After the end of World War II, Japan's economy was in a shambles, and its international economic relations were almost completely disrupted. Initially, imports were limited to essential food and raw materials, mostly financed by economic assistance from the United States. Because of extreme domestic shortages, exports did not begin to recover until the Korean War (1950-53), when special procurement by United States armed forces created boom conditions in indigenous industries. By 1954 economic recovery and rehabilitation were essentially complete. For much of the 1950s, however, Japan had difficulty exporting as much as it imported, leading to chronic trade and current account deficits. Keeping these deficits under control, so that Japan would not be forced to devalue its currency under the Bretton Woods System (see Glossary) of fixed exchange rates that prevailed at the time, was a primary concern of government officials. Stiff quotas and tariffs on imports were part of the policy response. By 1960 Japan accounted for 3.6 percent of all exports of noncommunist countries.
During the 1960s, the dollar value of exports grew at an average annual rate of 16.9 percent, more than 75 percent faster than the average rate of all noncommunist countries. By 1970 exports had risen to nearly 6.9 percent of all noncommunist-world exports. The rapid productivity growth in manufacturing industries made Japanese products more competitive in world markets at the fixed exchange rate for the yen (for value of the yen--see Glossary) during the decade, and the chronic deficits that the nation faced in the 1950s had disappeared by the middle of the 1970s. International pressure to dismantle quota and tariff barriers mounted, and Japan began moving in this direction.
The 1970s brought major, wrenching changes for Japan's external relations. The decade began with the end of the fixed exchange rate for the yen (a change brought about mainly by rapidly rising Japanese trade and current account surpluses) and with a strong rise in the value of the yen under the new system of floating rates. Japan also faced sharply higher bills for imports of energy and other raw materials. The new exchange rates and the rise in raw material prices meant that the surpluses of the decade's beginning were lost, and large trade deficits followed in the wake of the oil price shocks of 1973 and 1979. Expanding the country's exports remained a priority in the face of these raw material supply shocks, and during the decade exports continued to expand at a high annual average rate of 21 percent (see Balance of Merchandise Trade , this ch.).
Most of the concerns of the 1970s diminished in the 1980s. Oil and other raw material prices fell dramatically, and Japan's trade deficits turned quickly to enormous trade surpluses by the middle of the decade. In response to these surpluses, the value of the yen rose against that of other currencies in the last half of the decade, but the surpluses proved surprisingly resilient to this change. The large surpluses, combined with foreign perceptions that Japan's import markets were still relatively closed, exacerbated tension between Japan and a number of its principal trading partners, especially the United States. A rapid increase in imports of manufactured goods after 1987 eased some of these tensions, but as the decade ended, friction still continued.
Through most of the postwar period, foreign investment was not a significant part of Japan's external economic relations. Both domestic and foreign investments were carefully controlled by government regulations, which kept the investment flows small. These controls applied to direct investment in the creation of subsidiaries under the control of a parent company, portfolio investment, and lending. Controls were motivated by the desire to prevent foreigners (mainly Americans) from gaining ownership of the economy when Japan was in a weak position after World War II, and by concerns over the balance of payments deficits (see Capital Flows , this ch.). Beginning in the late 1960s, these controls were gradually loosened, and the process of deregulation accelerated and continued throughout the 1980s. The result was a dramatic increase in capital movements, with the biggest change occurring in outflows--investments by Japanese in other countries. By the end of the 1980s, Japan had become a major international investor. Because the country was a newcomer to the world of overseas investment, this development led to new forms of tension with other countries, including criticism of highly visible Japanese acquisitions in the United States and elsewhere.
Data as of January 1994