"White Paper on International Economy and Trade 2006" Toward "Sustained Potential for Growth" - Enhanced productivity through globalization and Japan as an "investment powerhouse"

Date June 29, 2006
Speaker SHIRAISHI Shigeaki(Director, Policy Planning and Research Office, Ministry of Economy, Trade and Industry (METI))
Moderator TANABE Yasuo(Fellow, RIETI)


This marks the 50th year since the publication of the 1956 White Paper on the Economy famous for its declaration of the end of the postwar period. As the Japanese economy once again stands at a turning point, Shigeaki Shiraishi, Director of METI's Policy Planning and Research Office, compiled an economic report which RIETI Vice President Yasuo Tanabe praised as "extremely insightful." Shiraishi, a graduate of the University of Tokyo's Faculty of Law, initially joined the former Ministry of International Trade and Industry (MITI). He earned a Master in Public Affairs at Princeton University and worked for the former Economic Planning Agency before assuming his current post at METI.

Japan is facing three major changes

As the underlying premise for the discussion in the "White Paper on International Economy and Trade 2006," Shiraishi points out that Japan is now facing three major changes. First, globalization is entering full swing. Second, Asia is rising. Particularly, with respect to the ascent of China, there have been two opposing views on its impact on Japan: China as a threat and as a growing source of demand, and now is the time for Japan to define its stance on China. In Japan, the declining fertility and aging population will inevitably result in a diminishing workforce and falling savings rate, which is the third major change.

The key point of discussion in the white paper that symbolized Japan's turning point half a century ago was what path to growth Japan, a country that had just experienced postwar reconstruction, should pursue. Likewise, in the "White Paper on International Economy and Trade 2006," Shiraishi presents a new growth path based on the assumption that Japan, which has now grown into the world's second largest economic power, will not be able to sustain growth as an extension of its past achievements amid the three major changes. Significant in the report is the introduction of the viewpoint of national disposable income or gross national income (GNI) based on the importance of how much money the nation is able to spend on its people. This marks a shift from the conventional viewpoint focusing primarily on gross domestic product (GDP). In other words, the primary focus is placed on GNI, calculated as a sum of GDP growth and expansion of the income account surplus consisting of earnings on overseas investments.

Steady growth and risk factors

In Chapter 1, "Trends in the International Economy and Structural Changes," which provides a macroeconomic analysis of the current conditions, Shiraishi concludes that the world's economy, while taking on certain risk factors, is growing steadily. As the growth engine, he points to advanced economies such as the United States, while noting that East Asian economies and the BRICs (Brazil, Russia, India and China) are further increasing their presence.

Meanwhile, as possible risk factors he noted: (1) rising inflation risks may result in excessive tightening, thereby overkill in the economy, with the current situation likened to "walking on the ridge of mountain," (2) current account imbalances between the U.S. and Asia may further expand, thus entailing major adjustments, and (3) high crude oil prices may begin to hit like body blows, undermining the world's economy gradually yet steadily.

Asia as the world's growth center

Chapter 2, "'Asian Dynamism' and the Formation of International Business Networks," analyzes the conditions in Asia which attract massive capital investments from Japan and other countries. In this respect, Shiraishi said that direct investments in China and ASEAN 4 (Indonesia, Thailand, the Philippines and Malaysia) are serving as a driving force for high growth, and high growth generates demand for even more direct investments. This virtuous cycle, he said, will make Asia the world's growth center which, according to one estimate, will account for 29.4% of the world's GDP in 2015.

In light of this, Japanese companies have located their production bases both in Japan and other Asian countries while continuing to undertake research and development (R&D) activities in Japan. Furthermore, Shiraishi pointed out the increasing tendency to split tasks in such a way that plants in Japan and those in other Asian countries respectively carry out the entire production process for their designated products, rather than dividing tasks between Japan and the other countries based on the stage of production. With this shift from the vertical to horizontal structure of production networks, inter-industry input-output relations between Japan and the rest of Asia, such as the one typically observed in automobile production, have been decreasing. However, such relations are becoming increasingly visible among Asian countries other than Japan. "Business networks are being now built within the Asian region," Shiraishi said.

As another focal point in chapter 2, Shiraishi said that the formation of an international business network, when viewed at a microeconomic level, is helping improve the productivity of companies that have launched overseas operations, while contributing to the growth of a national economy on a macroeconomic level. This idea, he said, can be defined as "antithetical to the so-called hollowing out theory." Meanwhile, regarding the Chinese economy, he said, attention must be paid to signs of: (1) overheating of investment, (2) nonperforming loan problems, (3) widening gaps and (4) appreciation of the yuan.

GDP growth and GNI increase

Chapter 3 of the white paper is titled "Challenges to Achieve Sustained Potential for Growth." To facilitate the formation of international business networks, it is indispensable to promote the liberalization of trade and investment, harmonization of legal and tax rules, and stability of foreign exchange and financial systems. In addition to these three key factors, Shiraishi said, it is important to: (1) promote inward direct investments that will lead to productivity improvement; and (2) improve the "quality" of the workforce by nurturing human resources within the country, promoting work participation of competent women and elderly people, and utilizing capable human resources from overseas.

In his conclusion, Shiraishi said that not only GDP growth but also increasing GNI (earnings from overseas investments) are necessary for Japan to ensure "sustainable growth potential" and increase "disposable national income." To this date, Japan's income account surplus has been increasing under what may be described as a "single-track" structure, that is, the huge current surplus has prompted an increase in external assets, thereby resulting in an increase in income account surplus.

In contrast, Shiraishi said, both the U.S. and UK have a "dual-track" structure. That is, even when the balance of net external assets is decreasing due to current account deficits, as is the case in these two countries, both domestic and external direct investment continues to expand and income account surplus can be generated as a difference between the rate of return on external assets and that on domestic liabilities. Japan may find itself in the same situation as the U.S. and UK if the ongoing phenomena of declining fertility and aging population further exacerbate, which would push down the savings rate, bring the current account balance into deficit, and lead to a decrease in external direct investment.

Rate of return on external assets must be improved

So then, what must be done to make Japan an "investment powerhouse" equipped with a dual-track structure? Shiraishi said that Japan's investment portfolio has three major problems evidenced in the comparison with its rate of return on external assets with those of the U.S. and the UK. Specifically, he said: (1) the proportion of investment in securities, particularly in U.S. Treasury bonds, is far too large; (2) Japanese investments are concentrated in countries and regions where rates of return are relatively low, such as the U.S. and EU; and (3) the proportion of highly profitable direct investments is low.

Noting that the networking of business activities is proceeding rapidly in Asia, Shiraishi said Japan's rate of return on external investments will only go up if the aforementioned three points can be reversed. That is, Japan should: (1) shift the weight away from securities investments to direct investments (including acquisition of control of the target companies), (2) increase investment in Asia, and (3) improve the rate of return on direct investments. To this end, he emphasized that Japanese financial institutions must make efforts to help improve the rate of return.

Current account surplus worth 2.9% of Nominal GDP in 2030 is not a dream

If all the proposals presented in the white paper are realized, Shiraishi said, "Japan's current account surplus can be maintained at a level worth 2.9% of nominal GDP even in 2030 thanks to an increase in income account surplus."

>> Original text in Japanese

*This summary was compiled by RIETI Editorial staff.