Trade deficits with and access to Japan

Trade deficits with and access to Japan

So if Japan is such a big and profitable market, why aren't more foreign firms in the market? Doesn't the closed nature of the Japanese market prevent entry?

Well, I think that certainly used to be true. Until the mid 1970s the Japanese government severely limited access to the country. For example, wholly owned foreign subsidiaries in the electronics arena were not permitted.

Although there still are some restrictions that limit access to the Japanese market, most of the more odious restrictions have been removed, and now Japan encourages imports and foreign investment.

For example, Japan now boasts average tariff ratios that are lower than Europe and America. Also within the last few years Japan has moved to encourage imports by giving tax credits to those manufacturers, wholesalers and retailers that increase their imports of foreign manufactured goods by 10% or more.

And indeed Japan has moved to import more manufactured goods. In 1983, manufactured goods accounted for only 27% of Japan's imports. Now about half of Japan's imports are manufactured goods.

Also, although the dollar-denominated trade deficit with America has remained stubbornly high, because of the yen's appreciation, the yen-based deficit with America has shrunk. Put in other terms, Japan's trade surplus with the United States, as a percentage of Japan's GDP, has shrunk since its highs in the mid 1980s.

Still, the picture could be better, because for the most part, consumers haven't really benefited from the sharp devaluation of the dollar relative to the yen. Among the two biggest reasons for this are Japan's complex distribution system and the existence of sole import agencies.