Annual Report on the Japanese

Economy and Public Finance

2003-2004

- No Gains Without Reforms IV -

July 2004

Cabinet Office

Government of Japan


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Key Points of Chapter 3

Section 1 Japanese Economy and Globalization
Globalization refers to the deepened economic ties worldwide due to the expansion of trade and investment resulting from stimulated movement of capital and labor force.
The four characteristics of globalization with focus on the period after the 1990s are as follows: (i) the yen appreciated against the dollar; (ii) increased significance of East Asia with respect to trade and investment; (iii) stagnation in Japan's international financial and capital transactions; and (iv) the pace of the Japanese economy is somewhat slow compared to European and North American countries.

Section 2 Economic Impact of Globalization
Export reduction effects and import increase effects during appreciation of the yen have increased, and their surplus reduction effects have risen.
The development of overseas production by companies led to the advancement of vertical specialization (intra-industry trade) in the manufacturing process of similar products in the Asian region. Meanwhile, a growing number of Japanese companies withdrew from Asia because of deteriorating debt conditions, rising capital costs and other factors.
Looking at the household sector, the benefits of globalization are shared by a broad spectrum of economic entities, while setbacks are concentrated on a limited group of entities. The growth in imports of low-priced products reduced the cost of living. Rising imports impacted employment and other factors in some industries, but growth in internal demand in response to globalization had a positive effect on employment.
In terms of regional economies, positive steps toward globalization have been taken, including the siting of foreign companies, promotion of tourism and exports of agricultural products. Regions have initiated reform harnessing their special regional characteristics.
   

Section 3 Promotion of Economic Partnership
Free trade agreements (FTA) have increased dramatically around the world since the 1990s. FTA cover not only trade liberalization, but also investment and competition policy, etc. FTA are expected to enhance advantages for consumers with growing imports of low-priced products and to shift economic activities to high productivity sectors.
It is important to strengthen measures aimed at economic partnership with East Asia through the integrated promotion of domestic structural reform.
   

Section 4 Structural Reform to Draw Benefits from Globalization
Agriculture is faced with significant declines in the labor force, decreased agricultural land and stagnation in land productivity. It is necessary to enhance international competitiveness by fostering motivated human resources and advancing reform aimed at the effective use of agricultural land and high value-added products, among others.
Japan's balance of inward direct investments has been increasing recently, but it remains at a low level. This is due to underlying factors such as macroeconomic conditions, economic and social infrastructure, and regulations.
The number of foreign workers is on the rise, which include specialized and technical workers, as well as foreigners of Japanese origin who have taken up permanent residence and others. The issue of accepting foreign workers needs to be discussed from a positive and comprehensive viewpoint.
Concerns about a decline in economic vitality should be kept in mind in determining future taxes and increased social security burdens.
It is necessary to enhance and strengthen domestic structural reform and competition policy that responds to globalization.
Measures toward structural reform need to be strengthened in order to build an economic foundation that elicits the benefits of globalization.


Chapter 3

New Challenges Presented by
Globalization and Structural Reform

    The Japanese economy continues to recover at the same time that structural reform is advancing. Exports have played a significant role in economic recovery since 2002. Looking at economic relations with other countries in the long run, there have been considerable changes such as the building of new production relations between Japan and Asian countries through direct investment and increased imports whose impact can be felt every day. In this way, the Japanese economy is growing while it maintains close relations with the overseas economy.
    This chapter looks at the forging of closer ties between Japan and the overseas economy as a sign of the advancement of globalization. This chapter addresses what kind of issues the advancement of globalization poses to the Japanese economy and what kind of structural reform is necessary in order to respond to these issues. Section 1 elucidates the characteristics of globalization that are evident in the Japanese economy. Section 2 analyzes the economic impacts that companies, households and regions have experienced and the responses they have taken in terms of the exchange rate and trade, overseas production and employment, etc. Section 3 has a view of the modality of economic partnership between Japan and East Asia(1) and examines its significance. Section 4 discusses domestic structural reform aimed at deriving the benefits of globalization with a focus on areas including agriculture, inward direct investment and foreign workers.


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