On Economic and Financial Policies
Department of Finance
The great need for taking various urgent measures in order to promote national development in accordance with the spirit on which the Empire was founded is felt very keenly in Japan today.
Putting these measures into effect obviously requires a vast amount of materials and funds, while the need for skilful technique and supply of labour should not be ignored. Yet since both technique and labour are dependent upon an abundant supply of materials, it becomes apparent that making this supply adequate is the primary necessity in dealing with the present situation. Thus an enigma is created, toward the solving of which the best efforts of economic and financial authorities are being directed: without an adequate supply of materials and funds, no essential progress can be made for the nation as a whole; yet the continued increase in imports (a marked tendency during 1937) will make difficult the balance of international payments, which unless checked, will undoubtedly retard national progress substantially.
Under these circumstances what line of policy should be adopted in economic and financial affairs? It must be one which, conditioned by present circumstances, will mobilize all available measures for augmenting and maintaining the economic strength of the country.
The Japanese Government holds the belief that all such plans must be coordinated into a whole, and be centred in the following three points:
1. To establish concrete measures for augmenting productive power. 2. To establish measures for the maintenance of a balance in international payments. 3. To establish measures for estimating and adjusting supply and demand in materials.
The steps decided upon at a Cabinet meeting, just after the formation of the Cabinet, in regard to the development and strengthening of productivity within the country are in accordance with these basic principles. Hence this article will be devoted to explanations of these three points.
Augmentation of Productive Power
It has already been noted that enormous quantities of commodities are called for in order to carry out measures for strengthening of national defence and improvement of the economic life of the nation, and that the matter of prime importance in this connection is increase in the supply of materials. For these purposes, however, either the production of commodities must be increased, or they must be imported from other parts of the world In other words, the essential step is to cultivate importing capacity by improving the balance of international payments on the one hand, and to enlarge and strengthen national productivity on the other. But, of course, to augment productive power more materials and funds are needed. It follows, therefore, that, in a country such as Japan where the supply of both materials and funds is far from abundant, it is not only unwise but impossible to proceed at random with augmentative activities. Accordingly, the basic course to pursue is to work out plans for using materials and funds economically and efficiently, eliminating wastefulness and overlapping. Herein lies the ground for the emphasis by the Government on definite and concrete measures for promoting production. If, however, such measures are undertaken without a carefully worked out programme, a breaking of the balance of international payments will result, through the increase of imports of materials to be used for these specific purposes together with that of imports of materials directly needed for enforcing other urgent measures.
The important question, therefore, is to what extent and by what methods the production of what classes of commodities should be expanded. Here again we may take our three points as approaches to the question. The first point can be summarized as planning for self-sufficiency in the supply of materials in time of emergency; the second as increasing production of commodities which are insufficient even in time of peace; the third as increasing production of commodities effective in improving the balance of international payments. The selection of commodities to be augmented through production, on the basis of these three points is being sought; and plans for definite and concrete expansive measures in consideration of the scale, rate of progress, and methods in regard, not merely to equipment, but to other factors of production such as raw materials, labour, and technique, are being established. In this planning, the allotment of work between Japan and Manchoukuo as well as between Japan proper and overseas territories must also be given consideration.
The term "to augment productive power" is to be specially noted
in this connection. Its importance is more positive than negative, and its positive aspect alone is generally stressed. Its negative aspect, however, of eliminating waste in distributing productive power to industries other than those classed as urgent under present circumstances, should be taken into consideration, for the effective working out of augmentative measures such as have been outlined. All these questions will be studied by the Department of Commerce and Industry, and other Departments in charge of industries, in association with the Board of Planning, with a view to developing the most efficient measures.
Balancing International Payments
The necessity for establishing measures designed to maintain the balance of Japan's payments will be appreciated when the vital necessity for maintenance of the present level of exchange rates, in relation to the execution of national policies and the safeguarding of the economic life of the nation is understood. The present trade situation has shown an extremely unfavourable trend, with the excess of imports amounting to 640,000,000 yen for the first half of 1937, an excess which represents more than twice the amount for the corresponding period of the preceding year.
This trend will remain accentuated for some time as various measures for defence and economic welfare are carried out. The bearing of expansive measures, with their demand for materials from abroad, upon the temporary increase of imports, has already been explained. At any rate, not until the expansion of productive power is completed and the scope of self-sufficiency in the supply of commodities has been widened, will the adverse movement in our trade be checked of its own accord. It follows, therefore, that without considerable efforts to check it, the balance of Japan's payments will be lost, and her exchange rate will tend to fall.
The present trade situation differs from that of the 1933-34 period when there was a marked increase in exports due to the lowering of exchange rates; and accordingly, the same kind of outward movement is not to be expected. On the contrary, materials having national significance need to be imported regardless of price, to a certain extent. The expectation of decreases in imports on the ground of unprofitability through lower exchange rates will simply be nullified. Moreover, since our overseas payments, in respect to the principal and interest of loans in foreign currency, have already amounted to a fairly large sum, their burden will greatly increase with the fall of our exchange rates. In the present state of affairs, therefore, it is eminently
clear that, once the downward process commences, with the fall of exchange rates, an internal rise in commodity prices will follow, and through the interaction of these two factors of exchange rates and prices, the situation will increasingly be aggravated, resulting inevitably in rendering impossible the realization of defence and welfare measures worked out with painstaking care. Thus considerable uncertainty will be created.
The Government is determined to maintain the present level of exchange rates by all means. Accordingly, shipments of gold to supplement Japan's overseas funds have been made since March, and will be continued in the future up to a certain amount according to the circumstances. There is, needless to say, a limit beyond which gold cannot consistently be shipped. Merely to continue to resort to this measure without adopting other basic measures for balancing international payments, will only defeat its own purposes, as it will seriously affect the economic world when that limit is reached.
At all events the vital importance of balancing international payments cannot be emphasized too strongly. It is imperative to plan for and establish definite and concrete measures in order to meet this exigency. Endeavours along this line, however, should not be exclusively concentrated on the negative aspect of bringing about a decrease in imports by economizing in consumption, since this is not at all in keeping with the general policies of expansion. The positive aspect of developing the capacity for imports, which is simultaneously the means of facilitating necessary national measures, must likewise be given attention.
The view that the sudden advance in prices from the end of 1936 was caused by the expansion of public finance is prevalent in certain quarters; but the expansion of finance does not bear directly upon price movement. The process is indirect, while the relations of international payments constitute an important intermediary factor. In other words, the expansion of finance and the increase in demand for commodities would not affect internal prices except through an external price movement, in case commodities could be imported without difficulty. In case, however, the capacity for imports is small on account of meeting international payments, the internal advance of prices, caused by an actual scarcity in supply and speculative manipulation, would be only too serious. Viewed in the light of these relationships, the maintenance of the balance of international payments has not only a negative but a positive significance. It comprises essentially such endeavours as the increasing of income from foreign trade by promoting exports and the augmenting of the gold production capacity; and, on the other hand, the restraining of imports
of commodities not urgently needed for national purposes and those which can be economized on, so as to apply the surplus purchasing power to importation of commodities entitled to priority from the broad viewpoint of the nation as a whole, and from the all-inclusive viewpoints of governmental and private policies. The imposition of restrictions upon imports, though advisable to a certain extent and under certain circumstances as an effective financial measure, is to be avoided as far as possible because of its unfavourable effect upon the standard of living. When, however, it is to be imposed, it should be done with adequate consideration and planning in regard to the necessaries of life and raw materials for subsequent exports. In particular, the possible effect of such restriction and the measures for adjusting demands and consumption of commodities should be given serious consideration. The simple and reckless method of restriction by means of exchange control and like measures should be discouraged.
Estimation and Adjustment of Supply and Demand
In this exposition of economic and financial policies, we have now come to the last of the three basic points. Measures for defence and economic welfare, as have been repeatedly explained, unavoidably cause the increase in demand for commodities. Unless, therefore, demand is adequately regulated, an upward price movement will set in, not only obstructing the execution of necessary measures but creating a general state of uncertainty. In this connection, it is hardly necessary to dwell upon the fact that this state of affairs will also react in the direction of increasing imports and of affecting international payments unfavourably. Consequently the estimation and regulation of supply and demand to ensure the supplying of the necessary commodities to the necessary places becomes a matter of immediate necessity.
In carrying out this measure, our primary objective should be to try to adjust this vital relationship of supply and demand, not by negatively restricting demand, but by positively planning for the increase of supply through the means of expanding both productive and importing capacity. In all these attempts, we repeat, their bearing upon the balance of international payments must constantly be watched, together with the question of priority in importance and urgency in respect to the demand for commodities. Accordingly, the question of economizing consumption and encouraging the use of substitute commodities might also be included in our consideration of this, the last of the basic points.
Nature and Inter-relation of the Three Basic Principles
This study of the three basic principles has well-nigh been completed. A point further to be clarified, however, is that these three basic principles do not constitute in themselves the objective of our national policies. They are the means of attaining a greater objective towards which Japan is striving. To be more specific, they are the means of carrying out necessary measures for strengthening national defence and advancing the economic welfare of the nation. These three principles, therefore, shall never run counter to the main objective. Nor should the three principles themselves be taken separately. As they constitute a coordinated whole, the failure of one of them will cause the collapse of the whole. True, they contain insignificant parts which may contradict one another; but it is the task of the Government to carry them out as one synthesized whole, overcoming all contradictions. There are not a few persons who hold that the three principles are essentially contradictory. But such a conception is formed through a lack of understanding with regard to the unified nature of the principles in which the positive and negative aspects are to be harmonized perfectly in operation. It must also be remembered that Manchoukuo, which is, in reality, inseparably related to Japan, should be taken into consideration as an integral part of one coherent entity constituted by the two countries. In other words, the three basic principles should be materialized in their relationship not only between themselves but including our allied Empire. In short, a nation such as Japan which is on its way to expansion and development must be prepared to proceed positively with measures essential to national defence and economic welfare by augmenting and maintaining her economic strength in accordance with the aforesaid principles.
To be too eager, however, in executing these measures without paying due attention to basic requirements is only to defeat their own purposes. It is therefore a matter of absolute necessity that the entire nation work as a coordinated whole for the preservation and development of economic strength, by giving full scope to efficiency and by eliminating all possible waste—in other words, by systematically carrying out the three basic principles. Thus, in proportion to the expansion and development of economic strength, can the necessary measures be put into operation; while an impatient rush toward their execution, regardless of the limitations of national strength, will not merely render execution impossible, but also will give rise to evils far worse than those arising out of their neglect. The size and scale of the State budget too will be decided hereafter
by the extent to which commodities can be supplied both by production and by importation under the most efficient carrying out of the three principles. For that reason, it was agreed at a recent meeting of the Cabinet in connection with budget estimates for 1938 and future fiscal years, that the Government do its best toward estimating supply and demand, in collaboration with private institutions functioning along the same lines, and that all Governmental Departments make special efforts for augmenting economic strength with a view to realizing as many national policies as possible.
Cooperation of the Entire Nation Needed
The Government is fully prepared to meet all economic and financial problems, adhering to the line of policy described in these pages. This constitutes an entirely new approach to these problems, and involves difficulties of no small extent. It is, however, the only course for Japan to adopt in the field of economic affairs, in order triumphantly to guide her destiny through the present crisis. It is a matter of necessity, and we are called upon to go ahead. Of vital importance, in this connection, is the cooperation of the entire nation. In the field of economic activities, forcible control by the Government is by no means the most effective policy. Only through the free, voluntary and original actions of individual citizens can efficient economic policies be operated. With this conviction, the Japanese Government calls upon the entire nation to render its full-hearted cooperation so that these economic and financial policies may be successfully executed.