATION AND BUILDINGSThe Research Institute for Economics and Business Administration is
located on the campus of Kobe University, Rokko, Kobe. It is a three-storiedbuilding named the Kanematsu Kinenkan and has a floor space of about 2,9oo
square meters, which includes a president's room, forty-one oMces, six rooms
used as a library, a room for statistics, three conference rooms, etc. Adjoining
is a one-story building recently built to install business machines.

ORGANIZATION
Under the directorship of the president, the Institute operates with two

research groups, each has five sections respectively. Each research groupand its sections are as follows:

A GroupofInternationalEoonomy(1) InternationalTrade(2) InternationalFinance(3) MaritimeEconomy(4) EconomyofLatin-America(5) InternationalLawofEconomy
B Group of Business Adiministration(1) InternationalManagement(2) Business Administration and Information Systems(3) Accounting(4) Business Statistics(5) InternationalLaborProblems
Besides the regular work ofthe Institute, research committees may be createdto carry on any special work requiring the joint study of academic and businesscircles. At present, there are three committees, that is, International FinanceCommittee, Research Committee of Structure of International Division ofLabour and Information Systems Committee.
For convenicnce and greater eMciency in carrying out its research activities,

the Institute has a general oMce which is responsible for 1) the collection andpreservation of a comprehensive collection of books, periodicals, pamphlets,and original records and data of finance, trade, commerce, industry and businessgenerally; 2) the classification, cataloguing, indexing, arranging, annotation andcompilation of these research materials; and 3) the formulation and publicationof the results of the investigations and studies accomplished by the professional
staff members of the Institute.

As an aMliated institute, the Documentation Center for Business Analysis
has' been established. It is the first systematic information facility in the fieldof business administration in Japan that has been recognized and authorized
by the Ministry of Education. The purpose is to collect and to make intensive

control of all kinds of materials on business administration and to make themavailable to scholars, universities, governments, and business world with theaid of modern documentation techniques.

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Hikoji KATA'NO

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YoBhiaki NlsHtMVKAI

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T6Tu KANO

I<azuh;ro)GAWA

Research Aseeciate of l'ltInternatienal 'rrade'

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Study on Latin America i

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