Balance of merchandise trade

Between 1960 and 1964, Japan incurred annual trade deficits (based on a customs clearance for imports) ranging from US$400 million to US$1.6 billion. The era of chronic trade deficit ended in 1965, and by 1969, with a positive balance of almost US$1 billion, Japan was widely regarded as a surplus trading nation. In 1971 the surplus reached US$4.3 billion, and its rapid increase was a main factor behind the United States decision to devalue the dollar and pressure Japan to revalue the yen—events that led quickly to the end of the Bretton Woods System of fixed exchange rates. By 1972 Japan's surplus had climbed to US$5.1 billion, despite the reevaluation of the yen in 1971.

The jump in prices of petroleum and other raw materials during 1973 plunged the balance of trade into deficit, and in 1974 the deficit reached US$6.6 billion. With strong export growth, however, this was reversed to a surplus of US$2.4 billion in 1976. The surplus reached a record US$18.2 billion in 1978, promoting considerable tension between the United States and Japan.

In 1979 petroleum prices jumped again, and Japan's trade balance again turned to deficit, reaching US$10.7 billion in 1980. Once again, rapid export growth and stagnant imports returned Japan quickly to surplus by 1981. For the next five years, Japan's trade surplus grew explosively, to a peak of US$82.7 billion in 1986. This unprecedented trade surplus resulted from the moderate annual rise in exports and the drop in imports noted earlier. Underlying these trade developments was the weakness of the yen against other currencies, which enhanced export price competitiveness and dampened import demand.

After 1986 the dollar value of Japan's trade surplus declined, to US$77.6 billion in 1988. This decline came as the yen finally appreciated strongly against the dollar (beginning in 1985) and as a rapid rise in manufactured imports began to offset the large drop in the value of raw material imports. By 1990 the trade surplus had declined to US$52.1 billion.

Underlying trends throughout the 1970s and 1980s were the fundamental strength of Japan's export sector. Under the fixed exchange rates of the 1960s, exports became progressively more competitive on world markets, lifting the country out of the persistent trade deficits that had continued into the early years of the decade. During the 1970s, rapid export expansion extricated the country from the deficits immediately following the two oil price shocks of 1973 and 1979. Continuing export strength then drove the nation to the extraordinary trade surpluses of the 1980s, as the temporary burden of costly oil imports waned.

Japan's fundamental strength in world markets required its fear of vulnerability and opposition to manufactured imports to be reassessed. In the early 1980s, fear of vulnerability remained strong and fed the continuation of policies and behavior that kept manufactured imports unusually low compared with those of the other industrial nations. Only with the large decline in raw material prices and the explosion of trade surpluses did policies and behavior begin to change.

After more than 30 years had trade surpluses, in 2011 the trade deficit came to 2.49 trillion yen ($32 billion), but the previous trade deficit came in 1980 was still a record by 2.6 trillion yen.

Export policies

For many years, export promotion was a large issue in Japanese government policy. Government officials recognized that Japan needed to import to grow and develop, and it needed to generate exports to pay for those imports. After 1945, Japan had difficulty exporting enough to pay for its imports until the mid-1960s, and resulting deficits were the justification for export promotion programs and import restrictions.

The belief in the need to promote exports is early strong and part of Japan's self-image as a "processing nation." A processing nation must import raw materials but is able to pay for the imports by adding value to them and exporting some of the output. Nations grow stronger economically by moving up the industrial ladder to produce products with greater value added to the basic inputs. Rather than letting markets accomplish this movement on their own, the Japanese government felt the economy should be guided in this direction through industrial policy.

Japan's methods of promoting exports has taken two paths. The first was to develop world-class industries that can initially substitute for imports and then compete in international markets. The second was to provide incentives for firms to export.

During the first two decades after World War II, export incentives took the form of a combination of tax relief and government assistance to build export industries. After joining the International Monetary Fund (IMF) in 1964, however, Japan had to drop its major export incentive — the total exemption of export income from taxes — to comply with IMF procedures. It did maintain into the 1970s, however, special tax treatment of costs for market development and export promotion.

Once chronic trade deficits came to an end in the mid-1960s, the need for export promotion policies diminished. Virtually all export tax incentives were eliminated over the course of the 1970s. Even JETRO, whose initial function is to assist smaller firms with overseas marketing, saw its role shift toward import promotion and other activities. In the 1980s, Japan continued to use industrial policy to promote the growth of new, more sophisticated industries, but direct export promotion measures were no longer part of the policy package.

The 1970s and 1980s saw the emergence of policies to restrain exports in certain industries. The great success of some Japanese export industries created a backlash in other countries, either because of their success per se or because of allegations of unfair competitive practices. Under General Agreement on Tariffs and Trade (GATT) guidelines, nations have been reluctant to raise tariffs or impose import quotas. Quotas violate the guidelines, and raising tariffs goes against the general trend among industrial nations. Instead, they have resorted to convincing the exporting country to "voluntarily" restrain exports of the offending product. In the 1980s, Japan was quite willing to carry out such export restraints. Among Japan's exports to the United States, steel, colortelevision sets, and automobiles all were subject to such restraints at various times.