In its economic relations, Japan is both a major trading nation and one of the largest international investors in the world. In many respects, international trade is the lifeblood of Japan's economy. Imports and exports totaling the equivalent of nearly US$1.309.2 Trillion in 2017, which meant that Japan was the world's fourth largest trading nation after China, the United States and Germany. Trade was once the primary form of Japan's international economic relationships, but in the 1980s its rapidly rising foreign investments added a new and increasingly important dimension, broadening the horizons of Japanese businesses and giving Japan new world prominence.
Postwar development Japan's international economic relations in the first three decades after World War II were shaped largely by two factors: a relative lack of domestic raw materials and a determination to catch up with the industrial nations of the West. Its exports have consisted exclusively of manufactured goods, and raw materials have represented a large share of its imports. The country's sense of dependency and vulnerability has also been strong because of its lack of raw materials. Japan's determination to catch up with the West encouraged policies to move away from simple labor-intensive exports toward more sophisticated export products (from textiles in the 1950s to automobiles and consumer electronics in the 1980s) and to pursue protectionist policies to limit foreign competition for domestic industries.
After the end of World War II, Japan's economy was in a shambles, with production in 1945 at 10% of prewar levels. Its international economic relations were almost completely disrupted. Initially, imports were limited to essential food and raw materials, mostly financed by economic assistance from the United States. Because of extreme domestic shortages, exports did not begin to recover until the Korean War (1950–53), when special procurement by United States armed forces created boom conditions in indigenous industries. By 1954 economic recovery and rehabilitation were essentially complete. For much of the 1950s, however, Japan had difficulty exporting as much as it imported, leading to chronic trade and current account deficits. Keeping these deficits under control, so that Japan would not be forced to devalue its currency under the Bretton Woods system of fixed exchange rates that prevailed at the time, was a primary concern of government officials. Stiff quotas and tariffs on imports were part of the policy response. By 1960 Japan accounted for 3.6 percent of all exports of noncommunist countries.
1960s During the 1960s, the U.S. dollar value of exports grew at an average annual rate of 16.9 percent, more than 75 percent faster than the average rate of all noncommunist countries. By 1970 exports had risen to nearly 6.9 percent of all noncommunist-world exports. The rapid productivity growth in manufacturing industries made Japanese products more competitive in world markets at the fixed exchange rate for the yen during the decade, and the chronic deficits that the nation faced in the 1950s had disappeared by the middle of the 1970s. International pressure to dismantle quota and tariff barriers mounted, and Japan began moving in this direction. The pressure also allowed the United States to grow even further economically.
1970s The 1970s began with the end of the fixed exchange rate for the yen (a change brought about mainly by rapidly rising Japanese trade and current account surpluses) and with a strong rise in the value of the yen under the new system of floating rates. The sense of dependence on imported raw materials grew strong, when crude petroleum and other material prices rose during the 1973 oil crisis and supply was uncertain. Japan faced sharply higher bills for imports of energy and other raw materials. The new exchange rates and the rise in raw material prices meant that the surpluses of the decade's beginning were lost, and large trade deficits followed in the wake of the second oil price shock in 1979. Expanding the country's exports remained a priority in the face of these raw material supply shocks, and during the decade exports continued to expand at a high annual average rate of 21 percent.
1980s During the 1980s, however, raw material prices fell and the feeling of vulnerability lessened. The 1980s also brought rapidly rising trade surpluses, so that Japan could export far more than was needed to balance its imports. In response to these surpluses, the value of the yen rose against that of other currencies in the last half of the decade, but the surpluses proved surprisingly resilient to this change. With these developments, some of the resistance to manufactured imports, long considered luxuries in the relative absence of raw materials, began to dissipate. Japan had caught up. Now an advanced industrial nation, it faced new changes in its economy, on both domestic and international fronts, including demands to supply more foreign aid and to open its markets for imports. It had become a leader in the international economic system through its success in certain export markets, its leading technologies, and its growth as a major investor around the world. These were epochal changes for Japan, after a century in which the main national motivation was to catch up with the West. These dramatic changes also fed domestic developments that were lessening the society's insularity and parochialism. The large surpluses, combined with foreign perceptions that Japan's import markets were still relatively closed, exacerbated tension between Japan and a number of its principal trading partners, especially the United States. A rapid increase in imports of manufactured goods after 1987 eased some of these tensions, but as the decade ended, friction still continued.
The processes through which Japan is becoming a key member of the international economic community continued into the 1990s. Productivity continued to grow at a healthy pace, the country's international leadership in a number of industries remained unquestioned, and investments abroad continued to expand. Pressures were likely to lead to further openness to imports, increased aid to foreign countries, and involvement in the running of major international institutions, such as the International Monetary Fund (IMF). As Japan achieved a more prominent international position during the 1980s, it also generated considerable tension with its trade partners, especially with the United States, although these have dissipated more recently as the growth of Japan's economy has slowed. The largest blow to these trade tensions was Japan's prolonged economic crisis in the 1990s known as the Lost Decade.
Foreign investment Through most of the postwar period foreign investment was not a significant part of Japan's external economic relations. Both domestic and foreign investments were carefully controlled by government regulations, which kept the investment flows small. These controls applied to direct investment in the creation of subsidiaries under the control of a parent company, portfolio investment, and lending. Controls were motivated by the desire to prevent foreigners (mainly Americans) from gaining ownership of the economy when Japan was in a weak position after World War II, and by concerns over the balance of payments deficits. Beginning in the late 1960s, these controls were gradually loosened, and the process of deregulation accelerated and continued throughout the 1980s. The result was a dramatic increase in capital movements, with the biggest change occurring in outflows—investments by Japanese in other countries. By the end of the 1980s, Japan had become a major international investor. Because the country was a newcomer to the world of overseas investment, this development led to new forms of tension with other countries, including criticism of highly visible Japanese acquisitions in the United States and elsewhere.
Relations by region Asia The developing nations of Asia grew very rapidly as suppliers to and buyers from Japan. In 1990 these sources (including South Korea, Taiwan, Hong Kong, Singapore, Indonesia, and other countries in Southeast Asia) accounted for 28.8 percent of Japan's exports, a share well below the 34 percent value of 1960 but one that had been roughly constant since 1970. In 1990 developing Asian countries provided 23 percent of Japan's imports, a share that had risen slowly from 16 percent in 1970.
As a whole, Japan had run a surplus with noncommunist Asia, and this surplus rose quickly in the 1980s. From a minor deficit in 1980 of US$841 million (mostly caused by a peak in the value of oil imports from Indonesia), Japan showed a surplus of nearly US$3 billion with these countries in 1985 and of over US$228 billion in 1990. The shift was caused by the fall in the prices of oil and other raw materials that Japan imported from the region and by the rapid growth in Japanese exports as the region's economic growth continued at a high rate.
Indonesia and Malaysia both continued to show a trade surplus because of their heavy raw material exports to Japan. However, falling oil prices caused trade in both directions between Japan and Indonesia to decline in the 1980s. Trade similarly declined with the Philippines, owing to the political turmoil and economic contraction there in the 1980s.
In 1990, South Korea, Taiwan, Hong Kong, and Singapore constituted the newly industrialized economies (NIEs) in Asia, and all four exhibited high economic growth during the 1970s and 1980s. Like Japan, they lacked many raw materials and mainly exported manufactured goods. Their deficits with Japan increased from 1980 to 1988, when the deficits of all four were sizeable. Over the 1970s and 1980s, they evolved a pattern of importing components from Japan and exporting assembled products to the United States.
Japan's direct investment in Asia also expanded with the total cumulative value reaching over US$32 billion by 1988. Indonesia, at US$9.8 billion in 1988, was the largest single location for these investments. As rapid as the growth of investment was, however, it did not keep pace with Japan's global investment, so Asia 's share in total cumulative investment slipped, from 26.5 percent in 1975 to 17.3 percent in 1988.
China is now Japan's largest export market, surpassing the U.S. despite a drop in overall trade, according to recent figures from the Japan External Trade Organization. Japan's exports to China fell 25.3% during the first half of 2009 to $46.5 billion, but due to a steeper drop in shipments to the U.S., China became Japan's largest trade destination for the first time. China is also Japan's largest source of imports.
Middle East The importance of the Middle East expanded dramatically in the 1970s with the jumps in crude oil prices. The 1973 oil crisis put a break to the high rates of economic growth Japan enjoyed in the 1960s, and Japan was deeply concerned with maintaining good relations with these oil-producing nations to avoid a debilitating cut in oil supplies. During the 1980s, however, oil prices fell and Japan's concerns over the security of its oil supply diminished greatly. Still, measures were taken to reduce Japanese dependency on oil as energy source. After the end of the Cold War, Japan tried to win Russia as another source of oil, but so far Japanese–Russian relations remain tense because of territorial disputes. Other oil sources include Indonesia and Venezuela.