Japan became a full member of the OECD 50 years ago, on 28 April 1964. It was the same year that Tokyo hosted the summer Olympics, and both events signalled a strong recognition of Japan’s resurgence from the devastation of war. By the late 1980s, Japan had grown to become the second largest economy in the world and, although overtaken by China in 2010, it is expected to remain one of the world’s largest economies for the decades to come.
Japan is neither geographically large nor rich in natural resources. For this reason, trade has played a significant role in the country’s economic development. The first OECD Economic Survey of Japan, issued just after its accession, pointed to the remarkable growth rate of Japanese exports. Textiles dominated in the 1950s, followed by steel and ships in the 1960s, and cars and consumer electronics in the 1980s. In recent years, the composition of exports and imports has continued to change as new players enter the global marketplace and technology evolves.
The international fragmentation of production in global value chains (GVCs) is a dominant feature of today’s world economy. A Japanese car, for instance, is assembled at different locations around the world, with components, parts and other inputs, including engineering and design, adding value along the production chain. This phenomenon is closely linked to advances in information and communications technologies and to international integration through trade agreements. However, the true value of the flow of goods and services within these global production chains is not always reflected in conventional international trade statistics. The complete Japanese car, for instance, may be exported from a final assembly point in, say, Malaysia, but most of the value in terms of electronic components and design may have been originally produced in Japan. The OECD-WTO Trade in Value Added (TiVA) indicators provide an insight into Japan’s integration into, and specialisation within, these GVCs. The TiVA approach traces the value added by each industry and country in the production chain and allocates the value added to these source industries and countries.
Looking at trade in value-added terms shows that the domestic value-added content of Japan’s exports is, at 85%, relatively high compared to other OECD countries (see graph below). This partly reflects the country’s specialisation in the development and production of advanced parts and components that are exported to emerging economies for final assembly. It also reflects other factors, such as geographical location–proximity to dynamic economies within “Factory Asia”, for instance–and in particular the large size and diversity of the Japanese economy, which gives it greater scope to source inputs within the economy’s own borders. Indeed, the proportion of domestic value-added content in Japan’s exports is similar to the US and the EU as a whole, though its decline from 93% of the total in 1995 illustrates Japan’s deeper integration into global value chains: seen another way, the foreign content of Japan’s exports more than doubled between 1995 and 2009. The TiVA indicators also provide another perspective on bilateral trade flows. China is Japan’s largest trading partner in gross terms, some way ahead of the US, which is in second place. But in value-added terms, these positions are reversed, offering a truer reflection of the nature of the underlying supply and demand relationships.
The TiVA indicators also reveal that services play an important role in the production process and are a great potential source of competiveness of goods, as well as services exports. In value-added terms, about 40% of Japan’s total exports reflect service activities (see graph above). This is more than double the share of exports of services recorded in conventional trade statistics (about 15%), but it is still relatively low compared to the OECD average of 48%. This is partly explained by a relatively high specialisation in exports of manufactured goods compared to some other OECD countries (such as the UK and the US, which have relatively high services exports), but it may also be partly explained by relatively higher vertical integration of manufacturing and related business activities, including design, research and development, marketing and sales warranties, and after-sales care within Japanese companies. In other words, there may be scope for gains within the manufacturing sector through outsourcing of some of these non-core activities.
How might trade policy in Japan benefit from TiVA? After two decades of economic stagnation, Japan’s recent economic performance is encouraging. To ensure sustainable economic growth in the long run, further integration of Japan into the world economy will be essential. Access to lower-cost or higher-quality imported inputs and investment from abroad can help to enhance productivity and improve competitiveness. More competition in the service sector would boost innovation and productivity in services, which has lagged behind gains in manufacturing in recent years. Services account for around three-quarters of total domestic value added in Japan, and obtaining more efficient inputs from outsourcing would benefit manufacturing too. This may be about to change. Japan has implemented 13 regional trade agreements (RTAs) in the past decade, covering about 19% of Japanese exports and imports. The Japan Revitalisation Strategy of 2013 set a goal to increase this ratio to 70% by 2018 via RTAs with major trading partners. To reach this goal Japan has entered into negotiations with those countries participating in the Trans-Pacific Partnership (TPP), including the US, and negotiations with the EU. The talks are a welcome indication of Japan’s commitment to open markets.
As Japan celebrates its 50th anniversary in the OECD, the economy finds itself on a new and more optimistic footing. By the time Tokyo hosts the Olympic Games in 2020, Japan’s recovery from recent natural disasters and the “lost decades” of economic stagnation should be complete. What an opportunity the Olympics will be for Japan to showcase its many strengths, including its friendly, well-educated population, its sophisticated lifestyle, and its healthy and internationally renowned cuisine. In the meantime, there is additional scope to continue to benefit from further integration into the world economy. Going more global would not only boost Japan’s growth potential, but allow it to better confront future shocks.
Japan Trade in Value-Added (TiVA) Country note at http://oe.cd/tiva
OECD (2013), Interconnected Economies: Benefiting from Global Value Chains, OECD Publishing. http://oe.cd/gvc
Thompson, Lyndon (2013), “Profiting from trade in value added”, in OECD Observer No 295 Q2 2013
©OECD Observer No 298, Q1 2014