JAPAN

Nippon

COUNTRY OVERVIEW

LOCATION AND SIZE.

Japan, an island nation in east Asia, is an archipelago (large group of islands) located east of the Korean peninsula. It has an area of 377,835 square kilometers (145,882 square miles), which makes it slightly smaller than the state of California. Japan is bordered by the Pacific Ocean on the north and east, by the Philippine Sea and the East China Sea to the south, and by the Sea of Japan on the west. It has a coastline of 29,751 kilometers (18,487 miles). Japan's major cities, including Tokyo, its capital, and Yokohama, its major port, are located in the southeastern part of the country, on the main island of Honshu. Kyoto, Nagoya, and Osaka are in the southern part of Honshu. Sapporo is located on the northern island of Hokkaido. The other 2 main islands in the Japanese archipelago are Kyushu and Shikoku, to the southwest.

POPULATION.

Japan's population was estimated at 126,549,976 in July 2000. The population grew from 115,000,000 in 1975 to 126,300,000 in 1998, indicating a growth rate of 0.5 percent. With Japan in a state of near zero population growth, this total is expected to decline to 126,000,000 by 2015. In 2000, the estimated birth rate was 9.96 per 1,000 population, and the estimated death rate was 8.15 per 1,000. In the same year, the net migration rate was 0 percent.

The Japanese population is very old. According to the 2000 estimation, 17 percent of the population is 65 years old and over, a proportion that is expected to rise to 24.6 percent by 2015. In 2000, 15 percent of the population was under 14, and 68 percent was between 15 and 64.

Japan's population is very homogenous, with ethnic Japanese constituting 99.4 percent of the total. Ethnic minorities, which account for 0.6 percent of the total population, include about 24,000 indigenous Ainu people in Hokkaido and about 690,000 Koreans, mostly citizens of North or South Korea. There are much smaller groups of Chinese and Caucasians.

The population is highly urbanized, with about 78.5 percent of the population living in urban areas in 1998, a very small increase from 1975, when they accounted for 75.7 percent. The urban population is expected to increase to 82 percent by 2015. Based on 1999 statistics, Tokyo, the capital, is the largest urban center, with a population of 8,049,000. Other major urban areas are Yokohama (3,393,000), Osaka (2,594,000), Nagoya (2,167,000), Sapporo (1,811,000), and Kyoto (1,460,000).

OVERVIEW OF ECONOMY

Once a predominantly agrarian society, Japan began its industrialization in the second half of the 19th century by adopting Western technology, and developed itself into a major industrial power by the first decade of the 20th century. Its economic and military power continued to grow in the following decades, enabling it to emerge as an expanding global power in the 1930s. The Japanese entry into World War II (1939-45) led to a devastating defeat marked by the U.S. atomic bombing of the cities of Hiroshima and Nagasaki. Apart from the destruction caused by the atomic bombs, the war devastated the Japanese economy and destroyed most of its industrial base and infrastructure .

Thanks in part to U.S. support during the postwar occupation, Japan began restoring its free-enterprise economy and industries in the 1940s. The Japanese economy began to expand in the 1950s and continued its impressive growth as a highly modern mature industrial economy until the early 1990s, when it slowed considerably. By the 1980s, it ranked as the world's second largest economic power after the United States. In 1999, Japan's GDP was 45 percent of that of the United States, but larger than the combined GDP of France and Germany. By the first decade of the 21st century, Japan had established itself as a major exporter of industrial products.

On average, Japan's annual GDP growth was about 10 percent from the 1950s until the 1970s. The growth rate began to fall in the 1970s for external and internal reasons. The first "oil shock" in the early 1970s pushed up oil prices and significantly increased imported fuel costs. Since Japan's economy depends heavily on imported fuel, this development slowed economic growth. In 1974, the economy contracted by about 1.2 percent of total GDP. The second oil crisis of the late 1970s and the early 1980s slowed the economy to a smaller extent, causing a 0.4 percent annual shrinkage of GDP from 1980 to 1985. The situation worsened in the mid-1980s when an increase in the value of the yen increased the price of Japanese exports, leading to a decrease in global market demand. As a result, GDP growth dropped from 4.4 percent in 1985 to 2.9 percent in 1986. The damaged export industries sought to regain their competitiveness in international markets through massive relocation of their production to facilities abroad, notably in southeast Asian countries, where the cost of production was much lower than in Japan.

To offset the negative impact of the stronger yen on the economy and to stimulate growth in the domestic market, the Japanese government adopted a financial policy in the late 1980s to bolster the real estate and financial sectors. During this period, which came to be known as the "bubble economy," the Bank of Japan reduced its lending interest rate and the government increased its spending dramatically, which raised the value of stocks and inflated the price of land. This in turn stimulated spending and investment by both businesses and consumers. By 1991, stock speculation and large investments in real estate pushed prices up so much that the Bank of Japan was forced to intervene. This burst the bubble economy, and contributed to a decline in the Japanese economy during the 1990s. During that decade, Japanese products became less competitive in domestic and international markets because of higher prices.

The end of the bubble era initiated a period of sluggish growth and a loss of public confidence in the economy, both of which have continued into 2001. Although the government's deflationary measures (policies to reduce prices) triggered a decline in the Japanese economy in the 1990s, they did succeed in keeping inflation very low throughout the decade; annual rates were 1.8 percent in 1997,-0.3 percent in 1999, and-0.6 percent in 2000. The declines in the financial sector have resulted in higher unemployment through layoffs, once considered unthinkable in Japan. From its near-zero levels before 1991, the unemployment rate jumped to 2.2 percent in 1992, 3.2 percent in 1995, and 4.7 percent in 1999. The rate reached a record high of 4.9 percent in March 2000. Compared with many other developed economies such as Canada's, with an average unemployment rate of about 10 percent in the 1990s, Japan's unemployment rates since 1991 have not been very high. Yet they have been very high for a country which long prided itself on its traditions of "lifetime employment" for selected workers and strong employee loyalty. To avoid massive layoffs, many companies initiated a policy of reducing salaries, wages, and bonuses, thus lowering the living standards of many employees and decreasing spending, which, in turn, has prolonged the economic decline. Aimed at boosting the declining economy, Japan tried to restructure the financial sector in 1996 by introducing the so-called "Big Bang" reform measures. Its near zero-percent interest rate contributed to a short-lived increase in GDP (5.1 percent), but it failed to make growth sustainable.

The 1997 Asian financial crisis (which affected South Korea, Hong Kong, Thailand, Indonesia, Malaysia, and Singapore) was the major external factor responsible for Japan's economic downturn. It affected many markets of importance to Japan and worsened the Japanese economy by reducing export demand. The collapse of 3 major Japanese banks and a decrease in consumption further damaged the Japanese economy, which registered a 2.5 percent GDP decline in 1998, though it increased slightly, by 0.2 percent, in 1999 and about 1 percent in 2000.

Japan has benefited from continuous trade surpluses since the 1980s, amounting to $107 billion in 1999 and $95 billion in 2000. As a result, it has the world's largest foreign reserves, equal to $288 billion that same year. Four factors are responsible for these trade surpluses. First, Japan has a highly diversified advanced manufacturing sector capable of producing high-quality exportable products, and total exports were valued at $450 billion in 2000. Second, Japan's protected economy puts restrictions on foreign competition, including barriers to large-scale imports of foreign products. This situation has been gradually changing since the early 1990s, and the main barriers to foreign consumer goods , for instance, have been removed. Nevertheless, many restrictions have limited the flow of imports, which totaled $355 billion in 2000. Third, Japan's poor economic performance since the early 1990s has decreased demands for the import of various products, including fuel and raw material for commercial purposes, while also decreasing demand for many consumer products by a public concerned about unemployment and wage/salary cuts. Finally, Japan's aging population has, since the 1980s, gradually been spending less money on consumer products. If the population decreases as predicted, the shrinkage of the domestic market will have a severe economic impact on the Japanese economy.

Still, Japan is the world's second largest economic power and the second most technologically advanced economy after the United States. The most important sector of the Japanese economy is industry, which includes manufacturing, construction, and mining. Manufacturing is highly diversified and includes light industry, heavy industry, and high-tech. Manufacturing is the largest contributor to exports, but it is heavily dependent on imported raw materials and fuels. Industry is the second largest sector in terms of contribution to GDP (35 percent in 1999) and to the workforce (30 percent in 1999). Like other mature industrial economies, services form the largest economic sector, accounting for the largest contribution to GDP (63 percent in 1999) and to the work-force (65 percent in 1999). The growing service sector consists of many services such as financial, retail , and tourism. At the beginning of the 21st century, agriculture, including fishing and forestry, is its smallest sector, accounting for the smallest share of GDP (2 percent in 1999) and of the workforce (5 percent in 1999). However, this sector is highly developed and produces all of Japan's rice, but it does not supply all its agricultural needs, which makes Japan dependent on large imports of agricultural products, including foodstuffs. Being a major industry, fishing has expanded into the world's most highly modernized and efficient fishing industry, accounting for 15 percent of the globe's annual catch. Nevertheless, its products meet only a portion of domestic needs, making large imports of fishery products a necessity. Japan is also dependent on large forestry product imports, because its forestry industry can only satisfy a fraction of needs.

The Japanese economy consists of a large private sector and a small public sector . The economy benefits from a very dedicated and disciplined workforce whose members are known for their strong work ethic and loyalty to their corporations. It also enjoys advanced technology, which makes it capable of producing state-ofthe-art products. Close cooperation among suppliers, manufacturers, and distributors in close-knit groups called keiretsu also helps the economy grow fast. Such cooperation has received credit for the rapid rebuilding of the devastated Japanese economy in the post-World War II period. However, the economy lacks adequate domestic production of raw materials, fuel, and agricultural products; consequently, it is extremely sensitive to fluctuations in world prices for these items.

The Japanese economy is highly regulated. In the postwar period, this turned it into a well-protected economy practically closed to foreign competition by tariffs , restrictions, and quotas. Pressures by its trading partners and competitors (mainly the United States and the European Union) forced it to begin opening its market to foreign competition (goods and investments) in the 1980s. The economic decline of the 1990s inclined the Japanese government to encourage foreign investment by further liberalizing the economy. Since the early 1990s, the government has sought to reduce its role in the economy by initiating deregulation reforms that removed an enormous number of restrictive government regulations.

The Japanese government has not implemented the deregulation reforms evenly. The consumer-goods market is now open to foreign imports, while many restrictions on the financial sector have been removed. Deregulation in the air transport industry has increased foreign flights to Japan, especially from the United States, which now has an "open skies" pact with Japan. However, the reforms have been quite limited in the manufacturing sector due to a fear of massive unemployment caused by an extensive foreign presence in this sector. The increased competition will likely force domestic manufacturers to downsize their operations while bankrupting others, resulting in layoffs and unemployment. In short, the ongoing deregulation reforms have gradually contributed to a more open Japanese economy, although there are still many restrictions on economic activities.

History and geography have made an impact on the shaping of the Japanese economy. Japan's close proximity to the Asian Pacific countries (South Korea, Taiwan, Hong Kong, China, Singapore, Thailand, and Malaysia), all among the world's fastest-developing economies, has helped it expand its trade with them. These countries have been emerging as Japan's largest group of trading partners, accounting for 37.2 percent of its exports and 39.6 percent of its imports in 1999. These economies address some of Japan's major needs for fuel, minerals, and agricultural products, for example, while being large markets for its industrial products. Japan recognizes South Korea as the only legitimate Korean government, and its growing economic ties with South Korea have worsened Japan's relations with North Korea. North Korea's strong military force remains a security threat to Japan, a justification for spending $42.9 billion on defense (0.9 percent of its GDP) in the fiscal year of 1998-99. This is a small amount, with no major negative impact on Japan, but symbolically reflects concern about North Korea's military power. Russia's continued occupation of the Kurile Islands, captured by the Soviet Union in 1945, has prevented the conclusion of an official peace treaty between the 2 countries, and has limited their economic relations.

POLITICS, GOVERNMENT, AND TAXATION

Defeated in World War II, Japan began its postwar political life as an occupied country. The Allied military occupation, which aimed to democratize the nation, continued until 1952 when Japan regained its full sovereignty. Japan began political, economic, and social reforms in the second half of the 1940s, which paved the way for its future economic growth. In 1947, its new constitution provided for a democratic multi-party political system based on a free-enterprise economy. The emperor remains as a ceremonial head of state, but political power rests with the prime minister as head of government. The parliament consists of a 480-seat House of Representatives (Shugi-in) and a 252-seat House of Councilors (Sangi-in). Members of parliament are elected through regular free and fair parliamentary elections held every 4 years. In practice, the leader of a party, or coalition of parties, with the majority of seats in the House of Rep- resentatives becomes the prime minister. The central government in Tokyo makes all major policies and decisions, which are implemented by the regional and municipal governments.

The Liberal Democratic Party (LDP) has dominated the Japanese political system for most of the postwar era, either as the ruling party or as the leading member of a coalition government. In the June 2000 parliamentary elections, the ruling coalition of the LDP, the New Komeito, and the Conservative Party maintained its parliamentary majority and remained in power. These 3 parties favor a free-enterprise economy with a strong private sector in which the state also plays a role.

The Japanese government has a great influence in the economy. It is extensively involved in the development and operation of the nation's infrastructure (roads, airports, power generation, and telecommunications services). The government's regulatory power enables it to exert control over economic sectors and activities. It uses its resources and power to develop domestic industries through direct financial assistance to emerging or ailing industries and by setting various regulations to protect industries from foreign competition. The worsening of the economic situation in 1991 resulted in a demand by business for the deregulation of the Japanese economy to enable it to cope with the economic downturn. Deregulation reforms have resulted in a smaller state role in the economy, although it still exercises great influence.

With the exception of the Japan Communist Party, the opposition political parties of Japan support a free-enterprise economy led by a strong private sector with a varying degree of state involvement. Among them, the most important ones are the Democratic Party of Japan, the Liberal Party, the Reform Club, and the Social Democratic Party.

TAXATION.

Japan has a relatively complicated tax system. There are a variety of tax rates for corporations depending on their size, revenue, and location, and for individuals based on their income, location, and personal status. In 1999, tax rates ranged between 5 percent and 30 percent. Tax rates for Japanese and foreign corporations are the same. Foreign corporations operating in Japan are only liable for their income generated in that country. There are various tax breaks for businesses to stimulate economic activities. Corporate taxes accounted for 40.87 percent of total collected taxes in 1999, while other taxes, including personal income taxes and indirect taxes , accounted for the rest.

Taxes and stamp revenues form the bulk of government revenues (92.6 percent in 1999). Non-tax revenues (e.g., tariffs and various government fees) account for the remainder of government revenues (7.4 percent in 1999). Budget deficits are common, since government expenditures are always much larger than government revenues. There are 3 major reasons for this: tax rates are generally low; the aging Japanese population provides limited tax revenues, especially from the growing retired population, and consequently requires more government spending on health-care services; and the government spends large sums to stimulate economic growth. In the 1999-2000 fiscal year, total government revenues from tax and non-tax sources were about $446 billion while expenditures were $718 billion. The government finances budget deficits by issuing bonds, equal to $272 billion in 1999-2000. This reflects a substantial increase in budget deficit from the fiscal year of 1996-97. The Japanese government has tried to avoid raising taxes because of the reductions in consumer purchasing power caused by the economic decline of the 1990s.

The Japanese government's annual issuance of bonds to finance its deficits has created a huge debt. In 2000, the outstanding government bonds were estimated at about $3.5 trillion. The government also engages in off-budget spending (equal to 70 percent of its annual spending) under its Fiscal Investment and Loan Program (FILP), which funds large projects such as housing and road building. The source of this spending is the savings of individuals deposited in the state-run postal savings system. In 1999, the government paid $174 billion in service charges on its debt. This is a huge financial burden on the economy, though it has not yet created a crisis. Still, if the economy does not grow significantly in the next few years and the debt continues to increase, the debt burden will have a major negative impact on the Japanese economy between 2005 and 2010.

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

Japan has a very advanced and well-maintained infrastructure, which undergoes regular upgrading and expansion. Both the private and public sectors undertake various infrastructural projects and operate their respective services.

Japan has a very extensive and modern road network. It consists of 1,152,207 kilometers (715,981 miles) of highways, of which 863,003 kilometers (536,270 miles) are paved. They include 6,114 kilometers (3,799 miles) of expressways. The number of motor vehicles increased from 70,106,536 in 1995 to 73,688,389 in 1999. Major development projects to expand the Japanese highway network include a $32-billion project for the construction of a second Tomei-Meishin Expressway, connecting Tokyo and Kobe via Nagoya. The length of Japan's railways is 23,670 kilometers (14,708 miles), more than half of which is electrified. Japan is famous for its high-speed trains.

As a country surrounded by water, Japan has developed a very extensive and modern sea transportation system. It includes many ports and harbors such as Akita, Amagasaki, Chiba, Hachinohe, Hakodate, Higashi-Harima, Himeji, Hiroshima, Kawasaki, Kinuura, Kobe, Kushiro, Mizushima, Moji, Nagoya, Osaka, Saki, Sakaide, Shimizu, Tokyo, Tomakomai, and Yokohama. Japan has a very large merchant-marine fleet, which is a necessity for its international trade and for ensuring an uninterrupted arrival of raw material, fuel, foodstuffs, and other necessary products. The fleet comprises 662 ships with a total capacity of 13,039,488 tons.

Japan benefits from a modern and extensive air transportation system. In 1999, there were 171 airports, of which 140 have paved runways, and 14 heliports. Airports in Tokyo, Kagoshima, Osaka, and Kansai provide international services. The major international airports are Narita, which serves Tokyo; Kansai, which serves Kobe, Kyoto, and Osaka; and Chitose (Sapporo) and Sendai in Northern Japan, which serve many northern cities. Major airport construction projects include a second runway for Kansai International Airport, a $7.2 billion-project for Central Japan International Airport in Ise Bay, and the New Kitakyushu Airport in the Kyushu region located in the western part of Japan. Japan has a large air passenger fleet consisting of private and public airlines.

Japan's telecommunication system is very advanced. It consists of private and public service providers, but a public company, Nippon Telephone and Telegraph (NTT), is the largest provider, controlling about 95 percent of fixed telephone lines. In 1997 there were 60.3 million fixed telephone lines in use. By 1999, there were 30.6 million cellular phones in operation, a 260 percent increase in 2 years, and 6.3 million personal handphone systems (PHS), cheaper versions of cellular phones with limited signal coverage. Personal computer ownership is high: 237 PCs per 1,000 population, in 1998, compared to 459 per 1,000 population in the United States, which has the world's highest rate of PC use. In 1999, there were 357 Internet service providers in Japan. The rate of Internet use is low: 13.34 per 1,000 population in 1999, as compared with 112.77 in the United States. Japan has a very large television and radio industry operated by private and public sectors. In 1997, there were 86.5 million television sets and 120.5 million radios in use.

The Japanese power-generation industry includes both private and public companies, though in 1999, only 5 percent of the nation's power was created by the private sector, a proportion that is expected to increase with industry deregulation (a lessening of government controls). Japan's electricity is derived from 4 major methods: thermal (using oil, liquefied natural gas, and coal), nuclear, hydro (water power), and non-conventional (geothermal, solar, and wind). In 1998, the proportion of electricity generated from these sources was 57 percent, 32 percent, 9 percent, and 2 percent, respectively. In that year, total electricity produced amounted to 995.982 billion kWh, well above the consumption of 926.263 billion kWh. In anticipation of large increases in consumption in the 21st century, Japan is planning to increase its output to 1,280 billion kWh by 2020.

Since its thermal generators depend heavily on large imports of fuel, Japan is planning to decrease its dependency on this method and increase its dependence on nuclear power, although that method is more costly. Accordingly, 9 new nuclear reactors are planned to become operational by 2008, providing an additional 11.3 gigawatts (GW) of electricity. Japan is also encouraging the expansion of generators using renewable energy, such as hydropower and geothermal energy.

ECONOMIC SECTORS

Japan rebuilt its economy in the late 1940s and the 1950s to establish itself as the world's second largest economy in the 1980s, a position it still holds as it enters the 21st century. As a result, its 3 main economic sectors are technologically advanced. Agriculture, the smallest sector, is capable of meeting some domestic needs, though most foodstuffs must be imported. Industry, the second largest sector, has a highly advanced and efficient manufacturing branch that has been the engine of growth for Japan since the 1960s. Its state-of-the art products have captured many markets to ensure healthy annual trade surpluses for Japan. As in all matured industrial economies, services constitute Japan's largest economic sector, and this sector has been growing since the 1980s.

AGRICULTURE

Agriculture, including fishery and forestry, is Japan's smallest economic sector. Its contribution to GDP has decreased substantially since 1945. It represented 6.1 percent of GDP in the 1970s, but fell to about 2 percent in 1999. Its share of the workforce has remained stable since the 1980s; totaling 5 percent (about 3.38 million workers) in 1999.

FARMING.

Production of agricultural products, including rice for domestic consumption, is declining due to the scarcity of farming land, which makes large-scale and efficient cultivation rather difficult. High input costs push up the prices of domestic products, as do restrictions on production, pricing, and marketing imposed by the government and agricultural cooperatives. As a result, expensive domestic products are less attractive to consumers than cheaper imported goods.

As an indicator of its declining economic importance, the growth rate of agriculture has been mainly negative over the last 2 decades, even with direct government support, such as heavy tariffs on imported rice (300 percent in 2000). In 1999, the growth rate was 1 percent, a slight improvement from 1996 and 1998 when the growth rates were-6.8 percent and-4.5 percent, respectively.

The agriculture sector is technologically advanced and completely mechanized, but it does not satisfy the essential agricultural needs of the country. Major agricultural products include foodstuffs (wheat, barley, maize, potatoes, rice, soybeans, sugar beets, and sugar cane), fruits, meat products (beef, veal, chicken, horse, lamb, pork, and turkey), fishery products, and forestry products (timber). Export items include fish, prepared foods, cigarettes, crude organic materials, and husked rice. Major imports are fish products, grains, and fruits. In 1998, for example, the values of agricultural exports and imports were about $2.2678 billion and $51.7805 billion, respectively, revealing Japan's dependency on agricultural imports.

In 1999, total agricultural production was 21,177,737 tons, down from 23,016,800 tons in 1995. Rice production met domestic needs, but total output fell from 13,435,000 tons in 1995 to 11,468,800 tons in 1999. Production of potatoes and wheat showed slight increases during this period.

FORESTRY.

Forests cover about 70 percent of Japan, of which 40 percent are human-made. Reforestation is a necessity in a land that is endangered by systematic soil erosion caused by heavy rainfalls. Forestry products meet only a small portion of domestic needs (about 20 percent in 2000), while the rest has to be imported, mainly from such sources as the United States and Indonesia. The value of forestry imports was $5.7 billion in 1999, a sharp decrease from 1995 when it was $10 billion. Japan's economic downturn was responsible for this decline.

FISHERIES.

Japan has a large fishing industry. Despite the fact that its large annual catch accounted for 15 percent of the world's total for 1999, the industry is unable to meet Japan's domestic needs. Japan is therefore the world's largest importer of fishery products, consuming 30 percent of such imports in 1996. In 1999, 2,924,000 tons of fishery products were imported, a relatively large increase from the 1995 levels of 2,803,000 tons. The annual catch in the post-World War II era, which had always been above 10 million tons before 1990, dropped to 7.4 million in 1997. This decline is attributed to several factors, notably coastal-water pollution and disputes over fishing in international waters.

INDUSTRY

Industry, including manufacturing, construction, and mining, has been the engine of growth for Japan since the end of World War II. As happens in all mature industrial economies, the expansion of the service sector has surpassed that of industry, which has been reduced to the second largest sector. In 1999, industry's contribution to GDP was about 35 percent, a decrease from the 1970s when it was more than 40 percent. In 1999, industry employed about 30 percent of the labor force (20.34 million workers), a decrease from 1995 when it accounted for 31.7 percent (21.2 million).

MANUFACTURING.

Japan has a highly advanced and diversified manufacturing branch that has been the heart of the Japanese economy in the postwar era. It helped the Japanese rebuild their shattered industrial sector after the end of World War II while enabling them to emerge as a global exporter of a variety of products. It is the reason for the high-value of exports from Japan ($450 billion in 2000). Manufacturing is the most important reason for its constant trade surpluses ($95 billion in 2000), despite the poor performance of the Japanese economy since the early 1990s. Its share of GDP increased from 24.5 percent in 1995 to 25 percent in 1999, registering a limited growth. Its share of workforce dropped from 14.6 percent to 13.4 percent in the same period.

The high cost of labor and the high value of the yen encouraged the relocation of manufacturing to other countries, especially in Southeast Asia and the Pacific region, since the 1980s. This trend has continued through 2001. Japan's direct investment abroad increased from $40.8 billion in 1998 to $66.7 billion in 1999.

Manufacturing consists of light industry (textiles and processed foods), heavy industry (chemicals, automobiles, shipbuilding, machine tools, steel, and nonferrous metals) and high-tech industry (electronics, telecommunications, and computers). Japan is one of the world's largest and most technologically advanced producers of a wide range of light and consumer products such as semiconductors and electronic devices, as well as cars, ships, and steel. Manufacturing includes small, medium, and large enterprises, of which the first 2 groups account for the overwhelming majority, 99 percent in 1997.

The 3 largest contributors to exports are industries involved in high-tech transport equipment and non-electrical machinery. In 1999, the value of high-tech exports, including computer devices and semiconductors, was $101.5 billion, a decline from the 1995 figure of $113.5 billion but a significant increase from 1998, when it was $89.7 billion. The transport-equipment industry had 1999 exports valued at $94.8 billion, a substantial increase from the 1995 figure of $89.7 billion. Exports of motor vehicles were the largest segment of this industry, totaling $54.7 billion in 1999, an increase from 1995 and 1998 levels, when they totaled $53.1 billion and $50 billion, respectively. In 1999, the non-electrical machinery industry exported $89.1 billion in various products, such as office machinery, a decline from its 1995 exports of $106.5 billion.

A major weakness of the Japanese manufacturing sector is its heavy dependency on imported raw materials and fuel. For example, its iron and steel industry needs to import almost all of its iron ore requirements, which totaled 119.2 million tons in 1996.

CONSTRUCTION.

The construction industry accounted for about 9 percent of Japan's GDP in 1999, against a 10.8 percent share in 1995. It employed 9.7 percent of the Japanese workforce (6.57 million workers) in 1999, a small decrease from 1995, when its share was 9.8 percent (6.6 million).

The deflationary policies of the Japanese government since the 1990s had a negative impact on the construction industry, as demonstrated in a 1.8 percent loss in GDP between 1995 and 1999. Construction projects declined along with the economy. These economic policies accelerated the process of relocation of many manufacturing units abroad, resulting in a decline in large construction projects at home. The Japanese government has tried to assist this industry by implementing large infrastructural projects. In 1999, the total value of construction projects was $136.3 billion, a sharp decline from its 1995 level of $206.8 billion.

Many new, major projects after 2000 will help the industry survive until the economy begins to grow again. There is a $400-billion project by the Kansai local government to build complexes for commercial, industrial, and research facilities. There are also 2 multibillion dollar airport projects: one to construct a second runway at Kansai International Airport, and another to build a new airport in Ise Bay; as well as road projects such as the $32-billion Tomei-Meishin Expressway, connecting Tokyo and Kobe via Nagoya.

MINING.

Japan's lack of adequate minerals and fossil energy (oil, gas, and coal) forces it to rely extensively on imports. For example, domestic production of copper ore, lead ore, zinc ore, and iron ore met only 0.1 percent, 4.8 percent, 2.2 percent, and almost 0 percent of annual needs in 1999, respectively. This greatly handicaps the Japanese economy, since this situation makes it highly sensitive to any interruption of imported supplies. The mining industry makes a very insignificant contribution to Japan's GDP, 0.2 percent in the period 1995 to 1999, with about the same contribution to the workforce.

Japan's small mining industry is in decline because of the depletion of the country's small mineral and fossil energy resources. The production of copper ore dropped from 6,043,000 tons in 1994 to 1,070,000 tons in 1998. Likewise, lead-ore production fell from 9,946,000 tons in 1994 to 6,198,000 tons in 1998, and coal production declined from 6,932,000 tons in 1994 to 3,663,000 tons in 1998. Iron-ore output dropped from 3,000 tons in 1994 to 2,000 tons in 1998, and zinc from 101,000 to 68,000 tons during the same period.

Japan has no significant energy reserves other than a small deposit of coal equal to 865 million tons. Most of its major deposits were consumed in the 1960s during the period of rapid economic growth, at which time the annual production was about 61 million tons. The existing deposits are not economically viable because of high labor costs and strict environmental regulations. In 2000, there were only 2 operating mines with a total annual production of 3 million tons. These mines operated with government subsidies , and the Japanese government will end these subsidies in 2003. This will make their continued operation unprofitable, since domestic coal is priced 3 times higher than imported coal. Domestic production accounted for only 2.8 percent of supplies in 1998 and 1999, a drastic decrease from 1960, when it accounted for 86 percent. In 1999, coal imports totaled 109,263,000 tons, while domestic production totaled 3,286,999 tons. This marked a decline from 1995 levels of 128,978,000 tons and 6,263,000 tons, respectively.

Consuming 5.5 million barrels of oil per day in 1999, Japan is the world's second largest oil consumer after the United States, but has practically no oil reserves, as its proven stock is equal to only 59 million barrels. This consumption will likely increase significantly when the Japanese economy begins to grow again. Japan's oil consumption has declined since 1996 because of poor economic performance. In 1999, Japan imported over 228,927,000 tons of crude oil, while producing only 604,000 tons, a decline from 1996 when their respective shares were 266,921,000 tons and 861,000 tons.

Japan's natural gas reserves are about 1.4 trillion cubic feet. Its domestic production is limited, which makes it rely on large imports of liquefied natural gas (LNG), mostly from Indonesia and Malaysia. In 1999, such imports equaled about 97 percent of its needs and reflected a 200-percent increase from 1991 levels, while domestic production remained almost the same.

SERVICES

The service sector (financial, retail, tourism, and transportation) has been growing since the 1970s and now forms Japan's largest economic sector. In 1999, services accounted for 63 percent of GDP and 65 percent of the workforce (44.07 million workers). Both figures indicate a significant growth from 1995, when they accounted for 54 percent and 63.2 percent, respectively.

FINANCIAL SERVICES: BANKS.

Japan has one of the world's largest financial sectors, a necessity for its large economy. Among the most important are banks, securities companies, the postal savings system, and insurance companies. Financial services contributed 18.9 percent of GDP in 1999, an increase from its share of 17.9 percent in 1995. The entire financial system is highly regulated, making financial activities more difficult in Japan than in other mature industrial economies. The system is controlled and regulated by the Ministry of Treasury (formerly known as the Ministry of Finance), the Bank of Japan, which is the central bank, the Financial Supervisory Agency (FSA), and the Financial Reconstruction Commission (FRC). The Japanese financial system includes other institutions such as venture-capital firms, financial leasing, and asset-management firms.

Despite the deregulating reforms of the Japanese government since the 1990s, the financial system is still extensively regulated. Of these, the "Big Bang" reform has been the most comprehensive one. Launched in 1996, it was aimed at liberalizing the financial system to address the demand of domestic institutions for the removal of various government restrictions and also to open the financial sector to foreign competition. A new governmental entity, the Financial Supervisory Agency, was created to oversee the reforms. A major beneficiary has been foreign financial institutions, which are now faced with less restrictive regulations, and can extend their operations in areas previously closed to them, such as the mutual-fund business. They can also engage in alliances with Japanese firms or take them over. In 2000, for instance, Ripplewood Holdings, an American firm, took over the Long-Term Credit Bank of Japan.

Based on 1999 statistics, the Japanese banking system consists of 9 city banks, 1 long-term credit bank, 7 trust banks, 121 regional banks, 396 credit associations, and 322 credit cooperatives, with total assets valued at $6.74 trillion. City banks are large financial institutions that provide nationwide services while having extensive operations abroad. The largest of these have their headquarters in major cities such as Tokyo, Osaka, and Nagoya, where their principal activity is in serving large corporations, though they are gradually undertaking other types of activities including serving small corporations. Smaller regional banks, with total assets of $1.7 trillion in 2001, operate mainly in a particular region and provide services to small and medium-size companies. Credit banks, with 2000 assets valued at $570 billion, supply long-term industrial capital to large and small firms. Except for the Industrial Bank of Japan, all credit banks collapsed in the late 1990s. Credit associations, with estimated assets of $900 billion in 2000, function like credit unions in that they receive deposits from the general public and lend only to their members. Credit cooperatives, which provide financing to small- and medium-size businesses in urban areas, had assets of $172 billion in 2000. Like the credit associations, they receive deposits from, and lend to, their members only.

The Japanese banking system also includes public banks, such as the Development Bank of Japan (DBJ), the Japan Bank for International Cooperation (JBIC), and the National Life Finance Corporation (NLFC). Their mandate is to supplement the activities of commercial banks. The JBIC is mainly involved in international financial operations such as export/import and overseas investment loans. The DBJ provides Japanese and foreign companies operating in Japan with services such as long-term financing. The NLFC provides financial assistance to small businesses such as retailers, restaurants, and small construction companies.

There are also 89 foreign banks in Japan, of which 14 are American, 30 Asian, and 35 European. Owing to the financial reforms of the late 1990s, these banks can be involved in all types of banking operations, such as retail and investment banking and international business. They are also permitted to have branches and provide services to large corporations. As a matter of practice, they provide services mostly to foreign firms and joint ventures , while offering banking services to individuals.

OTHER FINANCIAL SERVICES.

Securities companies, which are active in investment services, have the combined role of underwriters, dealers, and brokers. In 2000, there were 291 securities companies, of which the 3 largest—Nomura Securities, Daiwa Securities, and Nikko Securities—controlled most of the industry. Some 59 are foreign companies, such as 2 American giants, Merrill Lynch and Salomon Smith Barney.

With assets valued at $2.27 trillion in 1999, the Japanese postal savings system is the world's largest. It consists of about 24,000 post office branches that accept savings deposits and offer insurance activities and annuities. The system provides an inexpensive source of funds for government projects.

As part of Japan's financial system, the insurance industry has reformed many of its restricted activities since the late 1990s, such as non-life premiums. The industry consists of 46 life and 34 non-life insurance companies with total assets of $1.9 trillion, making it the world's largest insurance industry. Foreign insurance companies are small (44 life and non-life companies), but they are growing. Joint ventures between foreign and domestic firms are also increasing.

RETAIL.

The Japanese retail industry is very large, consisting of a wide range of retailers capable of distributing goods and services throughout the country. In 1999, its share of GDP was 14.4 percent, an increase from its 12.7 percent share in 1995. The industry includes restaurants of various sizes, which also includes franchised restaurants of Japanese and foreign origin. Most retail stores are small (less than 500 square meters), although there are large supermarkets and department stores. High land prices and various regulations restrict the number of large stores, while regulatory laws seeking to protect small businesses from competition create a major barrier to the expansion of large stores. Regulations such as those limiting store space and business hours have contributed to high retail prices, though these have recently been relaxed to some extent. Laws also discourage the establishment of discount retailers and shopping malls.

The distribution system in Japan is complex, tightly controlled, and labor-intensive, making the sector difficult for foreign retailers to enter. As a rule, imported products are usually sold at large stores, department stores, and discount stores, while about half of all consumer purchases are made at small neighborhood stores with fewer than 5 employees.

TOURISM.

Japan has a very large and well-developed tourist industry, which generated $4.3 billion in 1997. It provides an insignificant contribution to GDP, equal to 0.1 percent in 1997, no change from its share in 1993. The country's mild temperatures and long coastlines, together with its numerous historical sites, make the country an attractive destination. Foreign tourists mostly visit Tokyo and Kyoto on the main island of Honshu, while domestic tourists are also attracted to the northern island of Hokkaido and the southern islands of Okinawa, Miyako, and Ishigaki. Still, only 4.2 million tourists visited Japan in 1997, a significant increase of 24 percent from 1993, but still far below other Asia-Pacific tourist destinations, such as the 9 million who visited Hong Kong in 1997, bringing $9 billion in revenues. This is mainly due to the high cost of living in Japan, one of the highest among the industrialized economies, and to its remote location. Events such as the 2002 soccer World Cup, which will be co-hosted by Japan and South Korea, will uplift the Japanese tourist industry. If successful, Japan's efforts to host the 2008 Olympics in Osaka will be a major boost for its tourist industry. In anticipation of an increase in tourism, many hotel projects are underway all over the country, including a 780-room Marriott hotel in Nagoya.

INTERNATIONAL TRADE

Japan has amassed large trade surpluses since the early 1980s because of 2 factors. Its diversified manufacturing sector has produced high-quality products such as electronics and cars, which are much in demand in many international markets. Also, the post-war Japanese economy was largely closed to foreign competition through restrictive regulations and high tariffs aimed at protecting domestic industries. Under heavy pressure of its trading partners and competitors such as the United States, Japan began to open its economy to foreign competition late in the 1980s. That resulted in a higher rate of imports, which lowered trade surpluses until early in the 1990s. The economic decline following the bubble economy era significantly reduced demands for imports, resulting in the return of large trade surpluses in the 1990s, which reached $144.2 billion in 1994 before falling to $131.8 billion in 1995 and $83.6 billion in 1996. By 1998, with the economic slowdown, the trade surplus had risen to $122.4 billion, but it declined again to $95 billion in 2000.

The return of large trade surpluses in the 1990s has restarted trade disputes between Japan and its main trading partners, including the United States and the European Union (EU). Two major trading partners of Japan— the United States and the EU—have negotiated with Japan since the 1980s to remove barriers preventing their extensive access to the Japanese market. These negotiations have resulted in relaxed regulations on the imports of foreign consumer goods, like foodstuffs, by Japan, but

they have failed to remove barriers in many other areas. Nevertheless, the Japanese government's economic deregulation policy has made the Japanese market more open to foreign imports, especially in the field of consumer goods.

In 2000, the values of Japan's exports and imports were $450 billion and $355 billion, respectively. This registered a significant increase in both exports and imports from 1998, when their respective values were $374 billion and $251 billion.

Major exports of Japan include electrical equipment and machinery, electronics, telecommunication and computer devices and parts, transport equipment and motor vehicles, non-electrical machinery, chemicals, and metals. Its imports are mainly machinery and equipment, raw materials, including minerals and fuel (oil, liquefied natural gas, and coal), agricultural products, and fishery products.

Japan's major trading partners are the Asian Pacific countries, the United States, the EU, and the Persian Gulf countries. The United States is Japan's largest single trading partner. In 1999, it accounted for 30.7 percent of Japan's exports, an increase from its share of 27.3 percent in 1995, and 21.7 percent of its imports, a decrease from its 1995 share of 22.4 percent. As a group of countries, the Asian Pacific countries (South Korea, Taiwan, Hong Kong, China, Singapore, Thailand, and Malaysia) form the largest collective trading partner of Japan. In 1999, they accounted for 37.2 percent of its exports, a decrease from their 1995 share of 43.2 percent, and 39.6 percent of its imports, an increase from their 1995 share of 36 percent. The Asian financial crisis of the 1990s resulted in a decline in Japan's exports to these countries. The slowdown in the Japanese economy was the main factor in lowering the share of imports from the United States and the EU. The EU (especially Germany and the United Kingdom) is Japan's third largest trading partner, accounting for a 17.8 percent share of Japan's exports and 13.8 percent of its imports in 1999, compared to its 1995 shares of 15.9 percent and 14.5 percent, respectively. As the main oil suppliers to Japan, the United Arab Emirates and Saudi Arabia accounted for 5.5 percent of Japan's imports in 1999, a small decrease from their share of 5.9 percent in 1995. Japan's economic slowdown of the 1990s reduced its fuel requirements and therefore lowered its imports.

MONEY

Japan has a free- floating exchange rate system against foreign currencies (one in which the exchange market determines exchange rates ). The rates fluctuate with the Japanese economy and those of its major trading partners, though the Bank of Japan intervenes in the

market to ensure that fluctuations do not damage the Japanese economy. Tokyo is the Japanese main foreign-exchange market where about 99 percent of all foreign-exchange transactions are conducted.

Japan has not experienced sharp and sudden fluctuations in its exchange rates since the late 1970s, even with the economic decline of the early 1990s. The rate of exchange of the yen against the U.S. dollar was ¥94.06:$1 in 1995; it rose to ¥130.91 in 1998, and then began to decrease, to ¥113.91 in 1999 and to ¥108 in 2000. As a result of the foreign-exchange liberalization program, which began in the 1980s, and the deregulatory reforms in the 1990s, various restrictions on foreign-exchange transactions have been removed. The 1998 Foreign Exchange and Foreign Trade Law eliminated almost all remaining government restrictions and controls over foreign-exchange transactions. Consequently, companies are now allowed to trade foreign currencies and individuals can open bank accounts in foreign countries without requiring government authorization.

Japan has a stock market of global significance. The market capitalization of the Tokyo Stock Exchange, the largest in Asia, was $4 trillion in 1999, an increase from the 1995 level of $3.2 trillion.

POVERTY AND WEALTH

Since the end of World War II, Japan has developed a highly efficient infrastructure capable of meeting the essential needs of its population in various services. This capability ensures the availability of safe water, sanitation, and health services to all citizens in urban and rural areas alike.

Japan spends a significant amount of its GDP on a modern and efficient health-care service. Spending equaled 7.3 percent of GDP in 1997, about half the level in the United States. The health insurance system introduced in 1961 ensures the availability of health-care services to everyone. Coverage is provided by 2 major insurers: the national health insurance scheme (NHIS) and the employee health insurance scheme (EHIS). Since all

Japanese must take part in a public or a semi-public heath insurance plan, there are few private insurance plans. Depending on the case, the insurance programs cover 70 to 80 percent of the cost services, while the insured covers the rest. The health-care system has contributed to Japan's achievement of the world's highest life expectancy, which was 80 years in 1998.

Japan also has one of the world's highest literacy rates, 99 percent. The Japanese government provides free public schooling for 6 years of primary school and 3 years of junior-high school. In 2000, about 95.9 percent of eligible students attended 3-year senior-high schools, a huge increase from 1960 when only 57.7 percent of the students did so. In 1999, almost 90 percent of the Japanese population completed high school. The quality of the schooling up to grade 12 is very high. The schooling system has been given credit for training an educated and highly disciplined workforce. In 1998, about 45 percent of the population between the ages of 18 and 22 participated in post-secondary education.

Japan is an affluent society where extreme poverty does not exist, although extreme wealth does. High wages and salaries guarantee high living standards, reflected in the high percentage of ownership of electronic devices and home appliances, for instance. In 1999, a color TV, washing machine, vacuum cleaner, and re-

frigerator were found in 98 percent of Japan's households. The standard of living has fallen somewhat due to rising unemployment and reductions in wages, salaries, and bonuses in the 1990s. Heavy government spending on Japan's social safety net, including its unemployment and welfare benefits, prevents extreme poverty. Such spending accounted for $141 billion in 1999, equal to 8.4 percent of GDP.

WORKING CONDITIONS

The Japanese workforce is well-educated and mostly skilled, thanks to the Japanese educational system. It grew from 66.7 million workers in 1995 to 67.8 million in 1999, of whom about 95 percent worked in urban enterprises. The rural workforce involved in farming, fishing, and forestry forms only 5 percent of the total work-force, or about 3.39 million workers. In 1999, 4.7 percent of the workforce (3.18 million workers) was unemployed, a significant increase from its 1995 rate of 3.2 percent (2.13 million).

Japan is a signatory to the International Labor Organization's conventions on workers' rights and freedoms. The Japanese Constitution also guarantees the right to form and join trade unions. Its labor laws recognize the right to organize and bargain collectively. With the exception of the military, police officers, and firefighters, all employees have the right to join unions, to bargain collectively, and to strike. Public employees may join unions, but do not have the right to strike, and their collective bargaining rights are also limited. The government determines their pay according to the recommendations of an independent body called the National Personnel Authority.

There are many unions in Japan, which operate freely. The largest is the Japanese Trade Union Confederation (JTUC), formed when several trade unions merged in 1989. In 2000, it had a membership of about 7.6 million. In 2000, about 22 percent of the workforce (12 million workers) were union members.

Japanese labor law provides for a 40-hour workweek, but the law is not usually enforced in small enterprises. It also prohibits forced or compulsory labor as well as child labor. Children under the age of 15 may not work; children over the age of 15 may be employed for non-hazardous jobs only.

Based on the recommendation of tripartite advisory councils (formed by workers, employers, and public authorities), minimum wages are set that vary from region to region and from industry to industry. On average, minimum wages range between $46 and $53 per day, which are adequate for a decent living standard for a worker and family. Generally speaking, employers usually consult with their respective unions on wage-related issues.

The labor law forbids discrimination in the work-force, though it exists in practice. The Burakumin, who are ethnically Japanese but are the offspring of the so-called outcasts of the feudal era, experience both social and employment discrimination. The labor law provides for equal pay for equal work and the right of women to work. Still, women receive less compensation than men in the same age and work groups. They are also poorly represented in managerial positions, accounting for about 9.2 percent of such jobs in 2000. Also, they form a very small portion of local government positions. Unemployment is disproportionately higher among women and foreign workers, especially undocumented ones coming from the Asian Pacific countries like China, South Korea, and Thailand, who are usually denied their labor rights and are subject to abuses. Work-related safety and health regulations are enforced by government inspectors.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

300 B.C. Jomon, an ancient hunting and fishing culture, begins to be displaced by Yayoi migration. Rice cultivation begins.

300 A.D. The Yamato state consolidates its power.

592. Prince Shotoku encourages the adoption of Chinese political and religious practices.

1543. First Europeans visit Japan in the form of Portuguese traders and Jesuit missionaries.

1573-1603. The Momoyama period begins as Oda Nobunaga assumes power.

1603-1867. The Edo period begins as Ieyasu establishes the Tokugawa shogunate, which closes Japan to foreign contact and expels European traders and missionaries. Rise of the merchant class in Osaka and Edo (Tokyo).

1853. Arrival of U.S. Commodore Matthew Perry in Japan leads to "opening" of Japan to the West after 2 centuries of relative isolation.

1868-1912. The Meiji period begins, initiating a period of Westernization. The power of the shoguns is curbed and the emperor is restored as a constitutional monarch.

1894-1895. Japan and China engage in Sino-Japanese War; Japan wins many decisive military victories.

1904-1905. Japan and Russia engage in Russo-Japanese War; Japan wins many decisive military victories.

1910. Japan annexes Korea and retains it as a colony until the end of World War II in 1945.

1912-1926. The Taisho period begins with accession of Emperor Yoshihito.

1923. The Great Kanto Earthquake levels much of Tokyo.

1926-1989. The Showa period begins with accession of Emperor Hirohito.

1931-1932. Japan invades Manchuria and annexes it to its empire as Manchukuo.

1937. Japan and China go to war.

1938. Military leaders in Japan call for "new order" in Asia, which leads to the Pacific War.

1941-1945. During World War II, Japan engages U.S., British, and other Allied troops in the Pacific, Philippines, and throughout Southeast Asia. The war ends with the American atomic bombings of Hiroshima and Nagasaki, forcing Japan's surrender. U.S. occupation continues through 1951.

1947. Japan adopts a postwar Constitution largely drafted by U.S. legal experts during the occupation period.

LATE 1940s. Japan begins the reconstruction of its industry and infrastructure, which were devastated during World War II.

1952. Japan regains full sovereignty upon signing a peace treaty with the United States and 45 other Allied nations.

1955. The Liberal Democratic Party (LDP) is formed by the merger of Japan's 2 main conservative parties, the Democratic Party and the Liberal Party.

1960s. Japan becomes a major global producer of electronics.

1973. The first oil crisis damages the Japanese economy and reduces GDP growth.

1979. The second oil crisis has a less drastic impact on Japan's economy than the first, in 1973.

1985. The yen appreciates against foreign currencies, increasing the cost of Japanese exports, and leading to the relocations of some manufacturing activities abroad.

1980s. Japan emerges as the world's second largest economy, and this era sees the beginning of the "bubble economy." Under foreign pressure, the Japanese government begins its economic liberalization program.

1989. Death of Showa Emperor (Hirohito). The Heisei period begins with the accession of Emperor Akihito.

1990s. The bubble economy ends with the intervention of the Japanese government, whose deflationary policy contributes to a period of economic decline and rising unemployment which lasts throughout the decade.

1995. In January, an earthquake kills more than 5,000 people in the Kobe area; in March, the Aum Shinrikyo cult attacks Tokyo's subway system with nerve gas.

1996. Prime Minister Murayama resigns and is succeeded by Ryutaro Hashimoto. Japan's economy experiences a significant growth rate (5.1 percent) after years of sluggish growth.

1998. Prime Minister Hashimoto resigns and is succeeded by Keizo Obuchi. The Financial Supervisory Agency is established.

2000. Prime Minister Obuchi suffers a fatal stroke and is succeeded by Yoshiro Mori.

2001. Prime Minister Mori resigns and is succeeded by Junichiro Koizumi.

FUTURE TRENDS

At the beginning of the 21st century, Japan has a very technologically advanced and mature industrialized economy. Even after a long period of sluggish and neg- ative growth in the 1990s, its economy is still the world's second largest and most technologically advanced one. While the prospect for long-term growth is assured, certain internal and external factors will impede or slow down its growth in the short run.

The external factors include the poor economic performance of the major trading partners of Japan. After about a decade of healthy growth, the American economy is entering a period of low growth and quite possibly decline and recession . With the exception of Taiwan, all other Asian Pacific countries are still suffering from the devastating blow of the 1997 financial crisis. Some of them, such as South Korea, are showing recovery, but their heavy foreign debt could easily prevent their full recovery and growth. As the major trading partners of Japan, the poor economic performance of these countries will damage the Japanese recovery and prolong its economic stagnation. External barriers also include the toughening competition among and between Japan, the United States, and the Asian Pacific countries over world markets, especially for motor vehicles and high-tech products like personal computers and semiconductors. More intensive competition will reduce Japan's share of these markets and negatively affect its economic recovery.

Internally, Japan will be faced with continued pressure to liberalize its economy and make it open to foreign competition. Economic liberalization carried out under the deregulation reforms has encouraged foreign investment in Japan, which is a positive stimulus to the economy in the short run. However, in the long run, extensive foreign competition will likely lead to downsizing, bankruptcies, and takeovers. The Japanese government has restricted much deregulation in the manufacturing sector, but it is not clear how long it can resist foreign pressure to do so, mainly from the United States and the European Union. Japan faces a dilemma here: its refusal to comply with their demands could lead to restrictions on Japanese exports to other markets, while its full compliance could damage its manufacturing industry.

Japan's aging population is another major long-term factor. Any future economic recovery will encourage spending by the Japanese, which will further contribute to the recovery, but an aging population has a lower demand for goods and services than a young one and tends to spend less and more cautiously even when the economy is booming. The gradual shrinkage of the domestic market will hamper Japan's economic growth in the short run, and could create major problems in the long run as Japanese enterprises face tough competition in foreign markets while suffering a decline in domestic demand.With an aging population, Japan will face a reduction in tax revenues and an increase in spending for health care and other components of the social safety net.

If the post-war history of Japan is of any indication, the Liberal Democratic Party will remain a leading political party in the foreseeable future. Though a reduction in its popularity has denied it a majority of parliamentary seats necessary for its forming governments on its own, it has proven quite capable of forging coalition governments and will likely remain a determining factor in future elections.

DEPENDENCIES

Japan has no territories or colonies.

BIBLIOGRAPHY

Economist Intelligence Unit. Country Profile: Japan. London: Economist Intelligence Unit, 2001.

Embassy of Japan, Washington, D.C. <http://www.embjapan.org>.Accessed October 2001.

Farrell, William Regis. Crisis and Opportunity in a Changing Japan. Westport, CT: Quorum, 1999.

Flath, David. The Japanese Economy. Oxford and New York:Oxford University Press, 2000.

Japan Information Network Statistics. <http://www.jinjapan.org/stat/index.html>. Accessed October 2001.

JETRO: Japan External Trade Organization. <http://www.jetro.go.jp>. Accessed October 2001.

Katz, Richard. Japan, the System that Soured: The Rise and Fall of the Japanese Economic Miracle. Armonk, NY: M.E. Sharpe, 1998.

Posen, Adam. Restoring Japan's Economic Growth. Washington, DC: Institute for International Economics, 1993.

Richardson, Bradley. Japanese Democracy. London: YaleUniversity Press, 1997.

Statistics Bureau & Statistics Center: Ministry of Public Management, Home Affairs, Posts and Telecommunications. <http://www.stat.go.jp/english/1.htm>. Accessed October 2001.

UNDP. Human Development Report 2000. New York: Oxford University Press, 2000.

U.S. Central Intelligence Agency. World Factbook 2001. <http:// www.odci.gov/cia/publications/factbook/index.html>. Accessed September 2001.

U.S. Department of State. FY 2001 Country Commercial Guide: Japan. <http://www.state.gov/www/about_state/business/com_guides/2001/eap/index.html>. Accessed October 2001.

Wood, Christopher. The Bubble Economy: Japan's Extraordinary Speculative Boom of the 1980s and the Dramatic Bust of the 1990s. New York: Atlantic Monthly Press, 1992.

—Hooman Peimani

CAPITAL:

Tokyo.

MONETARY UNIT:

Yen (¥). One yen equals 100 sen. There are coins of 1, 5, 10, 50, 100, and 500 yen. There are notes of 500, 1,000, 5,000, and 10,000 yen.

CHIEF EXPORTS:

Motor vehicles, semiconductors, office machinery, chemicals.

CHIEF IMPORTS:

Fuels, foodstuffs, chemicals, textiles, office machinery.

GROSS DOMESTIC PRODUCT:

US$3.15 trillion (2000 est.).

BALANCE OF TRADE:

Exports: US$450 billion (2000 est.). Imports: US$355 billion (2000 est.).