- As a resource poor country, Japan is heavily dependent on the import of energy and food. In FY 2010, 82% of its primary energy supply had to be imported. In FY 2011, its primary sector could only supply 39% of the population's calorie intake.
Low degree of internationalisation
- Due to the size of its economy, Japan is one of the world's largest exporters and importers. However, relative to GDP it trades less than all other OECD countries, even when controlling for size and geographic location.
- Only a small portion of Japan's international assets are linked to business operations abroad. The ratio of its outward FDI stock to GDP was 15% in 2010, well below the OECD average of 40%. The ratio of its inward FDI stock to GDP was only 4% and thus lowest among the 34 OECD member states.
Trade structure based on comparative advantage
- Japan's structure is characterised by inter-industry trade - it imports raw materials, food, and labour intensive goods and exports capital and technology intensive components and products. Most other developed economies have a much higher share of intra-industry trade, importing and exporting products within the same industry.
Fast structural adjustment
- While the overall relative level of international trade has been low, the regional and commodity structure of trade has been steadily changing.
- Regionally, China (including Hong Kong) has become Japan's most important trading partner accounting for 25% of exports and 22% of imports in 2010.
- Commodity wise, exports are still dominated by machinery and equipment (64% in 2010, but down from 75% in 1995!). To sustain their competitive advantage, these industries have been outsourcing labour intensive production to South East Asia and China. As a consequence, the import share of machinery and equipment products rose from 5% in 1985 to 32% in 2000. In 2010, it was at 26%.
- Japan has accumulated large current account surpluses over the last four decades, making it the world's richest economy in terms of net foreign assets. However, as the population is rapidly ageing, the aggregate household saving rate has been rapidly declining. It is likely to turn negative. As a consequence, Japan's current account surplus has also declined, but not as fast, because of low investment at home and increasing interest income from foreign assets.
- The ratio of outward to inward FDI was at 4:1 in 2010. This is much lower than the 7:1 in 1995, but it is still the largest imbalance in the OECD, where for all other countries the ratio was lower than 2:1.
Comparative advantage in machinery and equipment industries
Japan developed a strong comparative advantage in the machinery and equipment industries. These industries generated 75% of Japan's export volume in 1995 compared to 40% in the 1960s. No other industrialized country achieved such a strong specialisation. The growing share of machinery and equipment in Japan's exports went along with a widening productivity gap between these industries and the rest of the economy unseen in other OECD countries.
In my book "Organisation and evolution of division of labour" (1999, in German), I explain Japan's comparative advantage with reference to its specific work organisation and quasi-integrated supplier-customer relations that proved well suited to achieve organisational learning effects. The advantage could be exploited in machinery and equipment industries as the complex production structure of these "assembly industries" offered plenty of room for intra- and cross-organisational process optimisation.
Structural barriers to internationalisation
Japan's low level of imports and inward FDI cannot be explained by tariff or non-tariff barriers or domestic regulations as their level does not differ much from that of the EU or the US. The industrial groupings (kiygou shuudan) or the vertical keiretsu - once pointed out as important barriers to trade during the Structural Impediments Initiative (SII) undertaken by the US and Japan - have long lost their strength and relevance. Still, the level of imports and FDI into Japan have not much improved.
In my paper "Has the Japanese Economy Become More Open?" (2008), I agrue that the still existing predominance of internal labour markets poses an important barrier to inward FDI. Internal labour markets restrict the possibility of foreign companies to recruit highly qualified employees for technical and managerial positions. Surveys conducted by Japan's external trade organisation JETRO regularly show that most foreign companies consider the hiring of skilled labour as a major difficulty in the Japanese market. FDI can substitute imports, but the setting up of sales and service subsidiaries is often needed to support cross-border trade. Barriers to FDI then become barriers to imports. If the argument is correct, attempts by the Japanese government to improve access through further deregulation or bilateral free trade agreements will not lead to substantial improvements.