V.

Economy

Japan is the world’s second largest economy after the United States. In 2005 Japan’s gross domestic product (GDP) was $4.53 trillion, compared to $12.42 trillion for the United States. Japan also has one of the world’s highest living standards. Economists compare living standards in different countries using a measure called purchasing power parity. This measure takes into account the countries’ differing costs of living. By this measure, Japan’s per capita GDP rose from 21 percent of the U.S. level in 1955 to 56 percent in 1970. By 1992 per capita GDP had reached $19,920, 86 percent of the U.S. level. Despite the overall strength of the Japanese economy, in the late 1990s Japan was mired in its longest recession since World War II. GDP, which had grown slowly in the early 1990s, fell 0.4 percent in 1997 and another 2.8 percent in 1998. This was the first time in the postwar era that Japan’s GDP declined two years in a row. The recession continued into the early 2000s, but economic growth gained strength late in 2005.

As is typical in a mature economy, services make up the largest part of Japan’s economy. In 2003 services (such as trade, government, and real estate) accounted for 68 percent of Japan’s GDP, while industry (mining, manufacturing, and construction) made up 31 percent, and agriculture (including forestry and fishing) contributed 1 percent.

A.

Historical Development

Japan’s economy experienced two periods of rapid development in modern times. The first began in the late 19th century after a long interval of national seclusion, and the second followed the end of World War II in 1945. After recovering from the war, Japan experienced three and a half decades of prosperity and generally steady growth, although problems began to surface in the 1970s. Recession plagued Japan in the 1990s and early 2000s, spurring leaders to reevaluate the structure of the economy.

A.1.

From the Meiji Restoration to World War II

In 1868 a group of disaffected feudal lords, court aristocrats, and samurai responded to the threat of foreign domination by overthrowing Japan’s military government and replacing it with a new imperial government under the Meiji emperor. The Meiji Restoration, as it came to be known, ended 250 years of self-isolation for Japan and introduced an era of rapid economic change. The country’s new rulers adopted the slogan “Rich Country, Strong Army.” They wanted Japan to become economically and militarily powerful so it could retain its independence. Yet Japan had no modern machinery, steel mills, steam engines, telegraphs, railroads, postal system, or newspapers. It had few natural resources aside from coal and silk. Nor did it have modern business institutions, such as banking and public corporations. Its main resource was a population that was highly literate for a preindustrial country. At that time, 43 percent of boys and 10 percent of girls had some schooling.

The country’s takeoff was explosive. From 1890 through 1938, Japan’s GDP grew 3.3 percent each year, far faster than the United States and the countries of Western Europe at a similar stage of development. Manufacturing grew especially rapidly, soaring from 8 percent of GDP in 1888 to 32 percent by 1938.

Before the Meiji Restoration, Japan had conducted almost no trade. After the restoration, Japan welcomed foreign advisers and sent missions to the United States, Germany, France, and Britain to learn the best techniques in economy and government. Between 1885 and 1900 foreign trade grew to 18 percent of GDP. Still, to avoid dependence, Japan restricted foreign investments and loans.

Initially, the government had to fill the vacuum in promoting industrialization because business was so weak. The government owned few industries, but from 1868 to 1900, government agencies supplied more than one-third of all financial capital and encouraged modern industries. By the turn of the century, business replaced government as the leading economic force. Topping the corporate pyramid were a dozen large corporate groups known as zaibatsu, which were headed by rich families such as Mitsui, Iwasaki (operating under the company name Mitsubishi), and Sumitomo.

The worldwide economic slump of the 1930s, combined with other factors, led Japan to increasingly centralize and militarize its economy. The government passed laws giving itself control over imports, power to direct private bank loans to priority industries and firms, and authority to promote heavy industries needed by the military, such as petroleum, machine tools, aircraft, iron and steel, and automobiles. Industries were organized into cartels (groups of business firms acting in concert to reduce economic competition in a particular market). Heavy industry rose from 35 percent of manufacturing in 1930 to 65 percent by 1940. The legacy of this period was a pattern of corporate organization and government-business relations that remains influential today.

A.2.

Postwar Devastation and Reconstruction

When World War II ended in 1945, one-quarter of Japan’s buildings lay in ashes. The GDP was only one-third of its prewar level. Riots broke out among people who were barely surviving on 1,000 calories worth of food per day. To get recovery started, the government instituted a “priority production” system, subsidizing the manufacture of basic products such as coal, fertilizer, steel, and electricity. Japan’s economy did not return to its prewar GDP levels until 1955.

The United States, one of Japan’s opponents in the war, occupied Japan militarily and controlled economic policy from 1945 to 1952. At first, the occupation authorities embraced economic democratization as their first priority. They introduced land reform and permitted workers to unionize. They also broke up the zaibatsu, which owned 40 percent of all equity (stock) in Japanese companies. By the late 1950s, however, the zaibatsu were reforming. The groups of affiliated companies were now called keiretsu, and banks, rather than rich families, stood at their core.

The rise of the Cold War in the late 1940s pitted a bloc of countries led by the United States against another bloc led by the Union of Soviet Socialist Republics (USSR). With the new international situation, occupation authorities adopted a new priority: to make Japan into a strong ally for the United States. The change in policy became known as the reverse course. To promote economic growth, the United States provided financial assistance and opened its markets to Japanese goods. In 1950 the Korean War broke out, and the U.S. military began buying supplies from Japan, creating enormous demand for Japanese goods. Economic recovery exploded to 12 percent growth per year from 1950 to 1952. In 1952 Japan regained its sovereignty and the U.S. occupation of Japan ended.

A.3.

The Era of High Growth

Japan’s GDP grew an average of 9 percent annually from the end of postwar reconstruction in 1955 until the oil crisis of 1973 (called the oil shock in Japan), when international oil prices rose dramatically. While countries often grow quite rapidly during their industrial takeoff, Japan’s takeoff was unparalleled. In its years of highest growth, from 1965 to 1970, Japan’s GDP grew an average of 12 percent a year.

By 1973 Japan’s economy, five times as large as in 1955, was the third largest in the world. People began speaking of the “Japanese economic miracle” Instead of exporting easily broken toys and cheap blouses, Japan was now renowned for its high quality steel, ships, cars, and televisions.

The fruits of growth were widely spread among the Japanese people. During this period, real (inflation-adjusted) wages per person increased between 7 and 8 percent per year. By 1970 living standards had tripled. Whereas in the 1950s few households enjoyed piped-in water, a refrigerator, a car, a washing machine, or a color television, virtually every household did by the late 20th century. Throughout the era of high growth, Japan maintained one of the world’s most equal distributions of income as well as consistently low unemployment and no permanent underclass.

Economists attribute Japan’s growth during this period to a number of factors. One important element was high rates of saving and investment. Traditionally, Japan’s household saving rates, about 7 to 9 percent of income, were not high by international standards. However, huge tax incentives, increasing prosperity, and other factors gradually raised saving rates to 20 percent of income by 1973. As a share of GDP, business savings from growing corporate profits were even more important. Household and business savings provided capital for high levels of investment in things such as new factories and machinery that fed economic growth.

New technology and education also stimulated growth. Japan invested heavily in technology imports in the 1950s, and in several industries Japanese firms were among the first to adapt or commercialize technology invented elsewhere. Acting before their U.S. counterparts, Japanese steel makers built new plants with electric arc furnaces that helped them to produce quality alloy steels more efficiently, and Japanese television makers adopted solid-state technology that allowed them to produce televisions that were more compact, powerful, and reliable.

The process of industrialization itself accelerated growth, as many workers moved from low-productivity farming and textile production into modern industries enjoying higher efficiency and economies of scale (factors decreasing costs of production while increasing output). In 1950 farmers outnumbered factory workers; by 1970 farmers and fishers accounted for only 17 percent of all workers while the manufacturing workforce had risen to 40 percent. Equally important, production of higher-demand, higher-value goods, such as machinery, gradually replaced lower-demand items, such as textiles. By 1970 much of Japan’s industrial output consisted of products that had not even existed in the Japanese market 20 years earlier, such as color televisions, petrochemicals, and air conditioners.

An export boom was also a critical factor. From 1955 to 1971 Japanese exports increased 15 percent per year. Without exports, Japan could not have paid for all the imports of raw material and food it needed. Until the mid-1960s, Japan imported more goods than it exported (a trade deficit) nearly every year. However, as a result of the industrial shift to higher-demand goods, the country began to export more than it imported (a trade surplus). The increase in exports accelerated industrialization. Although industries such as steel, cars, and television got their start serving the domestic market, all soon began relying on the export market for growth.

Economists disagree about how important government economic policy was in fostering Japan’s growth, but much of the evidence indicates that it played a crucial role. Governmental measures helped accelerate savings and investment, the absorption of new technologies, and the shift to modern industries and high-value exports. Virtually every key export industry enjoyed protection and promotion during its early stages. For example, in 1953 Japan’s young automobile industry was almost wiped out by cheap European car imports. In response, the government allowed only negligible imports of foreign cars until 1965, when Japan’s auto industry was able to compete on its own. In addition to protecting emerging industries, the government provided special tax credits to favored industries and directed banks to provide low-interest loans to targeted sectors. While some industries that received aid were notable failures, such as petroleum refining and aviation, the overall success rate was high. Without government industrial policy Japan would still have industrialized, but perhaps not at “miracle” rates.

A.4.

The Era of Slower Growth

In the fall of 1973 the first oil shock set off a global recession. Japan’s GDP declined for the first time since postwar recovery. Then, from 1975 to 1990, Japan’s economy grew at 4 percent, just half of its pre-1973 rate.

While the oil shock triggered the end of high growth, fundamental trends were slowing Japan’s growth anyway. Most importantly, once a country’s industrial takeoff is completed, growth always slows dramatically. In addition, the fixed exchange rate system, which had held the value of the yen (Japan’s basic unit of currency) steady since the end of the 1940s, ended in 1971. The value of the yen rose, raising the price of Japanese exports, which caused sales of Japanese goods overseas to slow. From 1972 to 1990, exports grew at half the rate they had during the high-growth era.

In response to the oil shocks of 1973 and 1979, Japan conserved on energy. It also shifted much of its manufacturing from resource-intensive products such as steel to more capital-intensive and knowledge-intensive products such as cars, consumer electronics, and computer chips.

Despite the economic setbacks of the 1970s and 1980s, Japan seemed to be doing very well. Its growth rate was the highest of the major industrialized countries. It consistently ran huge trade surpluses despite a rising yen. Some analysts predicted that Japan would overtake the United States as the world’s largest economy.

However, Japan suffered from a dual economy that made the growth of the 1980s unsustainable. Its export sectors, spurred by competition with other countries, were superbly efficient. But the sectors that produced goods for domestic consumption—farming, retailing, construction, and materials industries such as glass and cement making—were shielded from both domestic and foreign competition and thus were much less efficient. Moreover, far more Japanese people worked in domestic than in export sectors.

By the 1980s Japan no longer openly protected its domestic industries from competition with foreign imports. The government had begun to reduce overt trade restrictions such as quotas (limits on the quantity of imports) and tariffs (taxes on imports) in the 1960s, and most restrictions were eliminated by the end of the 1970s. Nevertheless, Japan imported few industrial products that would compete with ones manufactured in Japan. This was due in part to government-organized recession cartels. Japanese industries that had excess capacity (that is, they could make more goods than they could sell) formed associations to control production, allocate market share, raise prices, and, some observers believed, block imports in hidden ways. After 1987 official recession cartels were stopped, but some industry associations continued these practices on their own.

Some foreign exporters who had difficulty selling their products in Japan believed that Japan also maintained invisible barriers to trade, such as collusion among members of keiretsu groups, and government regulations that slowed the import process and made it more expensive. Japan argued that its market was fully open and that foreign exporters were not trying hard enough. Tensions over trade in the 1980s gave rise to a series of negotiations between Japan and its trading partners, particularly the United States. By the end of the 1980s Japan began to import more manufactured goods, and by the late 1990s frictions over trade became less prominent.

Government influence over private business decisions also continued in an indirect manner. In the high-growth era, the government guided the economy through clear laws and powers, such as the open import restrictions of the Ministry of International Trade and Industry (MITI) or the official list of favored industries for bank loans of the Ministry of Finance (MOF). In recent decades, ministries have tended to use informal “administrative guidance” (gyōsei shidō) instead. This guidance takes the form of suggestions or directives that do not have the force of law. Businesses generally comply voluntarily with administrative guidance; if they do not, ministries may punish them indirectly by enforcing unrelated regulations. MITI used administrative guidance in the 1980s to encourage Japanese auto manufacturers to cooperate with voluntary export restrictions requested by the United States. The effectiveness of administrative guidance varies widely from industry to industry. In general, its power has diminished over time.

In the 1980s Japan compensated for its domestic inefficiencies—and thereby temporarily hid them—by greatly increasing investment. But its investment was also inefficient. Japan needed to invest 35 percent of GDP (private plus government investment) just to get the same growth that a more efficient economy could have gotten from 25 percent. This was like running on a treadmill that keeps going faster. Unless Japan devoted ever-larger portions of national income to investment, growth would inevitably slow.

A.5.

Bubble and Bust

The structural flaws in Japan’s economy came to a head in the late 1980s, first generating a five-year period of financial euphoria known as the bubble, and then bringing on a collapse. After the value of the yen rose sharply in 1985, Japanese exports fell and economic growth slowed. In 1986 a report by the government-appointed Maekawa Commission recommended fundamental structural reforms to avoid long-term stagnation. Instead, the Bank of Japan (BOJ) cut interest rates to stimulate investment and growth. This raised the price of stocks and real estate, which began to escalate in a self-feeding spiral. By 1989 the average stock was valued at 100 times the annual corporate earnings, an overvaluation of 400 to 500 percent. Rising stock and real estate prices stimulated an investment boom that led to rapid economic growth.

Fearing a crash, the BOJ steadily raised interest rates in 1989 and 1990, hoping that the economy would slow gradually. Instead, the bubble burst abruptly, as Japanese stocks lost nearly 70 percent of their value between 1989 and 1992. The financial bust ended the economic boom. From 1992 to 1994 growth averaged a meager 0.5 percent a year.

Presuming that Japan was just suffering from a normal recession, the government responded with standard recipes to stimulate the economy. The BOJ once again lowered interest rates, and the MOF increased government spending. The economy appeared to respond, with growth rebounding significantly in 1995 and 1996. Anxious to balance Japan’s budget and calculating that it was safe to ease stimulus measures, the MOF reduced government spending in 1996 and raised Japan’s consumption tax (a tax added to the price of goods and services) in 1997. A few months later, the value of several Southeast Asian currencies fell sharply, triggering a regional economic crisis and jeopardizing Japanese trade and investments in the region.

Had Japan’s economy been healthy, it could have absorbed these setbacks. Instead, a new recession began in April 1997. Within a year and a half of its 1997 peak, Japan’s GDP fell 5 percent. In the late 1990s Japan’s stock market was still 65 percent below its 1989 peak, and commercial real estate prices remained 80 percent below their highest levels.

The combination of financial collapse and recession meant that many companies could no longer repay their debts to banks. Over time, the size of the unpayable debt kept increasing. By 1998 the MOF said that bad debts amounted to about 80 trillion yen ($600 billion), or about 15 percent of GDP. Many private estimates were twice as high.

In 1998 the government reversed itself again and created three large spending packages. It also addressed the banking problem with a series of bills that authorized the nationalization of failed banks and the sale of bad assets, and provided funds to protect depositors and inject government funds into the banks. The government hoped to spark recovery by 1999, but Japan’s economy remained stagnant in the early 2000s. Signs of a turnaround appeared in 2005 as exports rose.

B.

Government Role in the Economy

Government ownership of business enterprises is very low in Japan. Since the early 1980s, the government has steadily sold off the few big enterprises that it did own, such as Nippon Telephone and Telegraph (NTT) and Japan National Railway (JNR). It still owns the major television network, Nippon Hōsō Kyōkai (NHK).

In banking, the government plays a big role. In 1996 one-quarter of all banking assets were in Japan’s government-controlled postal savings system, in which post offices accept deposits into various types of savings accounts. Postal savings are turned over to the MOF’s Trust Fund Bureau, which lends the money to businesses.

In addition, through extensive formal regulations as well as administrative guidance, government ministries influence private business activities. Japanese policymakers began calling for deregulation of sectors including telecommunications and transportation, and the Japanese government launched a series of moves to deregulate banks. Most of the banking reforms, known as the Big Bang, were completed by 2001, and other reforms were subsequently implemented to further deregulate financial markets.

C.

Labor

In 2005 Japan’s labor force totaled 66.6 million workers. The biggest employers were services (23.5 percent); manufacturing (22.3 percent); wholesale and retail trade (16.7 percent); construction (10.6 percent); agriculture, forestry, and fishing (7.1 percent); government (6.0 percent); transportation and communications (5.7 percent); finance, insurance, and real estate (4.6 percent); and utilities (0.7 percent).

Traditionally, Japan has had a low unemployment rate. It was 3.3 percent in 1996 and rose to a postwar high of 5.5 percent in late 2001. In 2005 men comprised 59 percent of the labor force and women, 41 percent. Japan’s famed lifetime employment system, in which firms employ workers for their entire career, covers about 20 percent of the workforce, mainly full-time male workers in big companies. Small and medium-size firms, for which the majority of Japanese work, do not offer this guarantee.

In 1945 only 3.2 percent of Japanese workers were unionized. That year a law was passed establishing workers’ right to organize, and by 1946 unionization had exploded to 41.5 percent. Initially, most unions were controlled by Japan’s Socialist and Communist parties. A pattern of frequent strikes, often violent, continued for years. Companies set up their own company unions, which resulted in violent clashes with the leftist unions. Union membership peaked at 50 percent of the workforce in the early 1950s.

Japan is now well-known for harmony between labor and management, but it did not achieve this harmony until rapidly rising living standards made union militancy unnecessary. Unionization fell to 33 percent of the workforce by 1964 and to about 20 percent by the early 21st century. Over time, many unions cut their ties to leftist political parties and became less militant. In 1989 the nation’s leading federations of private trade unions merged into a single group, the Japan Trade Union Confederation, known as Rengō.

D.

Agriculture

As of the early 2000s, agriculture employed 5 percent of Japan’s labor force, down from 21 percent in 1970. In 2003 agriculture (along with forestry and fishing) constituted 1 percent of GDP.

Due to Japan’s many mountains, only 12.9 percent of the country’s total land area is cultivated or used for orchards. Although farms are found in all parts of Japan, commercial farming is concentrated in Hokkaidō, northern and western Honshū, and Kyūshū. Rice is the most important crop, and more than 40 percent of farmland is devoted to rice production. The government encourages farmers to convert rice fields to other crops because Japan produces more rice than it needs. In addition to rice, wheat and barley are important grain crops. Other leading crops include sugar beets, potatoes, cabbages, and citrus fruits. Relatively little acreage is used for livestock.

Although agricultural productivity increased dramatically in Japan after World War II, Japan still imports much of its food. In 1946 and 1947, U.S. occupation authorities confiscated land from absentee landlords and resold it to former tenant farmers at low prices. Japan also embarked on a program to modernize farming with new crop strains, fertilizers, and machinery. These measures raised rural living standards and elevated farm productivity. However, as farm plots remained small, averaging 1.4 hectares (3.5 acres), productivity leveled off. To help maintain farmers’ incomes, the government eventually restricted food imports and granted subsidies to farmers amounting to as much as 75 percent of their incomes. Nevertheless, most farmers work part-time in industry in addition to running their farms. Despite the subsidies and quotas, Japan imports about a third of its food.

E.

Forestry and Fishing

Japan is still heavily forested, but the trees are needed to prevent soil erosion, and the timber harvest remains relatively small. Japan’s annual timber harvest in 2005 was 16.3 million cu m (575 million cu ft). Japan imports most of its lumber needs, mostly in the form of logs and raw lumber rather than as finished products. Many houses in Japan are made of wood, and thus timber is in great demand.

Japan’s fishing industry is one of the largest in the world, with a total fish catch of 5.2 million metric tons in 2004. Coastal fishing by small boats, set nets, or breeding techniques contributes about one-third of the industry’s total production, while offshore fishing from medium-sized boats accounts for more than half of the total. Deep-sea fishing by large vessels operating far from Japan makes up the remainder. Among the species caught are sardines, bonito, crab, shrimp, salmon, pollock, mackerel, squid, clams, saury, sea bream, tuna, and yellowtail. Japan is also among the world’s few remaining whaling countries. Although it officially outlawed commercial whaling in 1986 in conformance with an international ban on whaling, Japan continues to hunt minke whales in waters near Antarctica, saying this is for scientific purposes.

Fish is second only to rice as a staple in the Japanese diet. Japan’s fishing fleet provides most of the fish consumed domestically, although due to rising demand and decreasing catches, fish imports exceed exports.

F.

Mining and Manufacturing

Japan’s mineral resources are tiny, and the country is almost entirely dependent on imports. Among the minerals mined in Japan are limestone, coal, copper, lead, and zinc.

As in all maturing modern economies, Japan’s manufacturing sector has decreased in importance. Manufacturing also suffered from the stagnation of the 1990s. Between the early 1990s and 1996, 850,000 manufacturing jobs were eliminated; it was estimated that at least 2 million more were lost by 2004. Manufacturing output accounted for about 30 percent of GDP in the early 2000s, up from 28 percent in 1990 but down from 36 percent in 1970.

Japan’s leading manufacturing industries include general and electrical machinery, food and beverages, transportation equipment, chemicals, fabricated metal products, iron and steel, and publishing and printing. Japan is among world leaders in production and export of automobiles, steel, ships, machine tools, and electronic equipment.

G.

Services

Services have gained in importance for Japan’s economy. Their contribution to GDP has increased from 48 percent in 1966 to 55 percent in 1981, to 68 percent in 2003.

The most important service sectors are real estate, wholesale and retail trade, personal services (such as hairdressing and health care), business services (such as business accounting and legal services), transportation and communications, and finance and insurance.

H.

Tourism

In 2005, 6.7 million foreigners visited Japan, spending $12.4 billion. Popular destinations include Tokyo and the historic capitals of Nara and Kyōto, with their many ancient temples. The bulk of Japan’s foreign visitors come from South Korea, the United States, China, and the United Kingdom.

I.

Energy

Japan depends almost entirely on imports for oil, natural gas, and coal. Following the oil shocks of the 1970s, Japan developed effective ways of conserving energy. Its energy use per person in the 1990s was less than half that of the United States. Japan also moved away from using petroleum. As a source of energy, petroleum fell from 75 percent of total energy consumption in 1973 to 57 percent in the early 1990s. Although its natural energy sources are limited, Japan sustains a rapidly expanding industrial sector and a large populace with one of the highest standards of living in the world. To do this it has followed a policy of developing nuclear energy. Nuclear power generated from more than 50 nuclear plants provided 30 percent of the country’s energy in the early 2000s.

In 2003 Japan consumed 946 billion kilowatt-hours of electricity, amounting to 7,413 kilowatt-hours per person. Japan generates most of its electricity in thermal plants using coal or petroleum, nuclear power plants, and hydroelectric plants.

J.

Transportation

Japanese depend heavily on rail transport. Railroad track in 2005 totaled 20,052 km (12,460 mi), of which about 71 percent was electrified. In the late 1950s Japan began constructing the Shinkansen, a high-speed rail network linking major cities. The Shinkansen runs sleek trains known as bullet trains. The first branch, linking Tokyo and Ōsaka, began operating in 1964. Later construction extended the Shinkansen from Fukuoka on the island of Kyūshū in the south to Hachinohe in the north and to several cities in the west.

Japan has 1,177,000 km (732,000 mi) of roads, of which 5,054 km (3,140 mi) are expressways. In 2003 Japan had 433 cars for every 1,000 people. Bridges or tunnels link all of Japan’s main islands. In 1998 Japan completed construction of the world’s longest suspension bridge, the Akashi Kaikyo Bridge. Linking Kōbe and Awaji Island over the Akashi Strait, the bridge has a center span of 1,990 m (6,529 ft).

Japan has one of the world’s largest merchant fleets, with 6,731 vessels totaling 12.8 million gross registered tons in 2006. Japan Air Lines, established in 1951, provides international air service, while All Nippon Airways, primarily a domestic service, has expanded its international operations in recent years. Tokyo is the nation’s major hub for both domestic and international flights. Ōsaka is the second largest center for air travel, and important airports are also located in Nagoya, Sapporo, and Fukuoka.

K.

Communications

All media enjoy freedom of communication in Japan. Daily newspapers published in the country number 122. Their combined circulation exceeds 73 million, one of the highest in the world. The largest dailies are Asahi Shimbun and Yomiuri Shimbun, which are circulated nationally. The Japan Broadcasting Corporation, Nippon Hōsō Kyōkai (NHK), dominates the broadcasting industry, operating two public television networks and three radio networks nationally, as well as satellite channels. NHK programs are financed by viewer subscriptions. Several commercial broadcasters also offer television and radio programs, and many viewers subscribe to cable television or satellite services. In 2000 Japan had 728 television sets and 956 radios for every 1,000 people.

Japan has one of the world’s best telecommunications systems and high per capita telephone ownership. Until the mid-1980s the government-owned Nippon Telegraph and Telephone (NTT) provided all telephone service. In 1985 NTT became a private company, and other companies were permitted to enter the field. However, despite the somewhat increased competition, phone call rates in Japan remain high by international standards. Cellular phone usage has grown rapidly since new carriers offering digital mobile service entered the Japanese market in the mid-1990s. Personal computers in use in 2004 totaled 542 per 1,000 people, and Japan had the second largest number of computers linked to the Internet, after the United States.

L.

Foreign Trade and Investment

In 2003 Japan’s merchandise exports totaled $472 billion. Its imports totaled $383 billion. The largest share of this trade surplus comes from the United States. China and the United States are Japan’s leading trade partners, with other countries in Asia coming next.

In general Japan exports manufactured goods and imports raw materials, food, and manufactured goods; manufactures accounted for 93 percent of exports compared with 57 percent of imports in 2003. Japan’s leading exports include general and electrical machinery, automobiles, chemicals, steel, and textiles. Chief imports include machinery and equipment, food, fuels, chemicals, ores and metals, and agricultural raw materials.

As of the early 2000s, Japan had run a trade surplus (meaning its exports exceeded its imports) every year since 1965, with the exception of the oil shock years. The size of the surplus fluctuated up and down depending on the yen exchange rate and the relative growth rates of Japan and its trading partners.

Japanese firms used the trade surpluses to invest heavily in overseas stocks, bonds, bank loans, real estate, and new business ventures. Beginning in the 1980s, many Japanese companies established production facilities overseas, due to both the increased value of the yen and growing resistance to Japanese exports from Japan’s trading partners. Manufacturing or assembling goods at facilities in foreign countries gave Japanese companies several advantages. The companies were able to meet the foreign countries’ domestic content requirements (which mandate that a certain percentage of an item be produced within the foreign country), avoid quotas and other restrictions, and in some cases, save money on land or labor costs. Japanese firms now produce more cars and consumer electronics outside Japan than in Japan.

Japan is an active member of the International Monetary Fund (IMF), the World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD), and the Asia Pacific Economic Community (APEC).

M.

Currency and Banking

Japan’s basic unit of currency is the yen (110 yen equal U.S.$1; 2005 average). The Bank of Japan, established in 1882, is the country’s central bank and sole issuer of currency. About 140 private commercial banks constitute the heart of the financial system. The Tokyo Stock Exchange is one of the world’s leading securities markets.

The Economy section of this article was contributed by Richard Katz.