Exporting Spirits to Japan Politically Correct Economics Term Paper

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Traditionally it has been difficult for many American companies to penetrate the Japanese export market. For over three decades, the Japanese laws and regulations created barriers to entry, by culturally binding allegiance and employing strategies such as cross-shareholding which favor keiretsu (local industrial groups). Officially, Japan's policy is to promote imports, but in practice this was often not the case. For the purpose of this exposition we will examine the economic, political and regulatory environment surrounding the U.S. export of whiskey, or distilled spirits, to Japan.

As an island nation, Japan is a worldwide net importer due to its geographical limitations. Japan is America's largest overseas trading partner and the largest importer of U.S. agricultural products. With a gross domestic product of nearly $5 trillion, Japan's is the world's second largest economy. Japan's GDP is 70% of that of the U.S., while its population is roughly half. In 1996, the growth rate in Japan's economy was the highest in the developed world, at 3.6%. U.S. exports to Japan are greater than that of China, Taiwan, Hong Kong and Singapore combined, making Japan a prime Asian market for U.S. exports.

The World Bank has compiled comparative data between elements that influence food production and consumption between Japan and the U.S. Highlights are summarized in the table below:




Population (millions)

Area (000 sq. mi.)

Population Density (people/sq. mi)

GDP per capita ($) Purchasing Power Parity Basis

Avg. manufacturing labor costs ($/hr)

Source: Bryant College International Trade Data Network

The significant factors in the above comparison are the population density, or concentration of people within a given area. Japan's population density is much higher than America's, which allows for a targeted consumer group to reside in a much smaller geographic area. While the per capita GDP is lower in Japan than in America, the average labor cost for manufacturing wages is significantly higher, creating a favorable setting for imports of goods that are cheaper to buy than to produce.

ECONOMICS broad-brush stroke of the recent economic climate in Japan can be characterized by a lengthy recession, a deflated yen, increased price competition and deregulation. The recession, in hindsight, was the result of prior events. Namely, the speculative growth in land and stock values during the late eighties and early nineties was accompanied by a record low discount rate (2.5% between February 1987 to May 1989). This unprecedented investment resulted in a tripling of land prices and stocks between January of 1985 and December of 1989. In 1990, when stocks fell and the discount rate rose, consumer and corporate spending stalled, creating one of the longest and deepest recessions since World War II, one which is just beginning to recover.

Accordingly, the story of the yen mirrors that of the recession, and is loosely intertwined. In 1985, about the time speculative investment began to rise, an agreement called the Plaza Accord was reached between Japan and the then G-5 member nations. The Plaza Accord raised the value of the yen against the U.S. dollar to correct what was perceived as a growing trade imbalance. A decade later, the government enacted Emergency Economic Measures which were designed to correct the overvaluation of the yen in exchange markets.1 Fluctuations in currency influenced trade flows. Following a peak of U.S.$1/Yen79 in April 1995, the "correction" resulted in the depreciation of the value of the yen in late 1996/early 1997. The change resulted in slowing imports and an increase in exports. In June of 1998, the value of the yen was characterized as the Asian currency crises, depreciating to a low of 144.2 At the end of 2001, the yen stood at 131, a nine-year low. According to the Universal Currency Converter's live mid-market rates as of February 10, 2003, the yen stood at 121.054. The yen, then, is consistently strengthening against the value of the dollar, a sign that the economy is in recovery, albeit a slow one.

Considering that Japanese GDP growth was lackluster during the nineties, in the year 2000 GDP reached 3.86 million yen which was a 10% increase over 1990 levels of 3.53 million, while discretionary spending for food related products remained stable. Worth noting in considering the Japanese economic climate of the prior decade is the devastating Hanshin/Awaji Earthquake of January 1995, which served to hamper efforts at economic recovery.

In recent years the Japanese government, in an effort to buttress the domestic economy, announced historic measures aimed at promoting growth. A sum of 14.2 trillion yen was earmarked for public works projects to strengthen Japan's infrastructure (12.8 trillion yen), create jobs, and support research and development. In addition, the government expanded disclosure rules and raised the ceilings on depositors' insurance for financial institutions. Since 1995, the discount rate was reduced to ease access to credit.

Domestic demographic factors are also affecting the climate for U.S. exports. Imported products are competitively priced (note the average manufacturing labor cost per hour in Japan of $16.9 vs. $11.5 in the U.S.). In addition, more Japanese consumers are traveling abroad and becoming aware of the high prices of domestically produced products. The economic climate can be characterized as one of emerging "price competition," a climate that is not historically patterned in Japan. Japanese agricultural production has declined since 1990 while food imports in most categories have risen. Part of the shift is due to the aging population of domestic farmers, with an overall elderly increase in Japan's population of 12% from 1990 to a projected 27% by 2020, accounting for the fastest growing elderly population in the industrialized world. This has resulted in a declining food self-sufficiency ratio (47% in 1990 to 40% in 2000). In addition, Japan's unemployment rate reached record levels in 2001. According to the Ministry of Agriculture, Forestry and Fisheries (MAFF), imports of consumer-oriented food increased 18% between 1990 and 2000, and imports of total consumer food increased 14% during the same period (whiskey is technically classified as a food product according to the Japanese Ministry of Finance).

In addition, changes to the liquor law allowed large retailers to engage in the liquor market, loosening restrictions to any store with 10,000 or more square meters of retail space. This means that, for the first time, large supermarket chains can obtain a license to sell liquor.


Since World War II, Japan's economic diplomacy was bilateral (i.e., between two countries). While Japan formally became a member of the General Agreement on Tariffs and Trade (GATT) in 1955 (eight years after the U.S. joined), trade policy remained focused on bilateral agreements until recent years. In the forty years since Japan joined GATT, the United States utilized GATT to challenge Japanese trade policies a total of nine times.3

Loosely, as two of the world's largest trading partners, the direct negotiations between Japan and the United States served as the benchmark for relations with other countries. As the European nations adopted the Euro, multilateral trade negotiations painted the diplomatic landscape. The most notable brush stroke was the creation of the World Trade Organization (WTO) in 1995. The WTO operates in the resolution of trade disputes, and in establishing international precedence for such disputes. Although the United States plays a large role in the WTO, its' direct effect on Japanese trade agreements may be diluted from the bilateral influence of previous years.


Japan's total food imports remained high during the last decade at nearly 6

Trillion yen ($55.6 billion). However, the mix of imports changed dramatically during that same period. Commodities decreased from 40% in 1990 to 29% in 2000 while consumer oriented products increased from 60% to 71% of total food imports. The United States retained its position as Japan's largest import supplier, but its share of total imports fell from 32% to 29% over the decade while China increased market share. The United States is Japan's largest supplier of consumer-oriented foods and second largest of edible fishery products. China is the largest fishery exporter to Japan and second largest for consumer oriented foods.

Bars and coffee shops represent 22% of total food service sales. Although growth for this market sector turned negative during the recession, slow but steady recovery is beginning to emerge. Liquor imports & U.S. share is demonstrated for the Food and Fishery import categories recorded by the Ministry of Finance below:



1998 Total ($ millions)

US Imports

Total ($ millions)

US Imports







Total ($)

Total (trillion yen)

Rank relative to position in thirty categories: Rating of U.S. opportunity to increase exports: A - Excellent; B - Fair; C - Poor

Individual import items are converted to U.S. dollars at 1998 and 2000 exchange

The table shows that the rating of the United States' potential to increase exports is either excellent or fair. Whiskey remained stable between 1998 and 2000, at 21% of total market share. Figures compiled from annual reports of the Toyo Keizai…

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