          
          
          The Japanese economy, rebuilt from post-Second World War 
          ruins, was the world's second largest economy in 1990.  
          Persistently huge external trade imbalances have evoked 
          steadily mounting international economic and political 
          pressures on Japan to adopt policies that accelerate 
          structural adjustment.  Frustrated trading partners point 
          out that Japan is also home to inefficient transport, 
          agricultural, construction, and distribution sectors which 
          are sheltered from foreign competition. Transition to 
          greater competition in these sectors is under way -- too 
          slow to satisfy trading partners, but remarkably rapid in 
          Japanese eyes.
          
          Imports into Japan are increasing, and the share of 
          imported manufactured goods has risen from about 20 percent 
          in 1982 to about 48 percent in 1990 (SITC categories 5-8).  
          Japanese external balances, after a four-year upward 
          spiral, declined in yen terms in 1987, and in dollar terms 
          since 1988.
          
          Following Japan's reversal of its easy monetary policy in 
          late 1989, a climb in interest rates brought capital costs 
          from historic lows to levels more comparable with those in 
          the United States.  Together with a change in expectations 
          of earnings, the higher interest rates prompted reduced net 
          capital outflows from Japan.  Japanese monetary policy 
          tightening coincided with two distinct periods of broad 
          equity market depreciation, the first in the early spring 
          of 1990 and the latter following the Iraqi invasion of 
          Kuwait in August 1990.
          
          Japan has pursued relatively tight fiscal policies since 
          1982 to constrain growth in government debt, which had 
          expanded to about 35 percent of nominal Gross National 
          Product (GNP) in that year. However, under pressure from 
          other Group of Seven (G-7) countries to contribute to the 
          reduction of international imbalances, the Japanese 
          Government in June 1987 initiated a $35 billion multisector 
          public works spending package and followed up with tax cuts 
          worth about $10 billion. Building on economic growth which 
          began late in 1986, the package helped to reduce fiscal 
          drag on the economy.  In the June 1990 report on the 
          U.S.-Japan Structural Impediments Initiative (SII) 
          Agreement, the Japanese Government agreed to formulate a 
          ten-year plan to boost social infrastructure spending 
          significantly.
          
          In cooperation with the United States, Japan is playing a 
          leading role in increasing Official Development Assistance 
          (ODA) flows, and became the world's largest donor in 1990.  
          Japan has committed to double ODA to at least $50 billion 
          over the five-year period from 1988 to 1992 and to improve 
          the quality of that aid by boosting the share of grant and 
          untied aid.
          
          Japan ended most foreign exchange controls in the 1970s, 
          culminating in a major simplification of the Foreign 
          Exchange and Foreign Trade Control Law in 1980.  Currently, 
          pursuant to the international understanding launched under 
          the 1985 Plaza Accord and refined since then, Japan 
          actively coordinates economic policies with the United 
          States and its other G-7 partners.  The appreciation of the 
          yen since 1985 has increased the price competitiveness of 
          American products and is contributing to the reduction of 
          Japan's enormous external trade imbalances.  At this point, 
          although import price reductions have had some impact in 
          moderating domestic price levels, there remains room for 
          further improvement in terms of benefits for consumers.  
          This situation could stimulate additional demand for 
          imports.
          
