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This Non Technical Summary does not constitute part of the above-captioned Discussion Paper but has been prepared for the purpose of providing a bold outline of the paper
based on findings from the analysis for the paper and focusing primarily on their implications for policy
Views expressed in this Non Technical Summary are solely those of the individual author(s)
and do not necessarily represent the views of the Research Institute of Economy
The global trade landscape has been significantly impacted by escalating tensions between the U.S
particularly in technology-driven industries
has imposed stricter export controls to curb China's access to advanced U.S
This study investigates how these measures have affected global value chains (GVCs) and influenced Japanese multinational enterprises (MNEs) in their decisions to reduce or cease operations in the Chinese market
Department of Commerce through its Export Administration Regulations (EAR)
aim to regulate the export of specific products and technologies for national security and foreign policy reasons
The Foreign Direct Product Rule extends these regulations to products manufactured outside the U.S
By targeting critical technologies like advanced semiconductors
aims to disrupt China's technological progression without significantly disrupting overall trade flows
2024) have not observed a substantial decline in the trade of controlled products
this research identifies potential impacts on production within China
We hypothesize that Japanese MNEs which depend on advanced U.S
technology are encountering challenges due to the restricted availability of critical imported intermediate inputs
some of these firms are currently or are planning to relocate or scale back their operations in China
which is reshaping global production networks
we examine data from Japanese manufacturing affiliates in China
Japanese firms have been exiting the Chinese market at a faster rate compared to other regions (Figure 1) since about 2015
including rising competition from local Chinese producers
economic disruptions stemming from the COVID-19 pandemic
the heightened costs and complexities introduced by the U.S
One of the key achievements of our study is the development of a "variety index," which quantifies the diversity of imported intermediate goods impacted by U.S
This index is constructed using detailed U.S
HS 10-digit product-level data and regulatory changes outlined in the U.S
Our analysis shows that export controls have intensified over time
with significant effects on industries such as electronics
The study also employs a theoretical model to examine how reduced access to intermediate inputs influences production costs in China
it evaluates both the direct and indirect effects and derives an “export control index.” The findings indicate that industries that are heavily dependent on advanced technology face substantial cost increases
reducing the attractiveness of China as a production base for foreign firms (Figure 2)
An empirical analysis of Japanese MNE affiliates for 2017-2021 reveals a correlation between stricter U.S
export controls and an increased likelihood of affiliates exiting China
an increase of one standard deviation in the severity of export controls
increases the probability of Japanese affiliates exiting by up to 2.52 percentage points
This effect is particularly pronounced in industries such as communication and electronic equipment
which have experienced the most significant tightening of restrictions
Our findings underscore the critical role of intermediate inputs in shaping firms' decisions and demonstrate how targeted policies can ripple through the global economy
by restricting China’s access to advanced technologies
have driven Japanese firms to reconsider their operations
resulting in a restructuring of global value chains
These insights suggest that when analyzing the impact of tighter U.S
attention should be paid not only to changes in trade
but also to changes in foreign direct investment
IAA (JCN 6010005005426)JCN: Japan Corporate Number
Opinions expressed or implied on this website are solely those of the author
on this website are as of the date of publication
In the case of reposting material from our website
Japan’s per capita gross domestic product ranking has fallen from its top position among the Group of Seven major countries and been overtaken by those of other countries that had been far behind Japan in terms of economic power
Japan has changed from a role model for growth to a cautionary tale about stagnation
As Japan’s working population has decreased due to the declining birthrate and with the marriage rate falling
there is increasing diversity in family structure across the country
While people’s values and codes of conduct have changed along with labor markets and socio-economic environments
Japan has lagged behind other countries in updating its government policies amid the rapid technological advances around the world and has been left behind in terms of economic growth
Recycling ad hoc policies without addressing changes will not lead to sustainable growth
Outdated policies hinder economic activity and structural growth
Japan should make a shift based on a long-term perspective
the economy will decline if the productivity of each individual is not improved
It is important to encourage women and the elderly to work
but their labor force participation rate is in fact already high
so efforts to increase their labor force participation rate alone will not lead to sustainable growth
It is also necessary to improve the environment for enhancing individual worker productivity by correcting the gender-based wage gap and facilitating labor mobility
but these efforts alone will not be sufficient to deliver sustainable growth
Japan must remove existing barriers that dissuade individuals and companies from striving toward growth and accelerate investment in human capital and skill development
Harvard University Professors Claudia Goldin and Lawrence Katz point out that the United States maintained a strong economy until the second half of the 20th century by making high school education compulsory
raising the level of human capital in the 1930s ahead of other countries
With an abundant supply of high-skilled human resources
technological development created wealth without increasing economic inequality
if educational level and skill improvement are allowed to stagnate as has occurred in the United States since the 1980s
technological innovation leads to wider inequality and the benefits of economic growth are not shared
leading to a greater concentration of wealth
Japan’s education system has remained essentially unchanged since secondary education became compulsory just after World War II eighty years ago
The high school enrollment rate has reached almost 100%
but preparation to enter high school or university is largely dependent on the economic strength of parents
and the financial and time burdens of education are only increasing
The university enrollment rate is about 60% and is strongly correlated with parent educational background and income
but Japan could make high school education compulsory and create an environment where every student is able to pursue higher education if they wish to do so
Taking maximum advantage of information and communications technology to promote measures including efficient credit transfer would be of great benefit
It may seem counterintuitive to extend the compulsory education period and raise the minimum working age in the midst of severe labor shortages; however
in Japan the average number of years worked has been increasing despite the rising rate of university enrollment
Higher lifetime productivity and earnings would lead to greater macro labor force and higher individual lifetime income
putting young people into industries with no income growth is a loss for those individual workers and the national economy as a whole
and other sectors with severe labor shortages
it makes sense for the government to spearhead focused investment in alternative technologies
Such investment is important from the perspectives of personal income growth
Demand for highly skilled human resources will continue to increase in line with technological development
and stagnation in the supply of human resources will widen the wage gap
while expanding the introduction of foreign workers has been discussed
it is difficult to attract a sufficient number of foreign high-skilled human resources with the average wage level of university graduates in Japan
The same issue is true for highly skilled Japanese human resources
Excessive income redistribution will lead to an outflow of skilled human resources to overseas markets and a decline in the willingness to invest in skills
Support for low-income groups and security in retirement are important
the elderly hold the largest average asset values
while people in their 20s to 50s suffer the most poverty
Taxing working households to pour public funds into an affluent retirement for the elderly should not be Japan’s top priority
The repeated pork-barrel spending on resident tax-exempt
low-income households under the auspices of supporting low-income groups mostly benefits the wealthy elderly
Support for the poor should be narrowly targeted through conventional channels
the solution should be to improve the institution and not pork-barrel spending on the elderly
The stipend program amid the COVID-19 crisis when every moment was critical was significant to some extent
but why is the indiscriminate distribution of benefits continuing five years after we became acutely aware of the need to keep track of those who are afflicted by poverty and in need of relief
Structural stagnation of the economy is different from an economic crisis
It is irresponsible for the government to provide benefits and subsidies at enormous administrative costs in the name of economic stimulus while praying for growth
Temporary increases in government spending and consumption actually hinder sustainable growth
It is true that people whose incomes temporarily increase due to peacetime stipend payments increase their consumption
but if supply cannot meet the growth in demand
prices increase while the tax increase that provides the source of the benefits is postponed
A sudden increase in demand due to a temporary stipend program does not create incentives for companies to increase production or employment over the long term
Not only will income return to normal in the year following the consumption boon
but consumption will decrease because the postponed taxation will decrease taxpayer incomes
Companies therefore scale back production in anticipation of lower future demand and the administrative cost associated with the irregular stipend payments also increase the tax burden
Irresponsible spending today causes a tax hike tomorrow
and any increase in the future tax burden will discourage investment
Repeatedly adopting irresponsible policies of praying for a miracle will only lead to long-term stagnation
Every policy that does not lead to growth increases the burden on future generations
making the fate of government debt more uncertain
The role of policy should be to reduce uncertainty and create an environment in which people can invest and consume with confidence
Is the current situation unavoidable because of the aging population
While Japan’s average life expectancy has increased by 20 years since the start of the national pension system in 1960
the starting age for pension benefits remains 65 years of age
The increase in life expectancy has been supported by improved health and the current labor force participation rate for the 65-69 age bracket exceeds 50%
social insurance premiums account for about 30% of income
but the fact that the national pension system has not kept pace with the speed of societal change
The only way to achieve sustainable economic growth is to increase the productivity of workers and companies
thereby raising lifetime income and production
Growth will not continue if the government forces companies to raise wages
the government should remove barriers to work motivation and income growth while terminating unfocused benefits and ill-conceived policies
It is impossible for the government to predict growth sectors or future unicorn companies with certainty
It should raise the skills of the entire population through investment in human capital and encourage people and companies to find sources of growth on their own
We need an environment that respects diversity
encourages an entrepreneurial spirit and embraces failure
instead of being guided by rules of thumb based on outdated values and practices
This applies not only to government policies
but also to education and research environments
There can be no sustainable growth without an environment in which diverse personal skills and production technologies can grow freely
What will happen to the environment surrounding ESG investment in the future
I would like to summarize the current anti-ESG trends
President Donald Trump signed an executive order to withdraw the United States from the Paris Agreement and set out a policy to enhance support for the fossil fuel industry
including Goldman Sachs and JPMorgan Chase
withdrew from the Net Zero Banking Alliance (NZBA)
an international banking alliance that aims to reduce greenhouse gas (GHG) emissions to effectively zero
indicating a growing trend away from ESG investment
This can be viewed as a reaction to radical actions by environmental activists to date. For example, the East African Crude Oil Pipeline (EACOP) initiative has come under heavy fire from environmental activists, forcing many financial institutions to end their engagement with the initiative. One such institution is Mitsui Sumitomo Financial Group, which was requested by environmental activists in June 2022 to cease its involvement in the project (<a href="#note3" id="ref3">Note 3</a>)
the Japanese financial institution withdrew from the Equator Principles (which urge financial institutions to give due consideration to the impact of large-scale development projects on the natural environment and local communities when financing them)
it announced its withdrawal from the NZBA international decarbonization framework on March 4
the current situation surrounding ESG investment is more of a financial normalization
with companies focusing on issues that they are naturally compelled to focus on
The argument of anti-ESG activists is that companies should end ESG activities that are not related to their business and should focus on initiatives related to social issues that will lead to improving their reputation (projects
or appropriate ESG activities that can lead to future growth)
Companies that have been accused of “ESG-washing” (the act of pretending to take actions or exaggerating ESG considerations) are also likely to refrain from joining ESG funds in the future
ESG regulation development in Europe is also waning and becoming more realistic
companies will allocate resources to realistic social issues that are less punitive
rather than suddenly increasing management costs at enormous expense to the company
Given the current economic insecurity and inflation around the world
as well as the global impact of artificial intelligence (AI)
we are not in an era where we can afford everything
in this era we are required to respond to large-scale social changes
ESG investment may at first seem to have diminished
overly speculative and extreme activities are likely to be abandoned while returning to a more ideal state
corporate behavior will shift toward a more appropriate trend of simplified ESG evaluation through the use of AI and other technologies
the simplification of the Corporate Sustainability Reporting Directive (CSRD)
requiring companies in the European Union to disclose sustainability information
can be evaluated as a realistic change in the context of the current major transformation
more realistic ESG measures should be required to be taken without needlessly increasing costs
the simplification should be regarded as representing a systemic issue of how to utilize AI and other technologies to implement efficient and appropriate responses
Companies that use these technologies to efficiently manage risks and effectively contribute to solving social issues are expected to survive in the future (Managi
The explanation presented here utilizes the results of a questionnaire survey (Survey on Standardization Activities [SoSA) targeting companies in Japan (Appendix Tables A.1. and A.2.). Prior to the 2021 survey, the SoSA was administered four times, covering the period from 2017 to 2020 (Tamura, 2019, 2020, 2021, 2022a; <a href="#note3" id="ref3">Note 3</a>, <a href="#note4" id="ref4">Note 4</a>, <a href="#note5" id="ref5">Note 5</a>, <a href="#note6" id="ref6">Note 6</a>)
Human history can be regarded as a history of knowledge creation
encompassing the development of new knowledge in both the natural sciences and the humanities
The efficient creation and management of innovative knowledge have long been a central topic of interest in both academia and practice
long before the advent of generative AI technology (Nonaka and Takeuchi
Two types of knowledge are commonly recognized: explicit knowledge (formal knowledge that has been documented in text) and implicit (tacit) knowledge that remains undocumented (Polanyi
there is significant interest in clarifying the impact of documented knowledge sources—such as patents
and academic books—on the generation of new knowledge
as these are often viewed as reservoirs of scientific and technological information  (Ochi
The increasing volume of text data available on the Internet
combined with advances in Natural Language Processing (NLP)
enables the measurement of citation relationships between documents and the assessment of similarities between them
meta-analyses of the flow of knowledge among authors and the knowledge structure within specific domains have become feasible (Tamura
such analysis requires that the analyzed knowledge be available as text data (i.e.
It is useful to determine which knowledge sources are regarded as important for standardization
Previous results compare the perceived importance of text-based information sources—such as “patent information,” “academic articles,” and “standardization documents”—with non-text-based sources
such as “information obtained from participation in standardization activities” (Table 1; Tamura
Non-text-based knowledge related to SDO activities can be considered implicit knowledge
and approximately 62% of SoSA respondents consider it useful
knowledge obtained from standardized documents
is considered useful by about 57% of SoSA respondents
This result suggests that both explicit knowledge (e.g.
from standardization documents) and implicit knowledge (e.g.
non-text information shared during standards’ development activities) play significant roles in standardization
These findings are likely related to the development of de jure standards and consortium standards
as processes that necessitate consensus-building among participants
Generative AI employs large-scale language models (LLMs) to statistically estimate the appearance probability of each word in word sequences and produce documents as output (Brown et al.
Non-verbal information from SDO meeting participants
which may include signals related to decision-making
Even if some portion of this information is recorded in meeting minutes
it is likely to be limited and potentially introduces interpretive noise
such AI technology cannot generate knowledge that relies on processing non-verbal information
Even if the amount of implicit information becomes smaller in the future
compared to explicit knowledge-intensive creation
tacit knowledge-intensive creation poses greater challenges for generative AI technology
Executives generally do not carry out front-line work themselves and are therefore not able to gather information on the content of the work to the same extent as the employees who carry out this work
This situation creates a risk of information asymmetry between management and staff
the reallocation of managerial resources within an organization along with the introduction of generative AI technology must take into account the importance of tacit knowledge (for example
the standard development process described here)
the process must be carried out with a clear understanding of which job responsibilities cannot be replaced by generative AI technology
identifying “worker responsibilities that cannot be replaced” by generative AI technology is more crucial than identifying “tasks that can be replaced.”
The above considerations have substantial implications for Japan
the practice of creating job descriptions is very limited
and the work content often remains undocumented
accurately determining whether an individual’s work content can be performed by AI technology—including generative AI—is difficult
increasing the risk of poor decision-making regarding internal human resource allocation
This situation potentially leads to reduced productivity
This discussion has examined the effects and limitations of generative AI technology on knowledge creation
using standard development as an example of knowledge creation that may be difficult for generative AI to handle
While AI technology can be utilized to enhance competitiveness if applied correctly
inappropriate implementation can lead to superficial formalism in the use of generative AI
When applying NLP-based information processing technologies and theories (e.g.
it is essential to recognize that generative AI tools are not suited to certain knowledge creation processes
for organizations whose business strategies depend heavily on the standardization of goods and services
the knowledge creation work inherent in standardization activities (standard development) cannot be fully replaced by generative AI technology
cultivating and enhancing human capital is especially critical
Many Japanese companies do not have well-developed job description systems in place
The widespread adoption of generative AI technology may serve as an external shock that encourages changes in current human capital management systems
potentially accelerating a shift toward more direct managing of employee capabilities
creating job descriptions for each position is important
improving conventional job description formats by including a checkbox to indicate whether generative AI implementation is “suitable” or “not suitable” for given tasks
Implementing these measures appropriately requires that personnel responsible for human capital management possess a certain level of technical understanding of generative AI technology
a discontinuous change in the knowledge required of those who plan human capital management must occur
familiarity with NLP techniques in use among AI technologies will be essential for managers who are in charge of human capital allocation
The distribution of survey respondents by industry classification and R&D budget is presented in Appendix Tables A.1
A relatively large number of respondents belong to the manufacturing sector (e.g.
Respondents selected their industry classification from ten different categories
This classification differs from the technical classifications utilized in JIS and ISO standards
which rely on technical differences rather than industry-based distinctions
will be inaugurated in the United States in January 2025
a self-proclaimed “tariff man,” has already threatened to impose an additional 10% tariff on nearly all imports from China and a 25% tariff on imports from Canada and Mexico
This represents the suspension of the U.S.-Mexico-Canada Agreement (USMCA)
President Trump planned to withdraw the United States from the Trans-Pacific Partnership (TPP) agreement during his campaigns towards his first inauguration in 2017 and implemented the plan
It is quite possible that the tariff policy that he has advocated will be implemented immediately after his inauguration
It is useful to review the effects of Trump 1.0 policies when predicting the impact of Trump 2.0 trade policies on both global and Japanese trade
Trump 1.0 imposed an additional 25% tariff on a wide range of Chinese imports
It is well-known in international economics that if a large country
the exporting countries’ FOB (free on board) prices can be expected to decline
improving the large country’s terms of trade (relative prices of the large country’s export goods compared to import goods)
the Trump 1.0 tariff policy on China should have benefited the United States from the improvement of the terms of trade
little decline was seen in FOB prices for imports from China that were subject to additional tariffs
This means that the measures failed to improve the terms of trade for the United States
A study by Professor Tadashi Ito (Gakushuin University) found that
while imports of goods from China subject to tariff hikes decreased significantly
which implies a so-called trade diversion effect
China’s exports of goods subject to the U.S
tariff hikes to countries other than the United States increased more than their exports to the United States decreased
resulting in an increase in China’s overall exports of the goods in question
These studies suggest that the Trump 1.0 tariff policy might have failed to produce the intended results
How was Japan’s trade affected under Trump 1.0
I conducted collaborative research with Professor Keiko Ito  (Chiba University)
and Akira Sasahara (Keio University) to analyze import and export declaration data between 2014 and 2020
Let’s review changes in Japan’s imports and exports before and after the Trump 1.0 inauguration along with a factor-by-factor breakdown of the changes (see the chart)
Although it is difficult to identify any trend in annual changes in trade
the decrease in exports between 2017 and 2019 under Trump 1.0 was slower than in the 2014-2016 period before the Trump 1.0 inauguration
but there was a decrease in imports in the two-year period before the inauguration which turned upward in the next two years
There are three main factors that contribute to changes in trade volume
the first factor (1) is the change in the amount when the same firms export the same products to the same countries
Such change is referred to as the intensive margin
The second factor is (2) changes when the same exporting firms change products for export and destination countries and the third factor (3) is when firms start or suspend exports
This is referred to as the extensive margin
The intensive margin tends to account for an overwhelming share of changes in imports or exports
studies attribute this tendency to the fact that a small number of large firms account for most exports and imports
This type of oligopolization is observed in Japan’s external trade
indicating that this also applies to Japan
changes in trade volume by a few large firms in specific products with specific countries exert a great influence on Japan’s total external trade
as these firms engage in both imports and exports
a decrease in these firms’ exports of consumer goods leads to a decline in their imports of raw materials and intermediate goods
Regarding the intensive margin that accounts for an overwhelming share of Japan’s external trade
no accelerated decrease in trade or other negative effect was seen after the Trump 1.0 inauguration
the impact of changes by trade-continuing firms in products and trading partner countries accounted for about 17% of the decline in exports in 2019
Although Japanese firms may have changed export destinations and products in response to hikes in U.S
such changes should have exerted a far smaller impact on Japan’s external trade than the intensive margin
the trade data do not suggest that Trump 1.0 trade policy had a significant negative impact on Japan’s trade
how will the world and Japan be affected by the expected additional Trump 2.0 tariffs
According to a simulation result by the economist group of the Institute of Developing Economies
if Trump were to impose a 60% tariff on China and a 20% tariff on all other foreign countries from January 2025 as explicitly stated during his presidential election campaign
the United States itself would be hit the hardest economically as of 2027
Gross domestic product (GDP) would be 2.7% lower than in the case without the additional tariffs
with automotive and services industries hit hardest
indicating that the United States would be hit harder than China
Japan and other countries would see their benefits from the U.S.-China trade war offset by the direct negative impact of the additional tariffs
the impact on trade through exchange rate fluctuations is attracting attention
There has been much discussion on the impact of Trump’s policies on the Japanese yen
According to an analysis that I conducted in cooperation with Professors Keiko Ito Toshiyuki Matsuura
Uraku Yoshimoto of the Policy Research Institute
yen exchange rate fluctuations in recent years have had little effect on dollar-denominated export values
The reason for this is that contracts denominated in foreign currencies account for more than 60% of Japan’s export transactions
exchange rate fluctuations do not change export prices in foreign currencies
the response of export volume to exchange rate fluctuations has been weak
This is related to the fact that major manufacturing firms in Japan
as active importers and exporters of goods within international supply chains
have already made efforts to avoid exchange rate risks
Even with significant yen exchange rate fluctuations due to Trump 2.0 policies
Japan’s trade volume is expected to remain almost unaffected
it is anticipated that the additional tariffs under Trump 2.0
while reducing China’s exports to the United States
are likely produce a trade diversion effect that will result in an increase in imports into the United States from countries subject to lower tariffs
It is also highly likely that the increased burden of the tariffs will most heavily affect American citizens
the best course of action is to steadily implement policies that meet its national interests from a longer-term perspective without being swayed by inconsistencies in Trump’s remarks
Japan should correct the oligopolistic trade structure by providing support for new entrants in trade
maintain the free trade system through the expansion of the TPP
which has developed into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
and promote foreign investment in Japan to revitalize the domestic economy
many people remain concerned about how the ongoing global conflicts that have continued in recent years will develop
Even if these conflicts are limited to specific regions
their impact on global economic activities can be significant
especially when important resources or materials are concentrated in the affected areas
These disruptions can affect supply chains and
even on countries not directly involved in the conflict
This literature explores how standardization can help mitigate such effects
Standardization generally falls into two categories: de jure standards and de facto standards
and each has a different impact on the economy
De jure standards are formal agreements made by multiple stakeholders
such as specifications for the design of products
de facto standards arise naturally through market competition and represent the most widely accepted specification at a given time
These distinctions are especially important when considering their impact on economic security
especially in relation to supply chain security and managing the leakage of technological information
A survey on the state of standardization activities in Japan from 2019 to 2021
covering key indicators over these five years demonstrates that there was progress in standardization activities during this period [1]
particularly marked by the COVID-19 pandemic
accelerated digitalization and impacted social systems
Digitalization involves converting analog information
into binary data (0s and 1s) encoding the data based on established rules
This process necessitates standardized encoding and decoding methods
so digitalization today is effectively synonymous with standardization in terms of how it is implemented in society
This article will examine the significance of such advancements in standardization from the perspective of economic security
the disruption of transportation systems due to international conflicts or the restriction of exports of materials produced in specific regions is a significant concern
technological standards help harmonize transportation systems
making it easier to find alternative transportation routes
which contributes to stronger economic security
if a product is monopolized by a single company
excessive standardization can pose risks to economic security
This issue is relevant not only in relations between companies but also in international relations
and it becomes difficult to find alternatives from other suppliers
it becomes harder to diversify supply chains
which corresponds to the situation of de facto standards
This article provides an overview of the role of standards as sources of knowledge from the perspective of economic security
considering changes in the international environment
From the viewpoint of ensuring supply chains
the establishment of de jure standards helps ensure a diversity of suppliers and strengthens economic security
excessive monopolization leading to de facto standards may undermine supply chain flexibility
it is important to manage information exchange during the standardization process
especially in meetings related to de jure standards
where careful attention should be paid to managing relevant technical information
For Jeronimo CARBALLO's full bio,<a href="https://cepr.org/about/people/jeronimo-carballo" target="_blank">https://cepr.org/about/people/jeronimo-carballo</a>
For Richard MANSFIELD's full bio,<a href="https://cepr.org/about/people/richard-mansfield" target="_blank">https://cepr.org/about/people/richard-mansfield</a>
Accurately predicting the labour market impact of trade shocks is a complicated endeavour
Using job match records merged with firm-level customs records and changes in potential tariffs following China’s WTO accession
this column shows how differential firm-level exposure to China’s accession led to concentrated earnings and employment losses in the US
labour market competition among workers also diffused and reallocated earnings and unemployment losses among many seemingly untargeted kinds of workers
These findings are relevant for understanding the earnings and unemployment implications of the emerging trade war
The US has recently announced and imposed a host of new tariffs on China
which prompted these countries to impose retaliatory tariffs
with $1.2 trillion in US imports and exports potentially affected (York and Durante 2025)
News reports abound with predictions about which kinds of firms and workers will gain and lose from a new trade war
Yet accurately predicting the labour market incidence of such multifaceted trade shocks is a complex endeavour
It requires identifying (1) which firms' product demand and costs are most affected
(2) how sensitive their employment demand is to these changes
(3) what kinds of workers such firms tend to hire and retain
and (4) which other workers and firms compete elsewhere with and for the directly affected workers
In a recent paper (Carballo and Mansfield 2025)
we assess the role played by these four factors in the early impact of China’s 2001 WTO accession on US workers’ employment and earnings
2024) shows that trade liberalisation had profound effects on workers
But by relating industry or county exposure to increased import competition directly to worker outcomes
this research mostly sidesteps how differential firm exposure and competition among workers mediate the impact of trade shocks
We use customs records on each firm’s product mix among imports and exports
and domestic sales along with detailed product-level tariff changes to measure firms’ exposure to each of four channels through which China’s WTO entry might have affected their labour demand: import competition in domestic markets
export competition from Chinese products in other foreign markets
and improved access to Chinese imports for existing importers
We then assess how employment growth differed for more versus less exposed firms within industry
with employment sensitivity to exposure allowed to vary across these categories
We then use predictions of firms’ shock-induced employment changes as inputs in a labour market model estimated via millions of job transitions and retentions from administrative records
The model simulates how competition among workers from different industries
and pay levels translates the initial job creation and destruction to a distribution of medium-run earnings and unemployment impacts
Our analysis produces several insights that we believe are relevant to the current context
Non-manufacturing establishments can account for large shares of gross employment changes from trade shocks
we find that 51.8% of the job destruction via import and export competition and all the job creation via expanded import access occurred among non-manufacturing establishments
Multinational firms engaged in intrafirm international trade are likely to account for an disproportionately large share of each channel's shock-induced employment changes
multinational firms contributed at least 70% of the aggregate job change for all three primary channels despite representing only 26.6% of US jobs
This reflects the fact that multinationals account for 83.0% of US imports and 81.6% of exports
making them disproportionately exposed to this and most trade shocks
Shock-induced employment losses were concentrated in high-paying firms
while employment gains were concentrated in low-paying firms
Firms in the top two average pay quartiles accounted for 67% and 81% of jobs destroyed by the import and export competition channels despite employing 50% of US workers
the two lowest paying quartiles account for 88% of jobs created by expanded import access
the immediate impact of the current tariff retaliation on exporters may disproportionately impact middle- and high-paid workers
while disruptions to importing are more likely to cause initial distress to low-paid workers
Trade shocks can produce concentrated earnings losses when several channels align to target particular worker types
Workers initially at multinational manufacturing firms suffered the largest loss from China’s WTO accession
around $6,000 per worker over the subsequent five years
These losses partly reflect the increased competition such multinationals faced domestically but also internationally
since they rely more heavily on exports for revenue
But they also reflect that manufacturing multinationals were best equipped to exploit new opportunities to outsource from China inputs that their US workers had previously produced
job ladders within and across industries cause large shares of earnings gains or losses to trickle down to lower-paid and initially unemployed workers
even for trade shocks targeting high-paying firms or industries
we find that 2001 manufacturing workers only experienced 48.8% of aggregate earnings losses and 20.8% of additional years of unemployment caused by China’s WTO entry between 2002 and 2006
reduced opportunities to move to manufacturing and increased competition for jobs from displaced manufacturing workers cause workers in the low-paid leisure/administration/transportation industries to bear 10.7% of shock-induced earnings losses and 22.2% of increased unemployment
even though their firms generally were not directly targeted by any channel
we find that initially unemployed workers account for 13.4% of additional years of unemployment despite representing 9.05% of the 2001 labour force and having no job for a trade shock to target
As stiffer competition for fewer remaining jobs leads many workers to settle for less appealing positions
the workers squeezed out of employment tend to be those already struggling to find jobs who might have succeeded in a better labour market
One explanation is that while job destruction eliminates previously valuable firm-specific experience and forces costly job search for workers
filling new positions also requires search
limiting gains in workers’ well-being in the short run
A second explanation is that most job creation in wholesale/retail was at low-paying firms with high job turnover rates (<a href="#note3" id="ref3">Note 3</a>)
Job retention rates among positions expected to be created or eliminated by trade shocks are an underappreciated indicator of how concentrated shock-induced gains and losses in worker well-being will be
This is partly because workers who obtain jobs in high turnover industries may face greater layoff risk
but also because high turnover may reflect worker search effort stemming from a low-quality work environment
A couple of caveats are necessary when applying our results to the current context
purchasing power gains from price reductions likely offset some labour market-related losses due to China’s WTO entry
and may now exacerbate labour market losses from greater export competition and reduced import access
the perceived impermanence of current tariff changes could strongly affect their impact on workers
strong international commitment to the WTO meant there was broad faith that China’s entry would remove the possibility of new trade barriers restricting China’s access to international markets in the following years
Because the current tariffs may be revoked if other conditions are met (e.g
considerable uncertainty exists about their duration
firms may be reluctant to reshore jobs in America or alter supply chains until the trade landscape has settled (Carballo et al
increases in domestic labour demand from reduced import competition may be slow to materialise
while losses from decreased opportunities to export and import may be almost immediate
This article first appeared on <a href="https://cepr.org/voxeu" target="_blank">VoxEU</a> on March 31
The concept of "new quality productive forces," first proposed by General Secretary Xi Jinping during his inspection tour of Heilongjiang Province in September 2023
has emerged as a key element in China's economic policies
Following the Central Economic Work Conference in December 2023
the promotion of new quality productive forces was also positioned as a top priority for economic policy at the National People's Congress in March 2024
"New quality productive forces" is characterized by advanced technology
with "science and technology innovation," "industrial upgrading," and "improvements in the quality and allocation of production factors" as its driving forces (Figure 1)
In order to promote new quality productive forces
China is first placing emphasis on "science and technology innovation," in particular original and disruptive innovation
and is aiming to become independent and strong in science and technology under a whole-nation system led by the Communist Party and the government
with a view to "industrial upgrading," China is working to strengthen supply chains
transform and advance traditional industries
in order to achieve "improvements in the quality and allocation of production factors," in addition to implementing market reform of production factors and a three-in-one reform of education
the government is promoting the use of "data" as a new production factor
The three driving forces of new quality productive forces - "science and technology innovation," "industrial upgrading," and "improvements in the quality and allocation of production factors" - are not only having individual effects but are also expected to generate mutual synergies
such as developing new business models through the integration of cutting-edge technology with industry
promoting new quality productive forces is an important means of achieving "high-quality development" that embodies the "new development philosophy" consisting of innovation
and of responding to changes in the domestic and international environment
such as the progress of the Fourth Industrial Revolution
the protracted economic conflict between the United States and China
The promotion of new quality productive forces in China has already produced some results
as seen in the creation of many new business models through the integration of technology with industry
such as the impact of U.S.-China decoupling and a shortage of human capital and basic research capabilities
China  must adhere to reform and opening up
and expedite the creation of a market environment in which private and foreign-affiliated enterprises can compete on equal footing with state-owned enterprises without suffering discrimination
China is shifting its growth engine from conventional productive forces to new quality productive forces
The goal is to achieve "high-quality development" rather than merely "high growth," while also addressing changes in the domestic and international environment
"Productive forces" is originally a concept from Marxist economics
referring to the inputs used to produce goods and services
and corresponds to the elements that make up the input side of the "production function" in modern economics
The level of productive forces increases as a result of quantitative increase or qualitative improvement (rising productivity) of these factors
leading to an increase in the output of goods and services
The rise in productivity through investment
progress in science and technology and efficient use of resources is the key to economic growth
"New quality productive forces" refers to an advanced form of production that deviates from traditional economic growth models, emphasizing innovation as the driving force and characterized by advanced technology, high efficiency, and superior quality (<a href="#note1" id="ref1">Note 1</a>)
"advanced technology" refers to the introduction of cutting-edge technologies such as information technology
and new materials into industry to improve production efficiency and product quality
Next, "high efficiency" means maximizing output relative to input, resulting in a significant increase in total factor productivity. The objective is to decrease production costs, enhance labor productivity, and minimize environmental effects through actions such as automating and robotizing systems, implementing demand forecasting and inventory management using data analysis to streamline the supply chain, and enhancing energy efficiency (<a href="#note2" id="ref2">Note 2</a>)
"high quality" means providing high-quality products and services that meet consumer needs
emphasis is placed on thorough quality control
after-sales service that ensures high customer satisfaction
By comparing this to traditional productive forces
the distinctions of new quality productive forces become more evident in terms of their driving force
production and product delivery techniques
and impacts on resources and the environment
China is aiming for sustainable "high-quality development," and the promotion of new quality productive forces is seen as the most important means of achieving this
The concept of "high-quality development" was introduced by General Secretary Xi Jinping at the 19th National Congress of the Communist Party of China in 2017
It embodies the five elements of the "new development philosophy," which include "innovation," "coordination," "green," "openness," and "sharing."
When speaking about new quality productive forces, General Secretary Xi Jinping places as much emphasis on "green" as on "innovation" among these five elements of the “new development philosophy.” He also reiterates China’s determination to accelerate the green transformation of industry and support the peaking of carbon emissions and carbon neutrality (<a href="#note3" id="ref3">Note 3</a>)
The development of new quality productive forces is expected to play a major role not only in achieving "high-quality development," but also in responding to changes in the domestic and international environments surrounding the Chinese economy
the protracted economic conflict between China and the United States
and the intensification of international competition
China recognizes that in order to prepare for a protracted economic conflict with the United States
it needs to ride the wave of the Fourth Industrial Revolution and quickly catch up with the United States in terms of its science and technology capabilities
remarkable innovations in science and technology have led to a paradigm shift across economic
rendering conventional production models obsolete
and robotics are enabling dramatic improvements in productivity and the creation of new value
but at the same time they are bringing about challenges such as changes in the employment structure and widening disparities
China is under pressure to develop new quality productive forces so as not to miss out on the wave of the Fourth Industrial Revolution
the protracted economic conflict between the United States and China has exposed the vulnerability of China's supply chain
which is heavily dependent on the United States
China is aiming to mitigate the impact of its economic conflict with the United States and to achieve economic independence by promoting science and technology innovation and upgrading domestic industries through the development of new quality productive forces while accelerating the development of high-tech industries
China is facing a serious labor shortage due to its rapidly aging society and declining birth rate
The traditional labor-intensive economic growth model is reaching its limits
making it essential to shift to high value-added industries and improve labor productivity
New quality productive forces will utilize technologies such as automation
which will be the main means of achieving economic growth without relying on an expansion of labor input
As global environmental problems become more serious
sustainable development has become a common challenge for the international community
China is also accelerating its efforts to introduce green technologies that have a low environmental impact and to create a resource-circulating society
The promotion of new quality productive forces has the goal of sustainable economic development with an emphasis on improving resource efficiency
reducing environmental pollution and protecting the natural ecosystem
Amid intensifying international competition
China must shift its focus from producing low products towards high value-added industries
New quality productive forces can enhance the international competitiveness of Chinese industries by expanding investment in research and development
Science and technology innovation is the most important driving force for promoting new quality productive forces
Under a whole-nation system led by the Communist Party and the government
China aims to become self-reliant and strong in science and technology
and is focusing on original and disruptive innovation
In the course of China’s reform and opening up
science and technology policy has steadily evolved from "importing technology from overseas" to "indigenous innovation" and then to "self-reliance and strengths."
In the early days of reform and opening up
China actively introduced advanced technologies from overseas
the country has promoted the upgrading of domestic industries and economic development by introducing foreign technology and management know-how through the establishment of special economic zones
the focus was on learning and absorbing foreign technology
with the goal of improving the technology level and international competitiveness of domestic industries
China began to aim not just at introducing technology from overseas
but also at building its own innovative capabilities
The "Outline of the National Medium- to Long-Term Science and Technology Development Plan" published by the State Council in February 2006 promoted indigenous innovation
consisting of three elements: "original innovation," "innovation through technology integration," and "introduction
efforts were devoted to boosting investment in research and development
and developing the intellectual property rights system
aiming to become self-reliant and strong in science and technology
At the 19th Party Congress in October 2017
the goal was set to make China one of the most innovative nations in the world by 2035
at the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China (Fifth Plenum) in October 2020
which presented the party's proposal for the 14th Five-Year Plan
innovation focused on self-reliance and strengths in science and technology was positioned as a cornerstone of the national development strategy towards modernization
Compared with the stage of indigenous innovation
in the stage of self-reliance and strengths
China has placed greater emphasis on strategic
holistic and forward-looking approaches to promoting science and technology and aims to build a strong and self-reliant national innovation system
This policy shift was influenced by external factors
such as the technology blockade by the United States and other Western countries
such as the improvement of China's research and development capabilities
In a speech at the 20th Academician Conference of the Chinese Academy of Sciences, the 15th Academician Conference of the Chinese Academy of Engineering, and the 10th National Congress of the China Association for Science and Technology held on May 28, 2021, General Secretary Xi Jinping set out the following policies for China to become self-reliant and strong in science and technology: (<a href="#note4" id="ref4">Note 4</a>)
at the 11th Collective Study Session of the Politburo of the Communist Party of China Central Committee (January 31
General Secretary Xi Jinping positioned science and technology innovation as a core element of the development of new quality productive forces
and reiterated the need to focus on original and disruptive innovation
accelerate the realization of a high level of self-reliance and strengths in science and technology
and work toward breakthroughs in core technologies
China is establishing a whole-nation system to achieve self-reliance and strengths in science and technology
The leadership has formulated a comprehensive plan for science and technology development and is implementing it through all available means
The government is proactively investing in and supporting science and technology innovation and the development of new industries
it has implemented initiatives such as "Made in China 2025" (May 2015) and is making large-scale investments in priority industries
the government is supporting science and technology innovation through injecting funds into targeted state-owned enterprises and leading private companies
the government concentrates resources such as human capital
China is actively cultivating talent in science and technology and inviting overseas talent to the country
through focused investment in universities and research institutes
it is establishing a comprehensive research system that covers everything from basic research to applied research
In order to encourage science and technology innovation among companies
the government is also actively working on institutional reforms
such as easing restrictions on entry into industries and strengthening protection of intellectual property rights
The government also aims to increase international competitiveness in the field of cutting-edge technology by fully mobilizing the nation's resources
China is absorbing foreign technology and know-how through international economic cooperation
the country is strengthening global science and technology collaboration by participating in international standardization activities and encouraging foreign companies to enter the Chinese market
China also sought to develop science and technology by adopting a whole-nation system
Under this "old whole-nation system," the government centrally decided on science and technology development goals
and each region and institution then carried out those plans
Priority was given to areas such as national defense
and human and material resources were concentrated in these areas
many science and technology projects were placed under military control
and had limited dissemination of their results to civilian use
Compared to the "old whole-nation system," the currently implemented "new whole-nation system" differs significantly in the following respects:
China has been adversely affected by trade friction with the United States and the COVID-19 pandemic
exposing the vulnerabilities in its supply chains
the government is promoting measures to strengthen the supply chains by "compensating for weaknesses and enhancing strengths," as well as focusing on improving infrastructure and diversifying sources of procurement for raw materials and parts
China is trying to address its shortcomings in terms of core technologies
and is improving its ability to independently control its supply chains
in order to improve self-sufficiency in areas such as semiconductors
the government is investing substantial public funds in nurturing companies and promoting research and development
and ultimately international competitiveness in industrial sectors in which it has advantages
China is the world's largest market for electric vehicles (EVs) with a well-developed supply chain
Chinese EV companies source most of their key components
motors and electronics domestically and are also focusing on research and development
The Chinese government has also positioned the development of the EV industry as a strategic priority and is implementing various support measures
in order to avoid an overreliance on specific countries or regions for its supply chains
China is diversifying its sources of procurement of raw materials and parts
it is taking advantage of the Belt and Road Initiative to strengthen economic ties with Southeast Asian and other countries
The Chinese government is taking advantage of science and technology innovation to transform and advance traditional industries and nurture emerging and future industries
Made in China 2025 sets the transformation and advancement of traditional industries as one of its strategic priorities
and presents the following major policy measures:
the 14th Five-Year Plan for National Economic and Social Development and Outline of Long-Term Goals to 2035 (March 2021) lists next-generation information technology
and marine equipment as strategic emerging industries that the government will focus on supporting
emphasis is placed on promoting the integration and innovation of biotechnology and information technology
accelerating the development of industries such as biomedicine
expanding and strengthening the bioeconomy
as well as deepening the popularization and application of the BeiDou Navigation Satellite System (China's version of GPS)
the plan includes a policy to implement incubation projects for future industries in cutting-edge technology fields such as brain-based artificial intelligence
the "Implementation Opinions on Promoting the Innovative Development of Future Industries" (January 2024) issued by seven departments including the Ministry of Industry and Information Technology and the Ministry of Science and Technology of China clarified the policy of promoting science and technology innovation and industrial development
focusing on six major areas: manufacturing
Regardless of whether the industry is traditional or emerging
the integration of science and technology innovation with industry often results in new business models and types of business
Typical examples include the platform economy (Alibaba's e-commerce)
and fintech (Ant Group's Alipay) (Figure 4)
The digital economy refers to all economic activity that utilizes information and communications technologies such as the Internet
The digital economy contributes significantly to economic growth by creating new businesses and added value
improving productivity and cost efficiency
providing innovative products and services
and encouraging new entrants by lowering barriers to starting a business
introduced at the National People's Congress in March 2015
accelerated the development of China's digital economy
The aim was to use the power of the Internet to transform traditional industries
mobile payments and digital platforms saw rapid growth
The 14th Five-Year Plan for National Economic and Social Development and Outline of Long-Term Goals to 2035
approved at the National People's Congress held in March 2021
set goals such as increasing the value added of core industries of the digital economy as a percentage of GDP from 7.8% in 2020 to 10% by 2025
and realizing the world’s best infrastructure and industrial system for the digital economy by 2035
the "Notice of the 14th Five-Year (2021-2025) Plan for Digital Economy Development" (State Council
January 2022) states that China will work to: (1) optimize and enhance digital infrastructure
(2) fully utilize the role of data as a production factor
(3) promote the digital transformation of industry
(4) promote the development of the digital industry
(5) improve the level of digitalized public services
(6) develop a digital economy governance system
(7) strengthen the digital economy security system
and (8) expand international cooperation in the digital economy
The Government Work Report delivered by Premier Li Qiang to the National People’s Congress in March 2024 committed to implementing measures that support the high-quality development of the digital economy
This includes promoting the digital industry
facilitating the digital transformation of traditional industries
and fostering the in-depth integration of digital technology with the real economy
focusing on the use of artificial intelligence in various industries
in addition to science and technology innovation and industrial upgrading
improvements in the quality and allocation of production factors are required
China is accelerating the market reform of production factors and promoting a three-in-one reform of education
while also encouraging the utilization of data as a new production factor
China has been transitioning to a market economy since the late 1970s
but the marketization of production factors has lagged behind that of goods and services
the mobility of major production factors such as land
which is hindering improvements in economic efficiency
the "Opinions of the Central Committee of the Communist Party of China and the State Council on Establishing a More Perfect Market-Based Factor Allocation System and Mechanism" issued in April 2020 positioned market-based reform of production factors as the top priority in economic system reform
The aim is to promote factor mobility and market-driven determination of factor prices
thereby achieving the following effects: 1) improved productivity through the efficient allocation of production factors
2) industrial upgrading through the rapid diffusion of new technologies and ideas
and 3) enhanced economic vitality through the effective functioning of market mechanisms
The specific contents of the reforms are as follows:
In order to enhance the mobility of production factors, obstacles to their movement need to be eliminated, not only among companies and other economic entities, but also across different ownership systems (state-owned and non-state-owned enterprises), between urban and rural areas, among regions, and across industries (<a href="#note7" id="ref7">Note 7</a>)
and human resources are interconnected and reinforce each other
Reform of the education system can cultivate high-level talent
reform of the talent system can enable human resources to demonstrate their capabilities
and reform of the science and technology system can promote the transfer of technology to industry
In order to take advantage of the virtuous cycle of these three elements
the 20th Party Congress in October 2022 proposed promoting a three-in-one reform of education
This means that the development of science
technology and high-tech industries has become the main goal of education and human resource development
In order to develop and utilize the human resources that will support innovation in science and technology
the government is promoting the following reforms in the education system and human resources system (for science and technology system reform
the main factors of production have shifted along with changes in the industrial structure
labor and land were the main factors; in the industrial economy
it is capital; and in the information economy
data has become increasingly important as a new factor of production
the "Opinions of the Central Committee of the Communist Party of China and the State Council on Establishing a More Perfect Market-Based Factor Allocation System and Mechanism" published in April 2020 treats data as a production factor
Compared to traditional production factors such as labor
data has the following characteristics: 1) it is non-excludable
and can be used simultaneously by multiple entities; 2) it can be integrated with other production factors
to create synergies; and 3) it has economies of scale
data is expected to contribute to improving productivity through the following routes:
Recognizing the importance of data as a production factor
the Chinese government is actively promoting its use through various policies and initiatives
in terms of systems and legal arrangements
following the Cybersecurity Law of June 2017
China implemented the Data Security Law in September 2021 and the Personal Information Protection Law in November of the same year
the "Opinions of the Central Committee of the Communist Party of China and the State Council on Establishing a Data Infrastructure and Enhancing the Role of Data Factors" was formulated
providing specific guidelines for promoting the market-based allocation of data
and improvements in the quality and allocation of production factors are complementary and act as the driving forces behind the implementation of new quality productive forces
it is essential to create an innovation ecosystem through industry-academia collaboration and to promote industrial clusters that encompass more than one of these forces
The Chinese government is actively promoting industry-academia collaboration with the aim of further developing science and technology and revitalizing the economy
tax incentives and financial assistance systems have been established to promote industry-academia collaboration
and institutions and platforms are being developed to support technology transfer and joint research between universities and companies
Through collaboration between industry and academia to establish an innovation ecosystem
the promotion of the generation and implementation of science and technology innovations can be facilitated
research institutes and companies promotes the creation of new ideas and technologies
An innovation ecosystem will also enable technologies developed at universities and research institutes to be transferred quickly to companies
research institutes and companies can work together to develop the necessary human resources
industry-academia collaboration in China takes the following forms:
which are areas where companies and research institutes related to a particular industry are located in close proximity
foster synergy among science and technology innovation
and improvements in the quality and allocation of production factors
Close interaction between companies and research institutions promotes information sharing
leading to the creation of new ideas and technologies
Clusters also promote labor mobility and foster competition and cooperation between companies
they make it easier to develop the necessary specialized human resources and for necessary infrastructure to be developed
world-class industrial clusters have been formed in such places as the Pearl River Delta
Each region is leveraging its respective advantages
with the Yangtze River Delta aiming to develop smart manufacturing
the Pearl River Delta aiming to develop 5G communications
and Beijing Zhongguancun aiming to develop quantum computing
these three regions are expected to take the lead in promoting new quality productive forces in China
The development of new quality productive forces in China has produced many results
especially in the integration of technology and industry
there are many challenges that must be overcome
attempting to decouple from China and a shortage of human capital and basic research capabilities
China is making progress in developing new quality productive forces
China is emerging as a science and technology power
R&D expenditure in China is increasing rapidly
reaching 3.3 trillion yuan (approximately $470 billion) by 2023
making it the second largest figure in the world after the United States (Figure 5)
cutting-edge technology development is progressing in fields such as AI
in the Global Innovation Index published by the World Intellectual Property Organization (WIPO)
China has risen from 35th place in 2013 to 12th place as of 2023
four Chinese companies are among the top 10 companies in the world in terms of the number of applications under the International Patent System as of 2023 (Figure 7)
with the development of new quality productive forces
China's industrial structure is becoming more advanced and the proportion of high-tech industries is expanding rapidly
among new business models such as the rapidly developing platform economy and fintech
demonstrating its advantages in science and technology (new knowledge
This is being driven by innovative private enterprises such as Alibaba
the development of new quality productive forces has already become an engine of growth for the Chinese economy
While China has achieved great success in developing new quality productive forces
including the impact of the U.S-China decoupling
and a lack of funding for companies (Figure 8)
<a href="/users/china-tr/jp/ssqs/240702ssqs.html">The original text in Japanese was posted on July 2, 2024.</a>
When people form expectations and make decisions
such as limited information-gathering capacity
Such cognitive capacity and available time are called cognitive resources
People try to use these finite cognitive resources in the most rational manner
studies focusing on the finite nature of people's cognitive resources have been spreading in the fields of cognitive science
These are also collectively referred to as the analysis of resource rationality
I would like to introduce several resource rationality approaches in economics and consider the implications for research on currency bubbles (deflationary equilibrium) and other themes
the finite nature of cognitive resources was first emphasized in the theory of “rational inattention” advocated by Prof
He pointed out that people restrict their focus in order to effectively utilize their finite attention
which causes a gap between the people’s inference and complete rationality
Michael Woodford of Columbia University also states in his paper in 2012 that people
intending to optimize their finite cognitive resources
respond to any gaps between their subjective expectations (reference points) and actual outcomes
dependence on reference points arises in people's behavior
Dependence on reference points refers to situations where
then a half cup of water is recognized as 'a lot'
but the same half cup of water is recognized as 'a little' when a full cup of water is a reference point
Dependence on reference points in economic behavior is also well known in the “prospect theory” in behavioral economics
Woodford said that the emergence of dependence on reference points can be explained by resource rationality
David Laibson of Harvard University discussed how time discounting―evaluating future value as less than that current value―can be explained based on incomplete information and the finite nature of cognitive capacity
Even individuals who do not inherently have a tendency to discount future value eventually behave as if they are
due to increasing noise in predicting a more distant future.¬
Advancement of AI also influences economics
a graduate school student at the University of Pennsylvania
proposed a model where people have a multi-layered neural network and conduct deep learning from experienced data
This model assumes that people's expectations are formed similarly to recent AI principles
Since expectations are formed through learning from experience
differences in experience create differences in expectations
some save money excessively while others do not save at all
The research presented above highlights that people's expectations are not “perfectly rational.”
Modern macroeconomics is based on the rational expectations theory
is the assumption that people can make decisions by utilizing all information completely and rationally
which implicitly suggests that people's cognitive resources are infinite
Questioning these assumptions and trying to bring them closer to reality is what the resource rationality approach
that emphasizes the finite nature of cognitive resources
The rational expectations theory involves not only the complete rationality idea
Let us consider the recursiveness of expectations by citing an example of Government G and Market Participant M
This is the example used in my article on February 20
G formulates policy based on predictions of how M will think and react
the expectation of G (Expectation G) is "G's expectations regarding 'M’s expectations'."
M reacts to a policy while considering how her behavior affects G's policy
the expectation of M (Expectation M) is "M's expectation regarding 'Expectation G'."
Expectation M is determined by Expectation G and Expectation G is determined by Expectation M
The definition of Expectation G includes Expectation G via Expectation M
The characteristic in which something is recurrently a participant in its own definition is called recursiveness
The recursiveness of expectations is considered to be key in the development of resource rationality approaches
The possibility that incomplete information and the inherent recursiveness of the relationship change the nature of the equilibrium has been pointed out in theories of global games and higher-order beliefs
It is also known that when the recursiveness of expectations is associated with constraints in cognitive resources
monetary bubbles wherein worthless strips of paper circulate as a currency can occur even in an economy with finite numbers of transactions (as discussed in the 2024 paper by Dr
This is surprising when considering a state of complete information
In an economy where with a finite number of transactions
the last person to receive money has no opportunity to transact
no one receives money in the last transaction
Knowing this means that no one will receive money in the second-to-last transaction
because there is no one to whom money can be passed in the last transaction
If there is no one who receives money in the penultimate transaction
there is also no one who receives money in the third-to-last transaction
The continuation of this reasoning results in a situation where no one receives money from the very initial potential transaction
demonstrated that when participants have incomplete information regarding their transactional position in a finite number of transactions
people consider that they will have a chance to use the money in the next transaction
and this reasoning also applies in the last transaction
in the world consisting of only two people
B considers that A is wondering whether this is the last transaction
A also considers that B is wondering whether this is the last transaction
A and B both recognize that the counterparty is reading their own thoughts
Incomplete information propagates due to the recursiveness of expectations
meaning that worthless strips of paper circulate as currency even in an economy with a finite number of transactions
By applying this mechanism of currency bubbles
it may be possible to explain why Japan continues to experience deflation despite the government’s continued increases in the money supply through monetary easing in the 2000s
Deflation occurs when the value of money increases relative to goods and services
While increasing the money supply should naturally decrease the value of money
the increase in the value of the currency in reality suggests the occurrence of a currency bubble
Approaches based on the idea of resource rationality
have great potential in creating new developments in rational expectations theory
2023［Artificial Intelligence and Society: Philosophy of Fallibility］
Nestled in the hills of Italy about an hour north-east of Rome
the small town of Rieti is a special place in the world of athletics
Seb Coe and Steve Ovett ran their fastest 1500m times in Rieti
with the latter’s 3:30.77 in 1983 being one of eight world records staged there
such is the reputation of the town’s Guidobaldi Stadium when it comes to fast times
it has earned a reputation as "the Italian temple of running"
Other world records set in Rieti include Asafa Powell’s 9.74 for 100m in 2007
Noah Ngeny’s 1000m mark of 2:11.96 in 1999
Maricica Puică’s mile of 4:17.44 in 1982 and Daniel Komen’s 7:20.67 for 3000m in 1996
whereas Noureddine Morceli set world records for 1500m (3:28.86) and the mile (3:44.39) in 1992-93
Ngeny's and Komen's records still stand today
As well as its long-running end-of-season grand prix meeting
Rieti staged the 2013 European Under-20 Championships where winners included Britain's Dina Asher-Smith and Jake Wightman
With the track located at 1300ft of mild altitude
it has an almost mystical reputation for producing great performances
the NBA legend Kobe Bryant grew up in Rieti as a child
There are even rumours the Guidobaldi Stadium will feature in the docu-series
the track is being used by athletes as a base ahead of the European Athletics Championships in Rome on June 7-12 and the Olympic Games in Paris later this summer
in addition to international athletes like Andre De Grasse
the reigning Olympic 200m champion from Canada
Part of the reason for this is that the track has recently enjoyed an upgrade with the installation of a new CONIPUR Vmax surface from CONICA last year
This is the same track system that is installed at the Letzigrund Stadium in Zürich
Olympic Stadium in Stockholm and the Stade Louis-II in Monaco
all of which are stops on the Diamond League circuit and also renowned for producing fast times
The CONIPUR Vmax track was developed in cooperation with the Sports University of Cologne and is known for its top speed
reduced energy consumption during take-off and sprinting
Given this it is designed to be safe for athletes
the CONIPUR Vmax track has a combination of an energy-reflecting base layer paired with a force-stabilizing top layer ensures a revolutionary running performance
Thanks to its exceptionally high mechanical properties
the track guarantees maximum resilience and durability
Rieti is gearing up to host the European Under-18 Championships in 2026 where a new generation of athletes will be able to enjoy its magical qualities
» More on Conica <a href="https://www.conica.com/en/sport/" target="_blank" rel="noopener">here</a>
Westminster Mile and BMC combine to set sub-four challenge
Athletes to watch at the European Championships
The environment surrounding the digital industry and the semiconductors that form the basis of the industry is changing drastically
Semiconductors are a fundamental technology that sits at the intersection of four important policy axes: digital
This intersection represents the starting point for the development of digital hardware and software industry
What is required for Japan to regain its global competitiveness in the digital industry and what are Japan’s strengths regarding the digital industry
Director of the IT Industry Division of the METI
introduced the latest trends in the digital industry and semiconductors
Ikeuchi Kenta talked about challenges regarding academic analysis in this sector and the roles that academia can play
The most notable initiatives related to semiconductors include the construction of a semiconductor plant in Kumamoto Prefecture by a joint venture between TSMC
and that of a Rapidus semiconductor plant in Hokkaido
While the minimum linewidth of logic semiconductors for production in Japan is currently 40 nanometers
the Kumamoto plant is designed to produce 12- to 28-nanometer semiconductors at its first building
6- to 12-nanometer semiconductors at its second building
These semiconductors are expected to not only meet the needs associated with the electrification of automobiles
but also contribute to the improvement of data processing capacity for mobile phones and other edge devices
and the extension of the service life of storage batteries
The Rapidus Hokkaido plant aims to mass produce 2-nanometer and even thinner-linewidth logic semiconductors
While there is currently no need for such thinner-linewidth semiconductors in Japan
it is important to ensure accessibility for users of cutting-edge semiconductor technology with an eye on the future
By developing an ecosystem that facilitates communications between semiconductor suppliers and users
we aim to allow both semiconductor suppliers and users to improve their competitiveness
and other Asian economies continued massive industrial policy spending
Japan shied away from aggressive industrial policy by separating the private sector from the public sector to some extent
allowing the electronics industry to stagnate
When the competitiveness of the Japanese electronics industry became weak
the COVID-19 pandemic and Russia’s aggression against Ukraine occurred
As semiconductor shortages were identified as a factor behind various important supply disruptions three years ago
we began to seriously consider how to secure our own semiconductor technology base
It is important for Japan not only to manufacture semiconductors on its own
but also to have them used by domestic industries
software is the basis for various autonomous driving systems; however
in order to perform high-level digital functions while satisfying the other purpose of reducing power consumption
it is necessary to optimize the entire system
both Google and Apple have started to design semiconductors on their own
indicating that design ability is very important in the manufacturing of custom semiconductors.” So
we would like to increase policy measures and funding for such areas
there are many Japanese material manufacturers that have top global market shares
If these companies fail to invest at a speed that matches the growing demand
it would be quite possible for overseas manufacturers to fill supply-demand gaps to reduce the market share of Japanese companies
I think that we must provide support to allow Japanese companies to continue their steady investment
In response to the advancement of artificial intelligence in recent years
foundation models have been attracting attention
a key point is how to pool common data and integrate foundational models into it
we are always aware of the importance of having sound ecosystems including semiconductor and users in our policy development relating to AI
As the industrial base for advanced chips is established in Japan
there will be more opportunities for communication with chip suppliers in Japan
generating incentives for semiconductor manufacturing equipment and material companies to promote cutting-edge R&D domestically
we will focus on creating experimental facilities and hubs for open innovation
we will work with academia to foster human resources development to create a deep industrial structure
theoretical analysis in an academic manner can only be undertaken by academia
and our cooperation with universities and technical colleges is indispensable for the development of next-generation human resources
As the use of AI in the design field spreads in the future
it will be important to democratize such AI use
This will become an important source of added value
While technology competition has been intensifying globally
it is becoming increasingly important to ascertain technological capabilities of individual countries from the viewpoint of security and economic development
The "Critical Technology Tracker" (hereinafter
which the Australian Strategic Policy Institute (ASPI) published at the end of August 2024
analyses scientific and technological capabilities of individual countries in 64 critical technologies
which was referenced by various national governments and news media
the latest second edition analyses each country's technological capabilities and technology monopoly risk based on a dataset of research papers covering a 21-year span (from 2003 to 2023) and other data
What is notable is the reversal of the positions of the United States and China due to the technological rise of China
the United States was the world leader in many technological fields
but that hierarchy has been completely reversed in the last 20 years
the United States occupied a leading position in 60 technologies out of 64
while the United States held only seven technologies
Such reversal phenomena are most notable in the advanced materials and manufacturing and communication fields in particular
and in the field of biotechnology in recent years
China has rapidly strengthened its leadership and is surpassing the United States in many other fields
What should be noted next is the rapid advancement of India
India was in the top five countries only in four technologies
it was ranked in the top five in 45 technologies
It is expected that India will surpass China and will gain the world's top position as the only nation other than the United States and China in the field of biofuels in the next few years
technology monopoly risk has been increasing
The Tracker assesses technology monopoly risk based on whether any scientific expertise and high-impact research outcomes have become concentrated in a single country in the last five years
The number of technology fields for which the risk was assessed to be high was 14 in the period from 2003 to 2007 but the relevant number increased to 24 in the period from 2019 to 2023
such as radar and advanced aircraft engines
are newly classified into high-risk fields
A monopoly could lead to military use of the relevant technology and directly affect national security and become a cause of increased global geopolitical risks
It is therefore necessary for individual countries to pursue multilateral cooperation in technological development or otherwise take measures to reduce such risks
Japan still maintains strengths in several technology fields
in the fields of semiconductor and nuclear power
Japan has a long history of technological development and advanced specialized knowledge and has maintained third place
following China and the United States (in the fields of wide and ultrawide bandgap semiconductors and nuclear energy)
Japan is ranked in the top five in the fields of advanced magnets and superconductors
in seven fields out of these eight in total
Japan has fallen in the rankings and has lost global market share
Given this fact and the fact that Japan was ranked in the top five in 32 technologies in the early 2000s
this can be said to be a significant setback for Japan
it seems that there were significant declines in Japan's rankings in various technologies; specifically in the fields of advanced information and communication technologies (advanced radiofrequency communication
Japan's rankings also declined in the fields with high technology monopoly risk (nanoscale materials and manufacturing
and it can be said that technology availability and access in Japan are threatened
While Japan has been losing technological capabilities
the ROK has achieved significant growth in the AI and energy fields and has almost surpassed Japan in these last 20 years
which was ranked in the top five only in seven technologies in the early 2000s
is ranked in the top five in 24 technologies
mainly in the AI and energy and environment fields
In light of the heightening technology monopoly risk
it is necessary to assess risks based on the possibility that monopolized technologies could become unavailable and to consider countermeasures
I have served as an official at the Ministry of Economy
but I am currently engaged in research in the United Kingdom on the assessment of risks associated with the availability and access of emerging critical technologies
I would like to introduce the approach used for the research
it is common to combine the probability of a risk and the level of its impact
this common practice is applied in assessing risks associated with the technology availability and access
The risk probability of a certain technology becoming unavailable or inaccessible (or the availability and access of a technology) is defined as "whether it is possible for a country to obtain some specific technology domestically or from abroad and to actually utilize that technology in research and development and industrial activities in the country." For example
when advanced research on a specific technology has progressed to a particular necessary level and the capacity of the industry is high in a country
it can be said that the availability of that technology is high (the probability that the relevant technology becomes unavailable is low) in that country
if that technology is monopolized by another country
or if the country lacks human resources who understand and can fully utilize that technology
or if legal regulations are strict and public opposition is strong
it can be said that the technology’s availability and access are low (the probability that the relevant technology becomes unavailable is high) in that country
Another factor is the level of influence when a certain technology is unavailable
but if stable operation of critical infrastructure cannot be ensured without that technology or if a country's industrial competitiveness would be significantly damaged without that technology
The development of a concrete quantification method for the influence of the unavailability of technologies is a future challenge
In response to the shifting global technology landscape
interest in technology risk assessment is increasing
which was established in the National Science Foundation (NSF) based on the CHIPS Act in 2022
launched an award-based support program through the "Assessing and Predicting Technology Outcomes" (APTO) project
rather than research and development processes
It will also be necessary to consider how to assess the availability of technologies and risks regarding the influence thereof in Japan
Various organizations such as the JST Center for Research and Development Strategy
the NEDO Technology and Innovation Strategy Center
for which preparation work has been conducted by the Cabinet Office
are expected to work to strengthen the link between the government
such as the NSF in the United States and the ASPI in Australia
thereby promoting full-scale efforts for risk assessment for critical technologies
For David BLOOM's full bio,<a href="https://cepr.org/about/people/david-bloom" target="_blank">https://cepr.org/about/people/david-bloom</a>
For Michael KUHN's full bio,<a href="https://cepr.org/about/people/michael-kuhn" target="_blank">https://cepr.org/about/people/michael-kuhn</a>
For Klaus PRETTNER's full bio,<a href="https://cepr.org/about/people/klaus-prettner" target="_blank">https://cepr.org/about/people/klaus-prettner</a>
Fertility rates have been declining in high-income countries for decades
This column argues that a holistic set of policies can be implemented to address the economic risks
These policies should stimulate human capital accumulation and education
which are more important than population size for economic prosperity
polices should promote healthy aging and more choice over retirement decisions
and family-friendly policies to slow the fall in fertility should be enacted
which represents the expected lifetime number of children per woman
given current age-specific fertility rates) among OECD countries fell by more than half – from 3.29 children per woman to 1.54 (United Nations 2024a)
All but one of the 38 OECD countries (Israel being the exception) currently have a TFR well below the long-run replacement rate of roughly 2.1
meaning that their total and working-age populations are on long-term contractionary paths (see Table 1)
Unintended Consequences of a Declining Population,” Charles Jones argues that the “profound implications” of low fertility include a growing paucity of new ideas that could effectively asphyxiate innovation and lead to long-run economic stagnation (Jones 2022)
He points out that multiple economic growth models centre on innovation and that a larger population with larger absolute numbers of researchers
more bites at the (breakthrough) apple—is likely to achieve more (and more significant) discoveries
Jones proposes a model in which negative population growth leads to an ‘Empty Planet’ scenario (Bricker and Ibbitson 2019) wherein “knowledge and living standards stagnate for a population that gradually vanishes”
Jones juxtaposes this outcome against one of continued population growth and improvements in living standards that he calls the ‘Expanding Cosmos’ (Jones 2022)
“Can the quality of people substitute for the quantity of people in the production of ideas?” Jones ponders in a Stanford Graduate School of Business piece
If the number of people is shrinking to zero
it’s hard to imagine that one person with lots of education can make up for a billion people that contain Einstein and Edison and Jennifer Doudna” (Gilson 2022)
While Jones allows that automation and artificial intelligence could help maintain or improve living standards by propagating scientific advances
the central question of his piece’s title sounds an ominous note for declining fertility (Jones 2022)
we review data and ideas pertaining to the historically unprecedented fertility decline that characterises today’s wealthy industrial countries
We acknowledge that falling fertility could hinder innovation
and institutions can influence the economic impacts of fertility and workforce decline and fertility levels themselves
Innovation is indisputably a driver of economic progress
but it depends on more than just population size
Human capital – the skills and capacities that are embodied in people and enhance their ability to create valuable goods and services – is also key to innovation
Another basic feature of human capital is that it can be purposively accumulated
typically through investments in schooling
is a well-established determinant of macroeconomic performance and economic well-being
It also tends to expand naturally under conditions of low fertility
leveraging wider and deeper investments into the knowledge and skills of small-sized cohorts
low fertility tends to enhance a population’s capacity for innovation and enables it to create more value through work
spurring both individual and societal well-being (Lee and Mason 2010
small birth cohorts also aid population health
History and rigorous research indicate that a population’s productive characteristics figure more prominently than its size in defining its capacity for knowledge creation and innovation
The number of healthy and well-educated people – which is distinct from the number of people – represents the human capital that rightly features in the knowledge production function as a fundamental determinant of technological progress and economic growth
The Journey of Humanity: The Origins of Wealth and Inequality
buttresses our more optimistic perspective on the implications of low fertility for economic growth
This book centres on the argument that falling fertility and rising education (and subsequent technological progress) leading to human capital formation is at the core of long-term increases in economic prosperity (Galor 2022)
Galor points out that since the 19th century
life expectancy has doubled and per capita incomes have skyrocketed 14-fold across the globe
spurred by fertility decline that alleviated population pressure
paving the way for human capital accumulation and dramatic improvements in living standards
Low and declining fertility also translates into short- and medium-term declines in youth dependency rates
which can further charge the economic growth process by naturally boosting rates of labour force participation
which is known as a demographic dividend (Bloom et al
contributed up to 2–3 percentage points to the growth rates of income per capita in many countries following the end of the baby boom that occurred in the aftermath of WWII
the trend of falling fertility in high-income countries from the 1950s to the present day has promoted – not impeded – economic activity and improved standards of living
The challenge of low fertility is magnified by the fact that it causes older-age population shares to swell
Population aging may naturally hamper economic activity insofar as older people impose significant burdens associated with public expenditures on health and long-term care and economic security and tend to work less than their younger counterparts
Social and economic adaptations to these demographic realities are nevertheless possible
Retirement policy reforms are one of those adaptations (Kuhn and Prettner 2023)
Such reforms have considerable potential to forestall workforce shrinkage by removing the disincentives to working longer that increasingly long-lived people face
This strategy is emblematic of how policies related to declining fertility may be stronger in unison than in isolation: robust investments in the health and education of a relatively small youth and prime-age adult cohort may enable that cohort – as it reaches the older ages – to be healthy and well-trained enough to work productively past traditional retirement ages
In the middle of the United Nations’ Decade of Healthy Ageing
a frequently asked question remains relevant: are we just adding years to life
or are we also adding life to years (Bloom 2019)
Coupled with allowing more choice over retirement decisions
policies promoting healthy aging could relieve the mounting pressure on pension and health systems and the accelerating demand for long-term care in the wake of population aging (Bloom 2022)
stakeholders would benefit from combining synergistic policy initiatives to augment their efficacy
Public and private policymakers also have at their disposal a myriad of family-friendly policies that can slow or reverse the fall in fertility
which seek to balance work and family responsibilities
the short- and medium-term result would be an increase in the youth dependency ratio
with gains in workforce size not beginning to accrue for approximately 20 years
Policy decisions must be mindful of the evolving work landscape
and artificial intelligence (see Prettner and Bloom 2020)
While these tools offer tantalising potential
such evolution will not only impact the types of jobs available and how they are performed (as well as what is produced and consumed)
but it will also affect the way that workers interact socially
which will likely have significant implications for dating and partnering
with an as-yet indeterminate effect on fertility levels and patterns
Thoughtful policy changes should be holistic
recognising the social and political repercussions alongside the economic outcomes
Policies that relax or restrict international migration may be nationally or internationally destabilising
and have implications for social and economic equity
the environmental implications of low fertility must be kept in view as it could slow or accelerate the pace of climate change depending on whether fewer people with higher incomes have the net effect of easing or intensifying greenhouse gas emissions
Low fertility and fertility decline are indisputable realities in high-income countries across the globe
Given the significant uncertainty surrounding the nature and magnitude of its attendant economic consequences
ignoring the low-fertility alarm bell would be imprudent
particularly when fertility decline is paired with another dominant demographic trend: increasing human longevity
Fertility decline—and its implications for population size and structure—poses serious challenges
Humanity has an admirable record of identifying and taking advantage of the opportunities it faces
multiple mechanisms are available for countering low fertility and addressing its economic repercussions
The time is ripe for mounting a swift and integrated response to pinpoint and implement the most promising policy countermeasures
This article first appeared on <a href="https://cepr.org/voxeu" target="_blank">VoxEU</a> on August 12
The “job market ice age generation,” who joined the labor force in the mid-1990s through the beginning of the new century
which was a period of extreme job scarcity for new graduates that followed the collapse of economic bubbles
have for many years been at an economic disadvantage because they missed good opportunities for employment during their youth
those people have also come to be referred to as a “lost generation,” and their status as an unfortunate generation has been mentioned over and over again
this generation still continues to suffer from their economic disadvantage compared to the people who entered the labor force before the end of the bubble economy era
One is that low-income workers who have remained single will struggle to get by economically as they lose support from aging parents
and the other is that they will have to make do with inadequate pensions when they themselves reach old age
The first problem, the loss of economic support from aging parents, is already becoming apparent. In the figure below, which was compiled on the basis of the <a href="https://www.stat.go.jp/english/data/roudou/" target="_blank">Labour Force Survey</a>
the vertical axis represents the percentage of unemployed people and non-regular workers aged 35 to 39 who are single and live with their parents in the population
classified by gender and by educational background
while the horizontal axis represents the year of birth
across all levels of educational background
the percentage of people who are dependent on parental support is progressively higher among younger generations
Among men who were born in the second half of the 1970s
the percentage is higher than 10% in the group with a high school diploma and around 5% in the group with a university degree
the percentage is progressively higher among younger generations only in the group with a high school diploma
In the group of women with a two-year college degree
the percentage remains quite consistent at around 5% among those who were born in the second half of the 1960s or later
Most people who are now in their later 30s have parents aged between 50 and 70
and they may have been able to make ends meet by living with or sharing meals with parents
the job market ice age generation is expected to face a difficult situation as they can no longer depend on aged parents
the working environment tends to be not amenable to their taking nursing care leave
they lose income in proportion to the working hours reduced in order to care for parents
it will be difficult to amend their lifestyles to allow them to properly care for their parents
The “baby boomer junior” generation (the children of the baby boomers)
who graduated from university in the first half of the job market ice age period already have parents who are old enough to require nursing care
Among people who are younger than the baby boomer junior generation
the percentage of single people whose employment status is unstable and who live with parents is even higher
It is an urgent challenge to develop a system that will enable such workers to properly care for their parents
The second problem is how to enable the job market ice age generation to prepare for their own old age
the amount of savings that they can afford to set aside for old age will be small
if they have low incomes during their working years
the amount of pension that they will receive in old age will also be insufficient
Most regular workers participate in employee pension plans
with insurance premiums automatically deducted from salaries
The longer the duration of membership in an employee pension plan and the higher the premium amount
the greater the amount of pension benefits received in old age
the effects of the income gap during working age are passed on to the level of pension benefits in old age
Non-regular workers are unable to participate in employee pension plans in many cases
non-regular workers were not eligible for social security unless their regular weekly working hours were greater than three quarters of a regular worker’s working hours (roughly 30 hours)
When employees are covered by social security
their employers are required to share the burden of social security premium payments
many companies adjusted working terms in order to exclude non-regular workers from social security coverage
When workers cannot participate in their employers’ social security plans
they need to join the national health and pension insurance plans on their own
members pay a fixed pension premium that is not linked to the income level
unlike in the case of employee pension plans
Employees participating in the national pension insurance plan alone are eligible to receive only the basic old age pension
in the case of the national pension insurance plan
members must themselves undertake the procedures for the premium payments
If there is a period of nonpayment in the payment records
the amount of basic pension benefits will be reduced accordingly
As the social security coverage for part-time workers has gradually been expanded since 2016
most non-regular workers who are the main earners themselves are allowed to participate in employee pension plans
workers of the job market ice age generation
cannot make up for the loss of pension benefits that they would have received if they had been able to participate in employee pension plans earlier
the fact remains unchanged that so long as their wages remain low
the amount of pension benefits to be received in the future will be small
If the pension system remains unchanged when the job market ice age generation reaches old age
the amount of pension benefits paid to them will be inadequate because of the insufficient duration of membership in employee pension plans or the failure to fully pay premiums
more and more elderly households will find it difficult to make ends meet
more than 50% of the beneficiaries of the public assistance program (income subsidy for needy families) are people aged 65 or older
and the percentage may rise further in the future
The framework of the government’s support for the job market ice age generation is comprised of three pillars: employment support provided through Hello Work public employment assistance offices
support for the jobless provided through “local youth support stations,” and consulting support provided by various organizations for people suffering from personal problems such as social withdrawal
This framework is an extension of the system that was created in the 2000s to help young people achieve financial independence
it is necessary to continue the various support measures already introduced
to provide opportunities to develop skills
and to promote non-regular workers to regular workers
the job market ice age generation in their middle age cannot make up for their loss of working experience during youth
The time has come to accept the fact that the various measures implemented in the past two decades have not succeeded in helping the job market ice age generation attain employment stability and to consider the specifics of expanding welfare benefits
Under the existing social security framework
wealth redistribution for people who are working but whose income is inadequate is insufficient
The public assistance program is the only public support available for people who do not qualify for old-age benefits or disability benefits
they cannot receive sufficient unemployment benefits under the employment insurance system
The public safety net provides only tenuous support to working-age people who have income or assets in an amount that barely misses the eligibility threshold for the public assistance program
Those problems were already pointed out when the phrase “working poor” became popular in the 2000s
but few corrective actions have been taken in the past two decades
Benefits paid from employment insurance and other programs that constitute the social security safety net are available only for people who have paid insurance premiums
so this safety net does not provide relief for people whose employment status has been unstable since their youth
the eligibility criteria for the public assistance program are very strict
and it is not easy to regain economic independence once struggling people have come under that protection
It is essential to provide relief before their situation becomes so difficult that they need to qualify for the public assistance program
it is desirable to provide support to those who are working but who are unable to earn sufficient income in ways that increase income without dampening their motivation to work
a negative income tax (refundable tax credit) introduced in some Western countries and discussed as a possible option in Japan in the past
provides benefits to people whose income is below a certain threshold in proportion to labor income
Negative income tax is not necessarily an optimal form of support
but in-depth discussions should be held based on ideas that are not constrained by the existing framework of support
As society ages further and as more and more people remain unmarried throughout their lives
the number of single people that face the issue of how to reconcile working with caring for parents will continue to increase in the future
enhancing nursing care services and increasing nursing care insurance benefits for low-income households will be important safety net measures to prevent the further erosion of the income of single people with an unstable employment status due to the need to care for parents
including generations that are younger than the job market ice age generation
Discussions on pensions are becoming brisk in the runup to the revision of the pension insurance laws scheduled for 2025
including concerns over pension funding due to the demographic crisis and whether or not to abolish the Category III insured person designation
it is high time that discussions started on the specifics of the low pension problem faced by the ice age generation
To successfully implement the Regional Revitalization 2.0 initiative
which is one of the policy pillars of the Ishiba administration
it is necessary for the government to separate (i) demographic issues (including the stagnant fertility rate) from (ii) the issue of regional sustainability
The government must seriously address (ii) based on a strategy centered on “smart shrinkage,” on the premise of a shrinking population
I will briefly explain the reasons for this approach
The first point is the importance of squarely looking at data
The government is promoting the Evidence-Based Policy Making (EBPM) approach
policies based on inaccurate data or misguided assumptions will not provide maximal benefits
it is essential to determine policy targets based on accurate data
The first of the two important datasets is the birthrate data
In existing regional revitalization initiatives
the so-called “Tokyo Demographic Black Hole Hypothesis” (which maintains that the concentration of the young population in Tokyo
drags down the overall fertility rate in Japan) has been justification for efforts to lower the concentration of people in Tokyo
the potential of this hypothesis being flawed is starting to become clear when examining prefecture-to-prefecture comparisons of the demographic situation based on various fertility rate-related indicators
It is true that when using total fertility rate (TFR) to compare prefectures
Tokyo tends to rank near the bottom; however
in terms of the average fertility rate (the number of births per 1,000 women of reproductive age
The graph above shows the average fertility rate (the number of births per 1,000 women of reproductive age [between 15 and 49 years old]) by prefecture based on the Population Census (2020) data
providing evidence regarding the demographic situation in Tokyo compared with other prefectures
Okinawa has the highest average fertility rate
What is interesting is that the average fertility rate in Tokyo’s three central wards (Chiyoda
is higher than the average values in all prefectures except Okinawa
The other important dataset is data on the demographics of the young population moving to Tokyo. While the media and some experts commonly state that young people come to Tokyo from other parts of Japan mainly for university, this is a misconception. That is immediately apparent from the <a href="https://www.stat.go.jp/english/data/idou/1.html" target="_blank">Report on Internal Migration in Japan Derived from the Basic Resident Registration</a> (2023)
According to the dataset available from the report
the net population inflow into Tokyo in 2023 was around 58,000 people (38,000 people moved out of Tokyo and 96,000 people moved into Tokyo)
while the share of people aged between 20 and 24 was 63.6%
and people aged 25 to 29 accounted for 21.8%
Those two age groups (people aged between 20 and 29) account for as much as 85.3% of the total inflow
Given that the typical age of university enrollment is 18 and the typical starting age of work is 22 or 23
it is clear that young people come to Tokyo mainly to start careers
The data readings are also consistent across genders: for males
while 86% were in the 20-29 age bracket; for females
the 15-19 age bracket represented only 15.1% and 84.6% were aged 20-29
examining the data from the Basic School Statistics (FY2023)
among students enrolling in universities inside Tokyo
approximately 70% are from Tokyo and three neighboring prefectures and 80% are from the broader Kanto region
it is important to promote the compact city approach in view of the relationship between the economic growth rate and population density
I do not in principle support the idea of restricting population inflows into urban areas because such restriction would have a negative impact on the economic growth rate
if the government earnestly hopes to restrict the inflow of young people into Tokyo
it is necessary to consider how to curb youth migration to Tokyo at the start of their working career
rather than at the time of university enrollment
According to the National Grand Design 2050
60% of Japan’s land area will be subject to population declines of over 50% from 2010 levels
It is necessary to come to the sober realization that halting population decline through the regional revitalization initiative and measures to raise the fertility rate will not be an easy task
following the launch of the regional revitalization initiative in 2014
the total fertility rate declined for eight straight years
and the regional revitalization initiative has yet to produce any observable effect on the fertility rate
the disappearance of several cities is inevitable
a shift to a smart shrinkage policy based on the premise of population decline is imperative
a report (June 2008) by the Study Group on Future Framework of Urban Area Development under the Ministry of Land
is one early example where the importance of measures to “smartly shrink” urban areas was mentioned
The report recommended “inducing land use transitions
including converting urban areas into ‘green spaces,’ including forests; ‘farmland,’ including cultivated areas and plots for citizen farms; and ‘residential areas,’ including new types of suburban housing adapted to purposes such as dual-location living
in order to prevent the areas from falling into decay
while maintaining their public services to some degree.” More than 15 years have passed since the issuance of the report
and its principles remain urgent and relevant today
it is necessary to separate (i) demographic issues (including the stagnant fertility rate) from (ii) the issue of regional sustainability
The government must then seriously address (ii) above by thoroughly promoting smart shrinkage strategies including the compact city approach and other related initiatives in order to create a sustainable future
2024［Priorities for the Japanese Economy in 2024 (January 2024)］
presidential election in November has become chaotic following incumbent President Joe Biden's poor performance during his June debate and the subsequent attempted assassination of former President Donald Trump
But whoever wins the presidential election
the United States’ China trade strategy will likely remain mostly unchanged
Trade Representative Katherine Tai and her predecessor Robert Lighthizer in their respective speeches in June admitted that Presidents Trump and Biden share similar views on China
major trade measures against China under the Trump and Biden administrations have a high degree of continuity
the Biden administration retained tariffs imposed by the Trump administration under Section 301 of the Trade Act of 1974
the Biden administration announced its intention to raise the top tariff rate from 25% to 100% on electric vehicles (EVs) and 50% on semiconductors
It has also retained the additional tariffs initiated by the Trump administration on steel and aluminum products under Section 232 of the Trade Expansion Act of 1962
The Biden administration's tightening of export controls on advanced semiconductors since October 2022 also originated from the enactment of the Export Control Reform Act (ECRA) in 2018 under the Trump administration
the addition of Huawei to the entity list subject to the de facto embargo in 2019
and the application of the Export Administration Regulations (EAR) to semiconductors and related technologies
which were originally intended for national security
because of their contribution to political repression of the Uyghur people and of Hong Kong
This led to the Biden administration's revision of the EARs to establish human rights standards for the EARs
amounts to an extension of the customs suspension activated by the Trump administration for Chinese products on the grounds of forced labor
the Biden and Trump administrations have sharply differed over how to cooperate with U.S
The Biden administration has launched the Indo-Pacific Economic Framework (IPEF) to build an anti-China network
Regarding export controls for the purpose of human rights protection
it has developed cooperation frameworks such as the Export Control and Human Rights Initiative and the U.S.-EU Trade and Technology Council
These types of measures were not seen under the Trump administration
Regardless of who will become the next president
there will be no major changes in the hardline U.S
Washington will continue to furiously brawl with Beijing in defiance of World Trade Organization (WTO) rules
President Trump is feared to be leaning toward even more symbolic and radical measures
advocating a "strategic decoupling" from China as Lighthizer proposed in his recent book
President Trump is known for presenting what he refers to as "tariff man" ideas
he has vowed to impose a universal basic tariff of 10% on all imports
and a 100% tariff on Mexican-made cars produced through Chinese direct investment
The current Section 301 tariffs are still within 25%
excluding higher ones on some products such as EVs
but they could be significantly increased if a second Trump administration comes to power
President Trump could suspend the Most Favored Nation (MFN) status for China
Before China's accession to the WTO in 2001
Congress had reviewed the MFN status for China on an annual basis
granting China MFN status permanently was not necessarily a given fact
all of these extreme ideas may simply be aimed at winning the election and their implementation is uncertain
it is possible that some policies that are unfavorable to China might not continue for various different reasons
has hinted at withdrawing from IPEF in an attempt to contain China
The framework for "friendshoring" which involves the U.S
building supply chains with friendly countries could also be at risk
based on his strong stance against decarbonization
the Trump administration may abolish existing tax credits for EVs
With regard to the continuation or escalation of U.S.-China frictions and resulting impacts on Japan
I would like to highlight the following two points from the perspective of the international trade order
The first is the impact on the development of the trade order in East Asia
At a Japan-China-South Korea summit meeting in May
the three countries agreed to accelerate negotiations on a high-quality free trade agreement (FTA)
if President Trump is reelected and pressure to decouple from China increases
it may be difficult for Japan to pursue such economic partnerships with China
If the three countries were aiming for a high-level FTA
China might demand access to strategic goods such as semiconductors
for which Japan currently cooperates with the U.S
making it difficult for the three countries to reach a high-quality FTA
The second issue is the impact on the maintenance of the WTO regime
The WTO's Dispute Settlement Panel has already found the U.S
Section 301 tariffs and steel and aluminum tariffs as counter to WTO rules; however
the United States has refused to abolish them
there is a risk of intensified trade conflict
16 Nobel laureates in economics expressed concern about the negative impacts of President Trump being reelected on the U.S
Paul Krugman warned that high tariffs would send a negative message that the United States is no longer capable of leading the global economy
MFN status and tariff rules are core principles of the WTO agreements
which advocate for free and non-discriminatory trade
If the United States openly ignores these principles
the WTO regime itself will inevitably be further marginalized
which is highly dependent on the WTO regime
If the U.S.-China friction continues for another four years
which relies on the rules-based multilateral free trade system
will need to work with other middle powers to maintain the WTO regime
If the United States is reluctant for the WTO Appellate Body to resume its functions
the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) established by like-minded countries should be used to restore dispute settlement rules
it may be used to contain China’s economic coercion
Japan should contribute to WTO reform as a member of the Ottawa Group
which consists of Canada and other reformist and solid middle powers and the European Union (EU)
the United States and China are highly interdependent
which means that the WTO to which both belong remains an avenue for reconciling their interests
The agreement on patent exemptions for COVID-19 vaccines and the fisheries subsidy agreement in 2022 demonstrated that the United States and China can compromise when it comes to dealing with global challenges like the pandemic
The United States and China have also agreed to cooperate on climate change
if meaningful cooperation is established on climate change between the United States and China through the WTO's Trade and Environmental Sustainability Structured Discussions
it will contribute to the restoration of the WTO's negotiating function
Japan should strive to produce an agreement on such U.S.-China cooperation
who is known for his thorough anti-WTO and anti-decarbonization stance
it may be difficult to envision such a scenario
As a “Plan B” of interregional cooperation to replace the WTO
Japan should focus on revisiting the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
in which neither the United States nor China are contracting parties
As the United States has already turned cautious about WTO and IPEF negotiations on digital trade rules
updating the CPTPP rules first could pave the way to a future WTO agreement
the CPTPP members should try to increase the number of CPTPP participants and cooperate with the EU
South America’s Southern Common Market known as MERCOSUR
NPC: Giunta 15, Fabi 15, Cecchi 9, Capocotta 10, Ly-lee 2; Blatancic 11, Melchiorri 8, Mele, Giovinazzo, Castellitto ne, Novelli ne. Coach Ponticiello.
THE T TECHNICAL GEMA MONTECATINI: Burini 11, Passoni 20, Toscano 18, D'Alessandro 4, Bedin 7; Stanic 14, Di Pizzo 9, Cellerini, Albelli, Chiarini ne, Savoldelli ne, Acunzo ne. Coach Del Re.
T Tecnica Gema makes no mistakes at the PalaSojourner in Rieti and with the 70-83 inflicted on NPC, they secure at least fourth place in Group B and therefore home court advantage in the first round of the playoffs. A solid performance by Del Re's men, led in the first half by Toscano, and in the second half always capable of holding firmly to the lead of the game and closing it with the baskets of a Passoni in exponential growth.
NPC's attempts to close the gap continue after the locker room, but they are neutralized by Rieti's inability to contain Bedin under the basket and Passoni (9 points in the third quarter). Rieti fights and doesn't give up, even returning to -3. Passoni is always the one to take the chestnuts out of the fire: a bomb for 66-72, then he closes the match with a double-lock with another heavy conclusion, which is worth +13 with two minutes to go.
it has been suggested that a sharp decline in the young female population will lead to the “eventual extinction” of municipalities
despite a review of municipal population data over the past 40 years from 1980 to 2020 showing that the female population aged 20-39 has already halved in 879 municipalities
these municipalities have not disappeared as claimed
As 10 years have passed since the discussion of municipalities at risk of extinction was raised in a report published by the Japan Policy Council in 2014
it is necessary to revisit the definition of “extinction” and its side effects on the local economies
addressing the declining birthrate is an urgent challenge
a report published by the Japan Policy Council's Subcommittee on Depopulation Issues pointed out that 896 out of 1799 municipalities were at risk of extinction in the next 30 years to 2040 due to a halving of the female population aged 20–39 [1]
the national and local governments have taken various measures to revitalize rural areas
such as correcting the over-concentration of population and industry in the Greater Tokyo Area
the Population Strategy Council released an updated report on municipalities at risk of extinction based on the latest data [2]
Residents of the municipalities that were identified as being at risk of extinction in the latest report of the Population Strategy Council might have felt increasingly anxious about the future when they heard the term "extinction." The first thing to do is not to be overly swayed by future predictions
but to correctly understand the current situation based on past data
I use the Population Census by the Ministry of Internal Affairs and Communications as long-term time series municipal population data
I examine Population Census data for 1980 and 2020 to learn about municipal population trends over the 40 years between 1980 and 2020
Looking at changes in the female population aged 20-39 by municipality over the 40 years from 1980 to 2020
I find that the female population aged 20-39 had already halved in 879 of the 1,741 municipalities
This number is close to the 896 municipalities that were identified as being at risk of extinction in the 30 years from 2010 to 2040
as pointed out in the 2014 report by the Japan Policy Council
Whereas the 2014 report predicted that 896 municipalities could disappear due to the halving of the female population in question
almost the same number of municipalities have already experienced the halving of this female population
but these municipalities have not disappeared as claimed
It is necessary to reconsider the validity that the “extinction” is realized only on the basis of the decrease of this particular 20-39-year-old female population
The details of the data are visualized on the following web application as shown in Figure 1
it should be noted that for Figure 1 the 1980 and 2020 municipal population data were not directly comparable due to changes in the municipal boundaries between 1980 and 2020
The difference is attributable due to the large number of municipal mergers in the 2000s
I decided to recount the 1980 municipal population data for 1980 based on the municipal boundaries as of October 1
2020 and compare the resulting 1980 and 2020 municipal population data
This is a necessary consideration when interpreting the data
What do the 40 years of recent data tell us about municipalities at risk of extinction
where the female population aged 20-39 has declined
The overall impression is that most of the areas are colored blue
To understand why the young female population is declining in most areas
it is also necessary to know the rate of change in the female population aged 20-39 in Japan as a whole
both the male and female populations aged 20-39 declined by about 30% over the 40 years
The total population of Japan continued to grow after the end of World War II before beginning to decline in 2011 [3]
declined by about 11.1 million over the 40 years in question
Since the total population aged 20-39 has been declining in Japan as a whole
it is unreasonable to attribute responsibility for the decline in the female population aged 20-39 to individual municipalities or to take drastic countermeasures against the population decline
it should be noted that the number of women aged 20-39 has increased in 124 municipalities over the past 40 years due to their interregional migration
even though the total number of women aged 20-39 has declined significantly
This increase is substantial in the commuter cities of each metropolitan area
When considering future childcare policies
it may be important to understand what child-rearing households prioritize moving to such “bedroom cities.” Of course
it is also important to investigate households that did not move to such bedroom cities to see if staying outside the cities was in fact preferable
or if they wanted to move downtown but were unable to do so
The hyperbolic use of "extinction" may create a sense of crisis about the population decline
if the phrase results in harm by implying greater harm than is actually intended
a report by a private organization does not imply political responsibility
The fact that the risk of extinction has been raised has had the advantage of prompting municipalities to undertake various initiatives
it cannot be ruled out that the use of the term itself may accelerate or may have accelerated the outflow of young people from the identified municipalities at risk of extinction or cause or have caused potential residents to avoid those locations because of the expected future decline in property values
was identified as being at risk of extinction
While the 2024 report removed Toshima from the list of municipalities facing extinction
it is not clear whether it was really appropriate in 2014 to have classified Toshima as facing extinction
Komine (2017) reviewed the relevant data and pointed out the potential estimation error [4]
The change in the female population aged 20-39 in Toshima over the 40 years came to a 5.8% decrease
far less serious than the 30% decline for the whole of Japan over the same period
data for the 30 years from 1980 to 2010 would be preferable for evaluating the 2014 report)
it is also true that Toshima dramatically improved the welfare of its residents after being named as a municipality at risk of extinction [4]
It is also conceivable that the negative impact of the 2014 report naming Toshima as a municipality at risk of extinction was limited due to its location as one of Tokyo’s 23 wards
it is questionable whether the percentage decline in the female population aged 20-39 is the most appropriate metric for defining a municipality as being at risk of extinction
has been classified as a municipality at risk of extinction
the female population aged 20-39 declined significantly
this still leaves 22,954 women in this age group living in the municipality
Even if a similar rate of decline is assumed over the next 40 years
Aomori will maintain a population of approximately 10,000 women of that age
its total municipal population is forecast to be approximately 174,000 in 2050
according to estimates released on December 22
by the National Institute of Population and Social Security Research
The question of whether Aomori will become extinct is open to debate when the total size of the municipal population is considered
municipalities should consider implementing community development measures to safeguard local residents
The most worrisome situation would be the realization of a self-fulfilling prophecy
If the subjective impression given by the term "extinction" unintentionally leads to a further outflow of young people
it may be a matter of concern from a policy perspective
It is therefore important for the government to consider the side effects of the overstated expression
This paper primarily focuses on visualizing the percentage change in the female population aged 20-39 over the past 40 years
Further research is necessary to determine how to interpret the results
As a basis for determining whether or not municipalities are actually at risk of extinction
this paper publishes the data to clarify future prospects (see the Appendix for details of the data)
Regarding future population distribution forecasts
a research team under Professor Mori Tomoya at Kyoto University has conducted a detailed statistical analysis based on mesh data [5]
This analysis depicts a future in which it will be challenging to sustain some cities due to the decline in population
The presentation of a high-resolution outlook is anticipated to stimulate further public debate on how to prepare for a society with a declining population in the future
The publication of the Japan Policy Council report in 2014 played an important role in increasing the momentum for overcoming population decline and regional revitalization
it may be opportune to critically examine the 2014 and 2024 reports from various perspectives
The objective of the 2014 report may have been to persuade municipal governments to take action in response to a perceived crisis surrounding the "extinction." However
if the term “extinction” were overestimated
the report might have inadvertently contributed to a net outflow of young people
from municipalities that were identified as facing the possibility of extinction
There is criticism that regional revitalization measures have led municipalities to compete with one another to attract young and child-rearing populations
while the central government has been required to take measures to improve the birthrate for the whole of Japan
Although such criticism is also recognized in the Population Strategy Council report [2]
the repetition of these mistakes is evident
it is imperative to reexamine whether municipalities are at risk of extinction based solely on the percentage change in the municipal female population aged 20-39
Of particular concern is the manner in which the lower risk of extinction under the migration restriction would be interpreted
the analysis may lead to policies that restrict young women’s migration behavior
It is of the utmost importance to recognize that freedom of residence and movement should be guaranteed in principle
It is necessary to reconsider whether these reports represent policy proposals that are overly burdensome only for young women
When measures to address the declining birthrate and to support child-rearing are considered
it is essential that policy discussions are based on appropriate data analysis
there are many goals that are difficult to quantify for regional revitalization
leading to many projects based on individuals’ experiences
It is therefore necessary to have a policy implementation system that can be verified retroactively
As the number of data science professionals has increased in various fields over the past decade
it is my hope that more people will analyze relevant data to produce a better society for us in the future
Further policy discussions are required for a future society in which sustainable and affluent lifestyles can be realized regardless of whether people live in urban or rural areas
Population data by municipality is taken from the 1980 Population Census (Ministry of Internal Affairs and Communications) and the 2020 Population Census (Ministry of Internal Affairs and Communications)
Since municipal boundaries in 2020 are different from those in 1980
it is impossible to directly compare the municipal population data
I aggregate the municipal population data for 1980 based on the municipal boundaries as of October 1
allowing for the comparison of municipal population data in 1980 and 2020
A municipal converter developed in the RIETI Data Management Project was used for the recount [6]
I confirmed that the sum of municipal population data after the recounted 1980 data matches Japan’s total population in the 1980 census
People in areas with undefinable boundaries as part of Tokyo’s special wards in the 1980 Population Census were excluded from the recount of municipal population data
the proportion of persons with unspecified personal characteristics has increased
Since some persons with unspecified personal attributes may be classified as women aged 20-39
it should be noted that changes in the female population aged 20-39 may have been under- or overestimated for some municipalities
2021［Priorities for the Japanese Economy in 2021 (January 2021)］
2020［Priorities for the Japanese Economy in 2020 (January 2020)］
the Xi Jinping administration entered its third term
Since taking office as general secretary of the Communist Party in October 2012
Xi Jinping has overturned the traditional practices and rules that defined power relations within the Communist Party leadership
This is why he has earned the moniker “the most powerful leader since Mao Zedong.”
many studies have explored the factors that led to the concentration of power in Xi Jinping
empirical examination of the impact of this power concentration on Chinese politics and administration remain insufficient
we introduce our analysis of Xi Jinping's policy agenda (Lim
and Zhang 2023 in the RIETI Policy Discussion Paper version) to examine the relationship between power dynamics and policy
Our study confirmed clear changes in the content and structure of the policy agenda from the first Xi Jinping administration to the second one
The concentration of power in the hands of a single leader is not unique among authoritarian regimes
given that the essence of elite politics lies in the competition and cooperation among elites over power sharing
the excessive concentration of power in one individual suggests that some problems have arisen within elite politics
Particularly during China’s reform and opening-up period
efforts were made to establish a collective leadership system and curb the concentration of power as a reflection on the Mao Zedong era
the concentration of power in Xi Jinping represents a conundrum that warrants thorough examination
There are competing views regarding this conundrum
One argument focuses on the peculiarities of the internal and external situation in which the Chinese Communist Party found itself at the beginning of the Xi Jinping administration
it posits that a sense of crisis within the party
driven by factional conflicts within the leadership
prompted the concentration of power in the hands of Xi Jinping (Shirk 2023)
Another argument focuses attention on how the Xi Jinping administration came to power
It emphasizes that Xi Jinping's appointment as general secretary was not dependent on the support of a particular leader or faction
but was the result of collective choice by a broad range of elites (Shih 2022)
the consequences of the concentration of power
many studies have noted that the Xi Jinping administration reformed policy making processes significantly (Dickson 2021; Cabestan 2021)
there has been little discussion about how the concentration of power in Xi Jinping’s hands and the changes in the policy processes have affected the substantive content of policy
although some studies pointed to changes in the frequency and timing of policy changes (Chan
many existing studies tend to view Xi’s power consolidation as inevitable
may be too static to fully capture the power dynamics within the Communist Party
the concentration of power should be understood as a dynamic development resulting from Xi Jinping's own motivations and strategies in response to the situational and institutional conditions as described above
Given the current state of research and Xi's own orientation and choices to consolidate power
we analyzed the changes in the policy agenda under the Xi Jinping administration
What kind of policy agenda has Xi Jinping presented and pursued since he came to power
How has the policy agenda changed over time
we introduce the data and methods used and present the results of the analysis regarding these questions
The data used for this study are from Xi Jinping Xilie Zhongyao Jianghua Shujuku (hereinafter referred to as “Xi-Database”)
published on the website of the Chinese Communist Party newspaper network
The database contains more than 10,000 documents such as speeches
and congratulatory telegrams by Xi Jinping since he became general secretary
Although caution should be exercised regarding potential bias and political propaganda in this database
as it consists of articles from Chinese state media
it is valuable for its high frequency and high-dimensionality
allowing for empirical analysis of the Xi Jinping administration (Ito
we use these and other data to discuss the differences in policy orientation between General Secretary Xi Jinping and Premier Li Keqiang (Ito
This method of treating documents or texts as data was a classical method used for studying the communist countries including China
a broader application of larger-scale datasets and machine learning
has become prevalent in various fields of the social sciences (Grimmer and Stewart
This study uses Structural Topic Modeling (STM)
to extract Xi Jinping's policy agenda from Xi-Database
This method is an extension of topic modeling
which classifies documents by topic (Roberts
Topic modeling can efficiently aggregate information from a large number of documents by estimating the probability of a topic having appeared in each document and that of each word having been generated from a topic
which is defined as “a set of words that are likely to appear in the same document.” In particular
STM can be used to check correlations between topics and examine the impact of document metadata (attribute information)
These features of the STM made it possible to consider information (time of writing in this case) that accompanies any document in Xi-Database in connection to the distribution of topics and words
The following are the highlights of the results:
our analysis shows that the number of agendas came to 25
the content of the document is classified into topics which are predetermined by the analyst
In order to determine the optimal number of topics
we calculated estimates for different numbers of topics and checked the quality (including semantic coherence and exclusivity) of the topics classified by both quantitative and qualitative metrics (see Lim
Xi Jinping laid out roughly 25 distinct policy agenda items in the 10 years after he took office
we found that there are three main policy clusters as indicated by the policy agenda structure
This finding came from the network structure of the topics shown in Figure 1
The network provides a visual understanding of the overall structure of the topics and their relationships
The 25 topics can be broadly divided into three clusters -- foreign policy
and crisis response -- based on the content of the policy agenda
Dominant agenda items are “Global Economy and Governance” and “China and Major Powers” for the foreign policy cluster and “Socialism with Chinese Characteristics” and “(Xi Jinping’s) Speeches and Writings” for the domestic policy cluster
“Culture and Civilization” is the only domestic agenda that has a connection with foreign policy
it is noteworthy that “Military Modernization,” and “Nationalism and Taiwan” are positioned in the domestic policy cluster in Xi Jinping's discourse
the content of policy agendas indicated some notable changes between the first and second terms of the administration
The figure shows the effect of the second term (November 2017 to October 2022) or the time of document creation on the topic distribution compared to the first term (November 2012 to October 2017)
The vertical axis lists the 25 extracted agenda items
while the horizontal axis indicates the difference in prevalence for each topic between the first and second terms
A higher positive value on the horizontal axis for a topic indicates a greater increase in its prevalence from the first term to the second
Topics with horizontal axis values close to 0
suggest no significant difference in prevalence between the first and second terms
meaning that these topics received similar attention throughout both terms of the Xi Jinping administration
Figure 2 shows that agenda items more frequently mentioned in the second term include “COVID-19,” “China and Developing Countries,” “Socialism with Chinese Characteristics,” “Anti-Poverty,” and “Global Economy and Governance.” Conversely
the frequency declined for “China and Major Powers,” “Anti-Corruption and Cadre Management,” and “China and Asia-Pacific.” These results suggest that China's diplomacy expanded both geographically and substantively from the first term to the second
policy priority shifted from major power relations (including U.S.-China relations) to relations between China and developing countries
with the relative weight of the Asia-Pacific region decreasing
culture and civilization were more frequently discussed in the context of foreign relations in the second term
Internet and propaganda and other topics with stronger ideological emphasis became more prevalent in the second term
The leader’s interest changed over time concerning these agenda items while remaining strong in military modernization
Let us delve further into the transformation of the agenda in the second term
Figure 3 outlines a policy agenda aimed at supporting the legitimacy of the regime
The figure indicates that in the first term
policy tools for maintaining the regime and disciplining the elite focused on movements and institutional reforms
such as the anti-corruption campaigns and the development of the legal system
there was a shift towards more ideological measures
This pattern suggests that the basis of legitimacy of the regime is increasingly tied to Xi Jinping's personal authority and ideological contributions within the organizational history of the Communist Party
This implies that the concentration of power tends to heighten the dependence on Xi Jinping's personal authority in policy implementation
The following two issues should be further examined in the future
The first issue concerns the relationship between Xi Jinping's policy discourse and implementation
it is necessary to analyze how much of Xi Jinping's policy agenda (and the level of his personal attention given to each policy agenda) is shared and implemented by the Communist Party and government organizations
Examining the relationship between Xi Jinping's policy orientation and subsequent implementation on the ground provides an important indicator for evaluating the policy effects of political changes during the Xi Jinping era
This is particularly pertinent since enhancing the policy coordination capacity of the Communist Party leadership
has been discussed as an urgent issue from the beginning
our study uses the Belt and Road Initiative and the anti-corruption campaign to confirm the relationship between Xi Jinping's discourse and actual policy implementation
the correlation between the discourse and the current situation is high
reaffirming the dynamism of the policy process
Another issue to be examined is the estimation of changes in the vocabulary that constitutes and defines each policy agenda item (topic)
While this study focuses only on changes of topics
it is conceivable that the language that characterizes the same policy agenda item may evolve
The observation of changes in policy priorities even under the same slogan may allow us to predict future policy developments
The scene was filmed and shared on social media: you can see a pink box with the words "Barbie beam of light" written on it
containing a picture of the Prime Minister with an outstretched arm doing the Roman salute
During the “liberated carnival” of Poggio Mirteto
the effigy of the Prime Minister was burned in the square
The scene was filmed and shared on social media: a pink box can be seen with the words “Barbie beam of light” written on it
containing a portrait of Prime Minister Meloni with an outstretched arm doing the Roman salute
while in the background applause and the chant “we are all anti-fascists” can be heard
"Setting fire to a mannequin depicting Giorgia Meloni is a despicable and dangerous act that only fuels hatred and has no justification
What happened in Poggio Mirteto during the 'Carnevale Liberato' is yet another unspeakable act against the Prime Minister and which I hope will find the firm condemnation of all political forces"
“In expressing my sincere closeness to Giorgia Meloni
I renew the invitation to lower the tone of the political debate that must never
"I express my solidarity with the Prime Minister
It is essential that the discussion remains within the limits of mutual respect and civility
avoiding gestures that could appear as incitements to hatred and violence"
This was declared by the President of the Chamber of Deputies
in reference to what happened at the “Carnevale liberato” in Poggio Mirteto
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Former Nevada basketball standoutJazz Johnson has signed with Italian basketball teamRieti
Johnson played for RivieraBanca Rimini last season and will play next year for Kienergia Rieti
one cut below the top level of Italian basketball
He added 4.4 assists and 3.0 rebounds per game
44.2 percent from three and 85.5 percent from the free throw line
Johnson has played the last three seasons in Italy
including in country&#x27;s top league in 2020-21 forAcqua S.Bernardo Cantù before playing forSerie A2 sideGiorgio Tesi Group Pistoia in 2021-22
and honestly I don&#x27;t think I would want to play in any other country,&quot; Johnson said
The culture is so beautiful and the food is amazing
You have that midday break that everyone takes
so it&#x27;s nice to know that I&#x27;m able to play on that level and have fun on and off the court.&quot;
The 2019 Mountain West sixth man of the year at Nevada
Johnson played two years for the Wolf Pack after transferring following two years at Portland
The 5-foot-10 shooting guard averaged 13.3 points
2.5 rebounds and 1.7 assists per game in 62 contests with Nevada
shooting 43.9 percent overall and 43.2 percent from three
He made the All-MW second team in 2019-20 after averaging 15.9 points per game as a senior
We were digging in search of the external wall of the city
We were very excited because just a few days before we had found the remains of an exceptional mosaic
onyx and fragments of lapis lazuli and we hoped to find signs of an ancient manor house or a thermal bath
We blocked everything and asked ourselves who this stranger was
but who died in such violent circumstances that he could not be returned to the intra moenia cemetery
in the end we believe that it could be one of the famous friars of Farfa fleeing from the abbey with part of the treasure that Charlemagne had donated to the monastery and that the abbot
had divided into several parts and addressed it to the four corners of the world to save it from plunder
Perhaps a part of those precious objects and furnishings vanished at the gates of the city."
Before heading to the nativity scene in Greccio
where we learn what the conformation of the Rieti plain was like before the Capitoline hills began to converge during the Velino river the flood waters that made the basin a cold swamp
We discover that the city stands on semi-artificial islands of travertine and stone; in a not too distant time
the village could be reached by boat and in winter it was crossed by navigable canals
There Via Salary it rose above the ponds and marshes; despite the impressive hydraulic works of the 3rd century BC – which created the waterfall marmore to empty the river basin - and the continuous works of all subsequent eras
the city periodically ended up surrounded by water
Rita accompanies us in the intricate underground streets
expanded in the Middle Ages and then in the Renaissance era with the work of the architect Carlo Maderno and the young apprentice Francesco Borromini already competing with Bernini for benevolence papal
A connecting road between the walls and the centre
an underground world of trade and commerce which
passing through dark alleys and underground streets
to the point that the city administration of the time ordered its closure towards the end of '500
Incorporated in the cellars of noble palaces
the underground universe of Rieti remained unknown until 1998 when the restoration works begin and a visit route is finally imagined
The guide tells us about a "holy and saving" city
Rhea Silvia who lived here; the city of the beautiful Sabine women
whom the first Romans wanted as wives; the city of San Francesco who sought the peace of spirituality here
The same tranquility sought by the pontiffs who on several occasions took refuge in Rieti
Many events began right here: the marriage of Constance of Hauteville to Henry VI and the subsequent birth of Frederick II
even the idea of ​​having Raphael paint the&nbsp;Deposition
in the open air it is easier to recognize the jewels of the city: the historic palaces and religious buildings
Between these the thousand-year-old cathedral of Santa Maria Assunta
in whose baroque interiors it stands out the chapel of Santa Barbara designed by Bernini
e the church of San Rufo: visiting it is a must to admire the very valuable works of art it houses - above all the stupendous&nbsp;Guardian angel&nbsp;of Spadarino - and because the square is traditionally locatedUmbilicus Italy,&nbsp;the center of our peninsula
Who do you want to come to these isolated mountains to do what you say?” I look around
It really seems as if the voice is addressing us directly
a cold wind is blowing and it doesn't take long to see large snowflakes falling
The rugged peaks of the cliffs are already whitewashed and you would want to lock yourself in the camper and drink hot chocolate
but very few have given up and retreated indoors
regardless of the gusts that sweep the stage and the wind that carries his voice away
Are you sure you really want to have the first Nativity performance here
no one will come." It was 1223 and the castellan of the village
was trying in vain to convince the Poverello Friar to desist from his intention to create the first living nativity scene in history
In December of that year Francesco – who had been to Greccio for the first time in 1209: with his presence the hailstorms had stopped and the wolves had no longer attacked the population – he came from Rome
where he had obtained the blessing for the Rule from Pope Honorius III
and wanted to celebrate the birth of the Savior in a special way: reproduce in one of the many caves that open onto the mountains Nativity of Bethlehem
His idea was so successful that on that first Christmas Eve eight hundred years ago
dozens of people gathered to pay homage to the wooden baby lying in the manger
But not only that: even today the nativity scene in Greccio is able to unite adults and children
so much so that it keeps two thousand spectators glued to the stands on the cold nights of December
regardless of the adverse weather conditions and inebriated by the spirit of Christmas
It is thanks to that brilliant intuition and the passionate interpretation of the Pro Loco volunteers if even today we can give an enthusiastic answer to the questions of the ancient feudal lord: it doesn't matter if winter brings cold
The arrival of Jesus warms hearts and lights the way; people climb the mountains (today comfortably in a camper and not on foot) and face the storm just to pay their homage to the Bambinello
The performance held every year in Greccio
right under the spectacular setting of the sanctuary built around the first cells of Francis
is very different from the living nativity scenes that are widespread throughout Italy
It is the theatrical story in six acts of the life of the Poor Man of God in the period before and after the invention of the nativity scene
There are not the crafts and atmospheres of Palestine two thousand years ago
but the story of Brother Leo and the other little friars who surrounded the saint
It is the passionate and engaging narrative of the miracle that transformed a wilderness
harsh and unknown in the birthplace of the Christian tradition most loved by children
<a href="https://www.pleinair.it/wp-content/uploads/2015/11/Rieti-Greccio_8.jpg"></a>
________________________________________________________
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 President Biden has left the tariffs in place
 Figure 1 shows China's exports to the U.S
 The figure only extends to 2019 to avoid the impact of the Covid-19 pandemic on exports
 The figure shows that China's exports to the U.S
 This suggests that tariffs reduced imports from China
Bilateral tariff elasticity estimates may be larger than multilateral tariff elasticity estimates because countries can substitute to imports from other countries
a tariff on machinery exported from China to the U.S
may cause importers to switch to German machinery
companies have filed lawsuits challenging the China tariffs
 Computer makers thus have little pricing power and are forced to cut exports when tariffs raise costs
The high elasticities for steel arise because steel is manufactured in almost 100 countries (<a href="#note3" id="ref3">Note 3</a>)
Domestically supplied steel can thus replace imported steel when tariffs rise
 Excess capacity also makes it difficult to maintain price differentials on steel produced in different areas
 Supply flows can shift rapidly in response to relative price changes arising from tariffs and other factors
 Thus steel exports are especially sensitive to tariffs
Steel exports from China to the world are also subject to many trade remedy duties arising from antidumping
and other countries want to limit Chinese steel imports
Chinese President Xi also wants to limit Chinese steel production because of the severe pollution that the industry causes in the Beijing-Tianjin-Hebei region
 Rather than using a confrontational approach such as imposing tariffs
and other nations could negotiate with China to reduce its steel production
 It is important that grownups in both countries handle the U.S.–China trade war rather than politicians seeking to foment conflict
This article first appeared on <a href="http://econbrowser.com/" target="_blank">Econbrowser</a> on June 8
The global wave of the digital revolution has reached into the field of currencies. In China, cashless payment has become popular as a result of the diffusion of electronic money services, such as Alipay, and interest in central bank digital currencies (hereinafter referred to as "CBDCs") is growing (<a href="#note1" id="ref1">Note 1</a>)
the People's Bank of China (PBoC) has been ahead of other countries' central banks in research on CBDCs
and the issuance of a CBDC in China is about to move from the planning stage to the implementation stage
I explain China's CBDC scheme as revealed by experts involved in this process and consider macro-level effects that the issuance of a CBDC may have on monetary policy
mainly commercial banks (hereinafter referred to as "banks")
and the internationalization of the Chinese yuan
such as the International Monetary Fund and the Bank for International Settlements (BIS)
Among the factors behind this trend are growing expectations for CBDCs with respect to the following matters: (i) efficiency improvement and cost reduction of the payment settlement process due to new information technology
(ii) a decrease in cash in circulation and promotion of financial inclusion in some countries
(iii) arrival of blockchain and other decentralized ledger technologies and crypto assets (virtual currencies)
(iv) prevention of crime and tax evasion and AML/CFT (anti-money laundering / countering the financing of terrorism)
(v) improvement of the effectiveness of monetary policy
and (vi) contribution to financial stability (YANAGAWA Noriyuki and YAMAOKA Hiromi
Data Revolution and Central Bank Digital Currency," Bank of Japan Working Paper Series
Let us look at the position of a CBDC as defined by BIS in relation to other currencies based on the "money flower" classification
A CBDC is a legal currency that is issued by a central bank and concurrently meets criteria (i) and (ii) in the money flower diagram. If criteria (iii) and (iv) are also taken into consideration, CBDCs are classified into four types—(A) retail/account based type, (B) retail/token type, (C) wholesale/account-based type, and (D) wholesale/token type (<a href="#note2" id="ref2">Note 2</a>)
deputy head of the PBoC Digital Currency Research Institute
observed that the scope of the development of a CBDC by the PBoC excludes the two wholesale types
"Digital Currency Analysis," China Finance
have the following respective characteristics (Institute for Monetary and Economic Studies of the Bank of Japan
"Report of the Study Group on Legal Issues Regarding Central Bank Digital Currency," September 2019)
account holders of the issuing central bank are not limited to financial institutions as is the case under the current currency system
including individuals and non-financial companies
the CBDC represents a claim on deposits held by a general user against the central bank
The transfer of CBDC as a claim on deposits is implemented through the recording of an increase or decrease in the account balance
the CBDC is regarded as a digitalized version of paper money
monetary value is considered to be stored in an electronic form instead of in a paper form
CBDC data recorded in a dedicated electronic wallet
Settlement does not go through an account (of either the central bank or commercial banks) but is conducted directly in the form of data transfer between electronic wallets
a token-type CBDC that uses electronic wallets for the settlement purpose provides a higher level of anonymity than an account-based CBDC
China's research concerning CBDCs started in 2014
mentioned the need to study the possibility of the central bank issuing a digital currency
a study team was created within the PBoC to prepare for the issuance of a CBDC
and the Digital Currency Research Institute was established in 2017
China's CBDC scheme is about to move from the planning stage to the implementation stage
the head of the Digital Currency Research Institute
speaking at the Third China Finance 40 Forum
stated that China's CBDC project is moving closer to the introduction stage and explained the details of the planned CBDC scheme
speaking at the Bund Financial Summit that was held on October 28
a former mayor of Chongqing and vice chairman of the China Center for International Economic Exchange
mentioned the possibility that the PBoC might become the world's first central bank to issue a digital currency
creating a buzz both within and outside China
speaking at a press conference related to the 70th anniversary of the founding of the People Republic of China on September 24
PBoC Governor Yi Gang said that a specific issuance schedule had not yet been fixed and that processes such as pilot testing and risk assessment remained to be implemented
According to an article carried by Caijing
the PBoC would soon start CBDC tests in Shenzhen and Suzhou and that tests were also planned in other cities and regions (Zhang Wei
"Eve of the Birth of Digital Currency in China: Pilot Testing by the Central Bank and Competition between the Four Major Banks—Can China Lead the World?" Caijing
Although many countries are conducting research on CBDCs
China is a step ahead of others in this international competition
the results of research related to social acceptance and operational cost
and introduction efforts are expected to be useful as sources of reference information for other countries as well
Among the reasons cited for adopting the two-tiered structure are: (i) that because of China's huge economic size
it is difficult for the central bank to issue the CBDC directly to the people; and (ii) that if the central bank issues the CBDC directly to the people
it could become a potential competitor with banks
has effectively been ruled out as an option
is the only remaining option among the four types earlier mentioned
In light of the abovementioned characteristics of the planned CBDC scheme
we can see some common points and differences between China's planned CBDC and other digital currencies (Table 3)
The CBDC scheme will give the central bank a new monetary policy tool
it will be added to the liability side of the central bank's balance sheet
which also includes cash in circulation and reserves held by financial institutions
The asset side of the balance sheet includes such items as re-lending to domestic financial institutions and foreign exchange reserves
The central bank will be able to make liquidity adjustments by releasing (collecting) the CBDC through the purchase (sale) of foreign currencies or through the expansion (shrinkage) of re-lending
If the CBDC functions not merely as a means of settlement (substitution for M0) but also as an interest-bearing asset
which corresponds to its "price," as well as its quantity
Introducing an interest-bearing CBDC will facilitate the implementation of a negative interest policy
paper currency (cash) issued by the central bank does not bear interest
If the authority tries to lower interest rates on financial assets below zero as an economic stimulus measure
people holding the financial assets would prefer to convert them into cash
that the lower limit on financial asset interest rates is zero
and the zero interest threshold serves as an obstacle (liquidity trap)
if an interest-bearing CBDC is issued and if cash is abolished (or if high-value paper currency
interest rates on deposits and other financial assets may be lowered below zero in tandem with the CBDC interest rate
making the monetary policy all the more effective
The arrival of the CBDC could accelerate the decline of banks' influence
This problem will become even more serious if an interest-bearing CBDC is introduced
Banks are at the center of the modern financial system
Banks also manage deposit accounts held by companies and individuals and process settlement
As banks have an outstanding advantage in settlement and deposit-taking
they also have an advantage in related businesses
platform companies that process third-party settlements have become the vanguards of FinTech and are encroaching on the banks' central role in the financial system
as the flow of information obtained through the settlement process shifts from banks toward those companies
If major platform companies join the ranks of CBDC intermediaries in China
as the CBDC does not have a third-party settlement function
it will not compete with Alipay and other electronic money services that provide third-party settlement services
it will partially substitute for bank deposits because payment and receipt of funds between users and third-party settlement agencies do not have to go through a bank account but can be processed directly via CBDC
it is likely to substitute not only for M0 (cash) but also for demand deposits
it is also expected to substitute for savings bank deposits that form part of M2
Because the central bank has a high level of creditworthiness
if interest and other conditions are equal
savings bank deposits are likely to be replaced by the CBDC
a situation that could significantly reduce banks' deposits and related businesses
outflows of deposits from banks will significantly reduce their lending capacity
the entire financial system could become unstable
In light of the expected magnitude of the impact
an interest-bearing CBDC is unlikely to be introduced until ways are found to solve problems regarding how to make up for the expected shrinkage of banks' lending and how to maintain financial system stability
The issuance of a CBDC in China is expected to contribute to the internationalization of the yuan by enhancing the convenience of using the Chinese currency
the use of the yuan for the settlement of cross-border transactions
fund procurement and investment transactions
between China and other countries has increased
thanks to the government's efforts to promote it as well as the rise and globalization of the Chinese economy
online settlement has reached into every corner of the people's everyday lives compared with the situation in the United States
The technologies and experiences accumulated as a result are sure to be useful for promoting the use of the Chinese CBDC in and outside China
International use of a currency depends largely on economies of scale and inertia
China's lead over the United States in issuing a CBDC and promoting its international use is likely to create a favorable condition for the internationalization of the yuan
for the internationalization of the yuan to make progress
the following conditions must also be satisfied: (i) that China
and secures equal market access for residents and non-residents; (ii) that confidence in the yuan is established; and (iii) that China's share in the global economy (in terms of gross national product [GNP] or trade value) is large
China's strict capital controls pose the greatest obstacle to the internationalization of the yuan
As the forthcoming CBDC is also expected to be subjected to strict capital controls
the effects of its introduction on promoting the internationalization of the yuan is expected to be limited
stated that the Chinese CBDC is intended for use in domestic transactions
rather than in cross-border transactions (Zhou Xiaochuan
"Zhou Xiaochuan Talks About Digital Currency and Electronic Payment," Caixin Online
China is likely to become the first country in the world to introduce a CBDC in earnest
In preparation for the introduction of the CBDC
China is engaging in meticulous planning and is expected to continue to be cautious after moving to the implementation stage
the CBDC will completely replace cash in China
but there is still a long way to go before reaching that point
the greatest challenge will be how to respond to the decline of banks' influence and financial system disruptions that could ensue
<a href="/users/china-tr/jp/ssqs/191227ssqs.html">The original text in Japanese was posted on December 27, 2019.</a>
there is no chance that the issue will be solved in the foreseeable future
Graham is highly unlikely to continue to hear pending appeals
Since "December 11," the Appellate Body circulated its reports in 3 cases (more precisely 4, as one of these consolidates two appeals) (<a href="#note7" id="ref7">Note 7</a>)
for which oral hearings have already been completed
11 appeals are pending as of writing this report
but they are unlikely to be decided for now
parties involved in the Morocco — Hot-Rolled Steel (Turkey) (DS513) withdrew their appeal on December 10th and agreed on the adoption of the panel report (Morocco's loss)
Now that the Appellate Body has ceased to function, what can happen from now on? What's most likely to occur is that pending cases appealed on or after Dec. 11 will accumulate in a state of limbo. In other words, the party dissatisfied with the ruling still has the right to file an appeal according to Article 16, paragraph 4 of the <a href="https://www.mofa.go.jp/mofaj/ecm/it/page25_000432.html" target="_blank">Dispute Settlement Understanding (DSU)</a>; however
it will be left unattended "in the void," as no Appellate Body members will exist to examine the appeal
this means that the dissatisfied party can "block" the adoption of the panel report in the same manner as in the GATT era
The U.S. has already made the notification of "its decision to appeal" against the compliance panel report on the U.S.― Carbon Steel (India), DSU 21.5 (DS436) on December 18th (see the end of table above) (<a href="#note8" id="ref8">Note 8</a>). In fact, one cannot be sure whether this officially amounts to "an appeal" or not, because the U.S. has so far not submitted its formal notice of appeal and appellant submission (<a href="#note9" id="ref9">Note 9</a>)
Regardless of the legal status of the notification
since this case is to request a compliance review
The compliance panel of the case ruled partly against the U.S.
now has the right to immediately take countermeasures (a "reasonable period of time" is not allowed after the compliance phase)
made it easier for other WTO members to choose the option to appeal "into the void," although it is clearly undesirable for the WTO regime
We cannot expect that events will unfold as predicted in any one of these scenarios; they are equally likely to occur depending on the circumstances of respective disputes
while the two other options will significantly undermine the rule of law in the WTO regime
they are more likely to be adopted than the no-appeal agreement
The MPIA is intended to replicate in the DSU Article 25 arbitration
the appeal procedures provided for in relevant provisions in the DSU and other documents
Article 17 of the DSU and the Working Procedure for Appellate Review
including the provision of support by the Appellate Body Secretariat
Arbitrators will be selected from the pool of arbitrators
including available former members of the Appellate Body
the EU is going to take unilateral measures prohibited under the WTO agreements
especially in terms of Article 23 of the DSU
it is indeed paradoxical and ironic that the rule of law can only be maintained through such force
including Thomas Graham and Jennifer Hillman from the U.S.
would not accept the appointment to an arbitrator position due to personal or political reasons
if the majority of arbitrators consists of non ex-Appellate Body members
it could be difficult to ensure continuity and consistency of legal interpretation with the Appellate Body's precedents
Table 2 below is an outline of the results
Director General Azevêdo suddenly declared his resignation as of Sept
which is a year earlier than the expiration of his term
The members will engage in a few-month-long political process to replace DG Azevêdo
a loss of momentum in the Appellate Body reform seems inevitable
how should Japan respond to these circumstances
I always consider that Japan should work more actively with the EU and other groups that seek to maintain the Appellate Body's judicial nature and independence
while assuming the U.S.'s involvement as a premise
The reason for this is that Japan has benefited significantly from the WTO's dispute settlement procedures
and therefore the maintenance of the rule-oriented multilateral trade system contributes to our national interest
It is regrettable to say that Japan has lost some of its influence as a trading nation compared to the days in 1980s and 90s when it enjoyed
being praised for its prosperity as in the book title "Japan as Number One," and leading trade negotiations with other members that constituted the "Quad," i.e
Under such circumstances of diminishing power
it is even more important for Japan to rely on the rule of law
The following figures illustrate the above assertion
the number of appeals filed against Japan was significantly lower than those it filed
If limited to cases that were actually brought to a panel for its ruling
the number filed against it is only one-third of the number it filed
Japan succeeded in having at least one of its arguments or claims accepted in most of the cases it lodged
It is indeed a result of its exemplary attitude towards avoiding protectionist trade policies
but these figures show how Japan has benefited from the system
the country has benefited significantly from the "overreach" of the Appellate Body
there were a number of WTO disputes between Japan and the U.S
Then-President Bush won his first presidential election by
securing victory in fierce battles in the mid-western "rust belt" states
which were suffering from the reduction in the iron and steel industry
and the protection of the industry was one of his election promises
to implement numerous protectionist trade remedies and laws around 2000
disputes were successively brought to the WTO by Japan
All these disputes provide a basis for the current U.S
thanks to the Appellate Body's interpretation
which applied an active problem-solving approach and virtually constructed a body of case law under the principle of jurisprudence constanté as well
The success resulted in the repeal of legislations and measures in almost all cases
if we had tried to settle trade disputes without relying on the WTO dispute settlement procedures
we frequently would have been required to wage "mini trade wars" against the U.S.—which
are fought to settle individual trade disputes
considering Japan's heavy respect for the bilateral alliance with the U.S.
if Japan had tried to adopt such an aggressive strategy
it would have probably found it next to impossible to take the option
We could use the WTO dispute settlement procedures against the U.S
without hesitation because trade disputes were depoliticized through the settlement process and turned into "business as usual" performed by experts
as appropriately provided for in Article 3.10 of the DSU: "… Requests for use of the dispute settlement procedures should not be intended or considered as contentious acts."
While the country does not explicitly support the U.S.'s criticism against "overreach," it also does not strongly advocate either the EU's proposal designed to strengthen the Appellate Body's independence and autonomy or the alternative MPIA plan
Japan apparently hoped to act as a good-faith mediator between the U.S
the two parties having conflicting judicial views
This was most apparent in the Japan-Australia-Chile joint proposal in April 2019 (<a href="#note39" id="ref39">Note 39</a>)
While the proposal shows understanding of the issues raised by the U.S.
it is basically intended merely to confirm the current Agreement rather than to make revisions thereto
presented its sincere response to the U.S.'s statement of concern on the issue
and at the same time upheld the EU's position
which basically preserves the current judicial dispute settlement system
The Walker Principles take an approach similar to this joint proposal
indicating the intellectual contribution provided by Japan's proposal
Japan played an important role as an intermediary between the U.S
and some changes have occurred in the role to be played by Japan
Given that these circumstances will continue for the foreseeable future
it is necessary for Japan to develop a vision that lays out what is a desirable "new normal" and what functions the Appellate Body should have beyond the "new normal." As described in the preceding paragraphs
Japan has benefited from the WTO's dispute settlement procedures—more precisely
from the highly judicialized nature of the Appellate Body's rulings
the vision clearly should have its basis in the preservation and promotion of the judicial nature of the Appellate Body
However, Japan still lacks its own vision. Regarding a short-term solution, Japan has not joined the aforementioned MPIA, though Japan reportedly expressed an interest in this alternative plan (<a href="#note42" id="ref42">Note 42</a>)
To safeguard the rule of law in the multilateral trading system
we need to consider taking concrete steps towards supporting the EU's initiative
but I couldn't help but feel uncomfortable about the comment
criticizes the Appellate Body's ultra vires act based on its "overreach" argument
are interested in finding a method of preserving the Body's judicial nature and autonomy
Canada also shares the same opinion with the EU
these nations are working together with distinctly different goals
and it is therefore completely unknown in what respect the PM Abe found agreement with the other leaders
In his meeting with Foreign Minister Kono in May 2019, Robert Lighthizer, the U.S. Trade Representative, reportedly said that he did not want to see Japan sacrificed by the Appellate Body issue in this way. However, Ambassador Lighthizer also said as a preamble that the U.S. was fully aware of the Body's issue through its experiences in a number of cases (<a href="#note45" id="ref45">Note 45</a>)
its "overreach"— has provided Japan with favorable outcomes in the past
while the Body's reluctance caused by the U.S
criticism resulted in Japan being "sacrificed" (that is
the reverse of the ruling from Japan's win to a loss in the Korea—radionuclide)
if the government is bolstered by Ambassador Lighthizer's words and considers that it has gained support from the U.S.
any vision Japan may have for an ideal Appellate Body is completely incomprehensible
clearly agrees that the system has been discredited
what would justify the decision in terms of our national interest
these actions seem to be mere obsequiousness to the U.S.
arousing a sense of worry about Japan's lack of vision for a workable goal for the Appellate Body issues
I personally believe that our national interest lies in the basic preservation of the current Appellate Body and that what is appropriate for Japan is to strengthen ties with the EU
if the government views that there are other solutions
and the view is based on a well-considered policy decision
The true issue is the non-existence of consistent national policy
it is fitting to conclude this paper by proposing that more serious discussions should be held regarding the following topics and others
focusing on the national interest of Japan:
<a href="/jp/special/special_report/109.html">The original text in Japanese was posted on December 27, 2019.</a>
The fragmentation of the international trade and investment system is proceeding in the name of national security
since the years of the Trump administration
the United States has implemented many trade measures for national security reasons
Specific examples include: (1) aggressive application of the Export Administration Regulations (EAR); (2) the imposition of other restrictions on trade in goods and services; (3) the imposition of restrictions on foreign direct investment; and (4) the application of trade regulations from the viewpoint of human rights as a national security matter (see the table below)
the trend of decoupling in terms of trade and investment
which is occurring mainly between the United States and China
is making headway through the recent friendshoring movement
which refers to the building and strengthening of supply chains among like-minded countries
Following the conclusion of agreements on the Indo-Pacific Economic Framework (IPEF) and the U.S.-EU Trade and Technology Council (TTC)
negotiations on the Americas Partnership for Economic Prosperity (APEP) started in January 2023
Those partnership frameworks place emphasis on ensuring national security and sharing of values and aim to conclude agreements on cooperation for: the strengthening of supply chains particularly for strategic goods and technologies such as semiconductors
and post-quantum technologies; decarbonization; the reliability of artificial intelligence (AI); and export controls and investment screening
Those developments indicate the expansion of the concept of national security
which has traditionally centered on military and defense matters
When the United States applied the EAR to Chinese companies due to China’s acts of repression in the Xinjiang Uygur Autonomous Region and Hong Kong
it treated the human rights issues in China as a matter of national security for itself
The Biden administration has also clearly recognized climate change as a top national security challenge
which is rooted in national security concerns
covers not only human rights and climate change but various other challenges
the series of measures taken as a result of the expansion of the concept of national security has created divisions even among allied countries
the EU and other Western economies filed complaints with the WTO against the United States in relation to the additional U.S
tariffs imposed on steel and aluminum imports in 2018
The enactment of the Inflation Reduction Act and CHIPS Act of the United States has also brought about trade disputes with Japan and South Korea
whose products have been put at a disadvantage under those laws
the EU has enacted its own version of the CHIPS Act in order to promote the semiconductor industry and also launched the Green Deal initiative
which facilitates support for the decarbonization industry
there is a cause for a future trans-Atlantic trade war over subsidies
There are also concerns over acts of protectionism disguised as national security measures
A WTO dispute settlement panel did not recognize the U.S
tariffs on steel and aluminum imports and the U.S
requirements concerning country-of-origin labeling of products from Hong Kong as measures taken for national security reasons
With regard to the supply of strategic goods and the development of strategic industries
tax credit program for electric vehicles (EVs) under the Inflation Reduction Act imposes conditions that are neither consistent with the WTO agreements nor sufficiently reasonable from the perspective of national security
such as mandating the use of critical minerals manufactured or processed in the United States or in the regions covered by FTAs
The provision of subsidies under the CHIPS Act also has a strong element of industrial policy
as it requires compliance with conditions that are unrelated to national security
such as the use of U.S.-made materials in the construction of semiconductor plants and the disclosure of advanced technology to the government
ensuring free trade helps to diminish economic coercion
Australia was confronted with China’s restrictions on imports of wine and barley but succeeded in defending itself against the Chinese economic coercion by finding alternative export markets under the open
such as trade restrictions and financial embargoes
in order to achieve their own geopolitical objectives (such practices are known as economic statecraft)
Ensuring free trade prevents the “weaponization of interdependence,” which refers to the practice of taking advantage of the choke points in international supply chains for critical goods and technologies to engage in economic statecraft
Typical examples include the Chinese export ban on rare earths introduced in the early 2010s due to the dispute over the Senkaku Islands and the export restrictions on rare earth magnets that China is preparing to introduce in retaliation against the Western export bans on semiconductors and related equipment and materials
The presence of the WTO rules eventually led to the removal of the Chinese export ban on rare earths
The importance of economic security for Japan cannot be denied
but caution must be exercised in relation to promoting economic security
chairman of the Global Council of the International House of Japan
Japan is a country with a “national security deficit” because of the regional geopolitical environment—it is surrounded by countries that are considered to be potential national security threats
Russia and North Korea—and also because of its dependence on foreign supply sources of resources and food
maintaining the open multilateral trading system as a basic policy contributes to its own economic security by securing a diverse range of alternative procurement sources and foreign markets
a survey conducted in 2022 by the Economist Group of the United Kingdom ranked Japan sixth in the global food security rankings of countries
despite the country’s low food self-sufficiency rate and the impact of the Ukraine crisis
because Japan ensures stable supply through trade
which increased its energy dependence on Russia
with which an intimate relationship was cultivated at the top-leader level in the recent past
is an indication of the risk that depending excessively on partner countries through friendshoring presents to economic security
over-reliance on friendshoring or reshoring (bringing home manufacturing and other business operations from abroad) will not be in Japan’s best interests
They are merely measures for reducing excessive dependance on China by diversifying supply chains and dispersing risk
the emphasis should remain in maintaining the multilateral
The nature of Japan’s national interests is critically different from the nature of the national interests of the United States
which is a country with a “national security surplus” in terms of domestic natural resources
and which can create supply chains with its friendly neighboring countries
Japan should pursue a trade strategy based on the concept of the maintenance of the multilateral trading system in order to avoid the adverse effects of excessive decoupling and reconcile economic security with economic growth
Japan should exercise caution in taking trade measures for national security reasons
Measures permitted under the WTO rules and FTAs are limited to those that are essential for protecting critical national interests
national security is not a magic word that can justify everything
The recent export control of semiconductor-manufacturing equipment must be a measure that contributes not to the U.S
industrial policy but to the national interests of Japan itself
The joint efforts to counteract economic coercion that were proposed at the G7 trade ministers’ meeting represent a trade version of “collective defense,” so to speak
When considering whether or not to engage in such collaboration
it is necessary to keep in mind the possibility that doing so could cause fundamental changes to the relationship between the multilateral trading system and national security
Exercising leadership in maintaining and further developing the traditional multilateral trading system should be the basis of Japan’s future geopolitical policy
In the negotiations over China’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
Japan should cooperate with like-minded countries
and should not compromise over the principle of ensuring compliance with the rules and commitment to a high level of market openness
it is essential to restart the Appellate Body
and to continue exercising leadership in the negotiations over digital trade rules in order to deliver concrete results at the WTO ministerial conference scheduled for 2024
Japan has joined the Multi-Party Interim Appeal Arbitration Arrangement (MPIA)
which reviews appeals against panel decisions in the absence of an operational Appellate Body
The EU and Australia have filed complaints against the series of acts of economic coercion by China on the premise of using the MPIA
using the MPIA to maintain the trade order based on the WTO rules will contribute to its economic security
a group formed to encourage new music for old instruments
and since that time just about every major composer has written one or more works that feature the harpsichord
either as a solo instrument or in ensemble
Vittorio Rieti was by far the most prolific
He wrote more works for the harpsichord than any other modern composer
and his treatment of the instrument is among the most idiomatic since the 18th century
to an Italian-Jewish family that could trace its roots back to the 14th century
His father ran a successful export/import business
Despite his son’s prodigious musical skills
Rieti’s father expected his son to take over the family business
and shipped him off to Milan’s Luigi Bocconi University in 1912 to study economics
Vittorio dutifully returned to Egypt in 1917 with a doctorate (his thesis was on the economy of Turkey)
but he soon abandoned business for the world of music
Resettling in Rome with his family after World War I
Rieti had some lessons in orchestration with Ottorino Respighi and studied composition with Alfredo Casella
who took the “young Egyptian” under his wing
along with two other important Roman musicians
Gian Francesco Malpiero and Mario Castelnuovo-Tedesco
Rieti reminisced about this period of his life in a speech he gave at the Longy School of Music in Cambridge
1990: “I was first introduced to the musical world by Alfredo Casella
Casella conducted a concerto of mine for woodwinds and orchestra [i.e.
composed in 1923] in a festival of contemporary music in Prague in 1924
because the festival was attended by many conductors who took an interest in my music and performed it all over the world.” Three of those conductors were Fritz Reiner
ground zero at the time for all that was new and exciting in the arts
joined the staff of Sergei Diaghilev&#8217;s Ballet Russes and enjoyed immediate success with his first ballet
The choreographer was the 21-year-old George Balanchine
Rieti quickly became a member of inner circle of the most important musicians and artists living in Paris at the time
and forged artistic relationships and life-long personal friendships with composers such as Milhaud
Stravinsky was a particularly close friend and colleague
in 1928 he asked Rieti to be one of the four pianists (the others were Poulenc
Georges Auric and Marcell Meyer) to play in Diaghilev’s production of Les Noces
Rieti also maintained ties with Berg and Schoenberg in Vienna and Hindemith in Germany during this period
The intentions of the Nazis in the 1930s were becoming increasingly evident
and Rieti was finally able to emigrate to New York in 1940 with his wife Elsie (Rappaport) and son Fabio (now a highly-regarded artist in Paris)
The other members of Rieti’s family who had remained in Europe were not so lucky
as we read in a letter to Darius Milhaud of November 17
…My mother was taken by the Germans from San Remo last May and carried to an unknown destination
and with her she had brought her brother (81) and her almost blind sister (92 years old)…I am not going to fool myself
believing that their 247 years would protect all of them
uncle and aunt were ultimately murdered in the concentration camps
Rieti was able to keep on composing until the last years of his life
He also remained faithful to the neo-classical style
which he probably inherited from Stravinsky in Paris
long after most composers had abandoned or transformed it
“I maintain the same aesthetic assumptions I have always had
I have kept evolving in the sense that one keeps on perfecting the same ground.”
—the reader is probably thinking) was perhaps the ideal instrument with which to invoke the neo-classical sound
Rieti expressed his admiration for it early on in his career
intending to write a harpsichord concerto for Wanda Landowska in 1930
That plan was abandoned because of the political events of the period
and the work was later transformed into his first Piano Concerto (1937)
but Rieti never lost his fondness for the harpsichord
and as his affection increased so did his skill in writing for it
Over the next sixty years Rieti would publish eight instrumental works that feature the harpsichord
 The first two appeared in 1946: the Partita for Flute
Then came the Concerto for Harpsichord and Orchestra (1955
Harp and Harpsichord (1963); Pastorale e Fughetta for Flute
Viola and Harpsichord (1966); and Sonata Breve for Violin and Harpsichord (1967)
Rieti composed his last two compositions for harpsichord when he was in his 80s: the Variations on Two Cantigas de Santa Maria (1978)
and the Triptych for Two Harpsichords (1982)
Rieti’s death in 1994 was greeted with little notice
even though it represented the passing of the last representative of neo-classicism in the 20th century
But one can imagine that this would not have troubled this private and reserved man
a close friend and a member of the duo-piano team Gold and Fizdale remarked: “Vittorio never suffered from the American disease of having to be a success.” He also left a lasting legacy of harpsichord music and other works in his very personal style
which was eloquently described by his old teacher Alfredo Cassella: “Rieti&#8217;s oeuvre stands apart in its specific clarity
gaiety and sophistication of a kind only he possesses
An important proponent of Rieti’s music was the wonderful violinist, the late Janet Packer. She performed and recorded many of Rieti’s works, including the Serenata per violino concertante e piccolo orchestra (1931) on CRI. Mark Kroll has just released a recording of almost all of Rieti’s harpsichord music on New World Records [<a href="http://www.newworldrecords.org/album.cgi?rm=view&amp;album_id=93352">here</a>]
It includes Israeli-American harpsichordist Marina Minkin
<a href="https://www.classical-scene.com/2015/02/03/rieti-kroll-harpsichord/#comments">1 Comment &#187;</a>
Categories <a href="https://www.classical-scene.com/topics/news/" rel="category tag">News &amp; Features</a> 1 Comment <a class="comment-title-instructions" href="#postcomment" title="Leave a comment">[leave a civil comment (others will be removed) and please disclose relevant affiliations]</a>Thanks for this interesting article&#8211;I look forward to hearing the recording
 Rieti is truly an interesting guy who hasn&#8217;t had his due—and the connection to Balanchine is fascinating
 Glad to know that contemporary harpsichord music has its champion in Mark Kroll
 Henri Dutillieux is another composer who comes to mind—as does the terrific recordings/performances with Kroll and the BSO chamber players
Comment by Wendy Heller &#8212; February 6
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China has banned all Japanese seafood imports in response to the release of treated water from Tokyo Electric Power’s Fukushima Daiichi Nuclear Power Station into the sea
which absorb more than 30% of Japanese agricultural
have toughened restrictions on such Japanese imports
seafood prices in Japan have been impacted already
The hardline policy of banning all seafood imports from Japan in order to halt the release of treated water is regarded as a unilateral economic action or economic coercion to achieve a specific policy objective or demand
Is economic coercion permitted under international law
China is not the only country that engages in economic coercion (see table)
Middle Eastern oil-producing countries unilaterally raised oil prices through the Organization of the Petroleum Exporting Countries (OPEC) on the occasion of the fourth Middle East war in protest of pro-Israel countries
which was imposed on South Africa for its enhanced apartheid discrimination policy in 1977 in line with a United Nations Security Council resolution
can also be interpreted as economic coercion
Economic sanctions imposed by Western countries including Japan against Russia for its recent invasion of Ukraine are also economic coercion to achieve the goal of stopping the Russian invasion
all of these economic coercion measures were conducted as collective actions by multiple countries
China has recently repeated economic coercion on its own
China banned salmon imports from Norway in protest against the Nobel Peace Prize being awarded to Chinese democracy activist Liu Xiaobo
suspended rare earth exports to Japan over a bilateral territorial dispute over the Senkaku Islands
and restricted Australian coal and wine imports over investigations into the cause of COVID-19
There are also many other economic coercion cases involving China
The lawfulness of economic coercion measures under international law varies depending on the policy purposes and types of measures
The arms embargo on South Africa was compatible with international law
because the embargo was implemented against the apartheid measures which had been identified by the U.N
Security Council as violations of international law
Economic sanctions against Russia for its invasion violating international law are likewise compatible with international law
China's unilateral economic coercion is implemented to counter foreign policies or measures that China opposes
Chinese economic coercion cannot be interpreted as compatible with international law
As Chinese economic coercion measures include bans on rare earth exports to and seafood imports from Japan and other external trade restrictions
the question is whether these measures are compatible with the World Trade Organization (WTO) agreement or free trade agreements to which Japan and China are parties
China has described the ban on Japanese seafood imports as a measure to protect the lives and health of its citizens from seafood contaminated with the radioactive substance tritium
What China has references here is the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) to protect the lives or health of people
The WTO SPS Agreement requires import restrictions for food safety (1) to be based on scientific grounds and evidence
(2) to conform to or at least be based on international standards set by the international organizations
or (3) to be based on risk assessments if tougher standards than international ones are adopted for such restrictions
The World Health Organization's (WHO) guidelines for drinking water quality set an international standard for the allowable amount of tritium at 10,000 becquerels per liter
The International Atomic Energy Agency (IAEA) has tested the tritium content of treated water from the Fukushima Daiichi Nuclear Power Station and found that the treated water is diluted before the release to reduce the tritium content to less than 1,500 becquerels per liter
the current Chinese ban on Japanese seafood imports amounts to a tougher measure than appropriate for the above third requirement under the WTO SPS Agreement
China is required to demonstrate that the measure is implemented on the basis of risk assessments and that the measure is based on scientific grounds and evidence
China has not explained that the measure meets these requirements
the Chinese measure is a violation of the WTO SPS Agreement
China has failed to regulate treated water from its own nuclear power plants
which emit up to 6.5 times more tritium annually than the treated water from the Fukushima Daiichi Nuclear Power Station
China thus is requiring more stringent regulations on Japanese nuclear power plants than the levels actually being documented on Chinese ones
running counter to the principle of national treatment
China's ban on all seafood imports from Japan violates the WTO SPS Agreement
The Japanese government should resort to a WTO dispute settlement procedure to lead China to withdraw the import ban
Regarding the WTO dispute settlement procedure
the Appellate Body has been inactive since December 2019 as a result of the United States' boycott of the appointment and reappointment of Appellate Body members
a party to a dispute that loses its case at the dispute settlement panel stage in the first instance can essentially postpone the case indefinitely by appealing the panel ruling
which will bring the case to the inactive Appellate Body
have established the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) to replace the Appellate Body
if Japan wins a case against China at the dispute settlement panel stage
Japan lost a petition against South Korea’s ban on seafood imports from Japan as a response to the Fukushima accident in 2019
as the Appellate Body reversed a dispute settlement panel ruling that had endorsed the petition
This experience might have made the Japanese government more hesitant to file a petition with the WTO against the Chinese measure
Since claims of relevant parties and applicable SPS Agreement provisions differ between the Chinese and South Korean cases
it is too early for the Japanese government to predict a loss in the case against China
Even if Japan files a petition with the WTO against the Chinese measure
several years may pass before the case is finally resolved
Japan should continue to persistently urge China to rescind their measure while bringing the case to the WTO
Japan should consider at least two routes in addressing the issue
The first route is to raise the Chinese measure as a "Specific Trade Concern (STC)" for consideration at the WTO SPS Committee
A large number of import restriction measures have been raised as STCs at the Committee
The adequacy of such measures has been examined at the Committee
leading to the withdrawal of many such measures
The second is the utilization of the Regional Comprehensive Economic Partnership (RCEP) in East Asia
Regarding risk assessments for SPS import restriction measures
the RCEP agreement requires importer countries that impose such measures to report on the progress of risk analysis at the request of relevant exporter countries
the Japanese government should consider requesting that China conduct a risk assessment as a prerequisite for the measure and to report progress in the assessment in order to exert diplomatic pressure on China to withdraw the measure
China's ban on seafood imports from Japan in response to the release of treated water
which meets tougher safety standards than international standards
unwarranted economic coercion measure that runs counter to WTO rules
The Japanese government should exert pressure on China to withdraw the ban through the WTO dispute settlement procedure and softer
It is best for Japan to take a resolute approach to illegal
Global supply chains are undergoing change
the United States and European countries have been restricting trade and investment relationships with China since around 2019
as they have recognized the security risks involved in their relationships with that country
in order to disconnect supply chains for key products
from China and increase supply chain resilience
the United States and European countries have used huge amounts of subsidies to promote efforts to bring production facilities back to their home turf (onshoring)
The Japanese government earmarked a total of 620 billion yen as financial aid under the FY2021 supplementary budget to encourage TSMC
a major semiconductor manufacturer in Taiwan
to build a factory in Kumamoto Prefecture in southwestern Japan and to undertake other similar initiatives
The Japanese government has also provided around 520 billion yen in subsidies for domestic capital investments in order to reduce the risk of supply chain disruption in high-tech industries
as Japanese firms' supply chains have depended heavily on China
they have faced a serious risk of supply disruption
Data on China's shares in other countries' parts imports show that the share in Japanese parts imports hit a record high of around 30% in 2014 but it has continued to decline since 2015 (see Figure 1)
parts imports has also decreased steeply since 2019
Australia and Germany have become increasingly dependent on imports from China
the total value of exports from Japan and the United States to China has increased steeply over the past three years
Even exports of electronics and electrical products from both countries have increased
Among the few products whose exports to China have declined are aircraft and some semiconductor-related products
Supply chains become more resilient if they are more geographically diversified
That is because geographical diversity makes it easier to switch to an alternative supply source country when a pandemic or a natural disaster causes disruptions in supply from a certain country
That has been confirmed by the results of studies on the impact of the COVID-19 pandemic
including our analysis based on firm data collected by the Economic Research Institute for ASEAN and East Asia (ERIA)
Policy initiatives are contributing to this trend
whose dependence on China in terms of imports has declined since 2015
a change in Japanese firms' risk perceptions due to the intensified anti-Japan protest movement following Japan's nationalization of the disputed Senkaku Islands in 2012
as Japan also still continues to depend heavily on China
it must promote diversification further in order to develop resilient supply chains
but the currently implemented policy initiatives have some problems
if onshoring of supply sources goes too far
supply chains could become vulnerable rather than resilient
which is a country prone to natural disasters
the risk of domestic supply chain disruption is high
This risk can be reduced by dispersing supply chains internationally
the government is providing subsidies for the transfer of production facilities to ASEAN countries
and this is desirable from the viewpoint of enhancing supply chain resiliency
such as the Japan External Trade Organization (JETRO)
have been providing information that is useful for overseas business expansion and supporting the development of networks through business matching
There is much evidence to indicate that those support measures are effective
so they should be further utilized to promote the diversification of supply chains
it is doubtful whether using subsidies to encourage the construction of production facilities in Japan will revive the domestic semiconductor industry
a subsidy program to encourage the construction of high-tech industry production facilities in provincial areas
according to Keio University Professor Toshihiro Okubo and his colleagues
policy initiatives implemented in the 1980s and 1990s to promote research and development (R&D) and other intellectual business activities ended up attracting low-tech industries in many cases
That is because innovative firms are unwilling to move away from dense industrial clusters where technology and information are accumulated
A similar problem has occurred in the case of the effort to encourage TMSC to build a factory in Kumamoto
The factory planned by TMSC is expected to manufacture commodity semiconductors
That is unlikely to lead to advanced industrial development
it is also doubtful whether "industrial policy" as narrowly defined
policy focusing on supporting a particular industry
Industrial policy is attracting renewed interest globally
which is implementing industry-supporting programs on a massive scale
according to University of Tokyo Professor Tomoo Marukawa
China's industrial policies are a series of failures
Even the program to support the semiconductor industry has not necessarily been successful
with the domestic production ratio falling far short of the government's target
A study by Philippe Aghion of INSEAD and his coauthors
found that industrial policy improved firms' productivity only when competition was maintained within the supported industry
it may be said that China’s high-tech industry's rapid growth has essentially been driven by intense competition between private-sector companies although industrial policy may have made some contributions
industrial policy should be devised so as to encourage the exercise of ingenuity in the private sector by promoting competition in a broad range of industries
rather than focusing on a particular industry
as has been argued by Harvard University Professor Dani Rodrik
thanks to their cutting-edge technological prowess
Japanese firms have large global shares of some important production processes
and Japan has some degree of influence over the semiconductor supply chain
Making more Japanese firms globally competitive not only in the semiconductor industry but in a diverse range of industries will continue to be critical for both economic growth and supply chain resiliency
Providing policy support for R&D and intellectual partnerships is effective in strengthening competitiveness
That is because the benefits of R&D and intellectual partnerships proliferate throughout society
laureate of the Nobel Memorial Prize in Economic Sciences
Providing massive support for R&D will be the second pillar of U.S
and European plans to strengthen supply chain resiliency
along with encouraging onshoring of supply chains
Japan should follow the example of the United States and Europe
As part of its support for the semiconductor industry
Japan is also assisting intellectual partnerships
TSMC established an R&D center in Tsukuba City
In addition to the provision of subsidies by the government
the establishment of a framework for partnerships with Japanese firms and universities under the leadership of the National Institute of Advanced Industrial Science and Technology (AIST) served as an inducement for TSMC to set up R&D operations in Japan
Only if Japanese firms and individuals make successful use of policy initiatives under such governmental support to keep connected with the world and engage in constructive competition can Japan's economic growth be achieved
the government tends to adopt an isolationist policy as people cast a wary eye toward other countries as possible sources of the shocks
the government implemented many policy measures intended to promote economic growth driven by domestic demand
but those measures ended up prolonging Japan's economic stagnation
the government should overcome the current crisis without leaning towards an isolationist policy
<a href="/jp/papers/contribution/todo/08.html">&gt;&gt; Original text in Japanese</a>
Trade restrictions have increasingly been used for national security reasons in recent years
This column studies the impact of export controls in the semiconductor industry applied by Japan on South Korea in 2019
It finds these controls drastically cut trade of affected chemical inputs between Japan and South Korea
but increased trade of both countries with the US
the production of affected chemicals increased in South Korea
following a government programme to promote domestic production
policy considerations need to take into account these complex trade reallocation effects
particularly for industries where global value chains are pervasive
Trade policy being used to address national security concerns has been pervasive in recent years
Notable examples are the US trade restrictions against China in 2018
the US trade sanctions against Russia following its invasion of Ukraine in 2022
and the US export controls on the Chinese semiconductor industry in 2019
Research on trade policies has also been growing over the last ten years (e.g
While most of the research analyses the effect of tariffs on domestic economies
there is still relatively little empirical evidence on the effect of non-tariff trade policy on exports and imports in an industry with extensive global value chains (GVCs)
What is the effect of such trade policy on international trade in an industry where the production process is characterised by global value chains
Is unilateral export control effective in an industry where firms change their production and sourcing patterns in response to export controls
In a recent paper (Makioka and Zhang 2023)
we investigate the effect of non-tariff trade policy implemented in the name of national security on international trade in an industry characterised by global value chains – the semiconductor industry
We use a recent Japan–Korea trade dispute as a case study
the Japanese government announced potential export controls on South Korea for three chemical inputs
all of which are essential in semiconductor production
Japanese exporters of these three chemical materials are required to apply for individual export licenses
The semiconductor industry has what is a typical example of a global value chain
and China have dominant sales shares in all design
and outsourced semiconductor assembly and test (OSAT) stages
while the design stage itself tends to be located in Europe and Japan
the manufacturing stage in Israel and South Korea
protectionist trade measures can potentially affect the entire production process and input sourcing patterns
The semiconductor industry in South Korea was heavily dependent on these three chemical materials imported from Japan before the Japanese export control was introduced
Japanese firms supply more than 90% of South Korean imports of two out of the three key materials
The materials are then used in semiconductor production in South Korea
which comprises 20% of South Korea’s total exports
We use a difference-in-differences approach and the synthetic control method to determine the causal effect of the export control on Japanese export
We also provide some preliminary statistics to investigate the response of domestic production in Japan and South Korea to the export controls
the Japanese exports of hydrogen fluoride to South Korea declined by 87.9% due to the export control
but this was not the case for the other two restricted chemical materials
photoresist and fluorinated polyimide (Figure 1)
The latter could be partly because the Japanese Ministry of Economy
three-year bulk export licenses for some photoresist transactions
the restrictions increased Japanese exports of hydrogen fluoride to the US
a decrease in the Japanese production of semiconductor-related products
It also suggests the possibility that Japanese firms substituted their exports of restricted chemical materials to the US or exported the materials to South Korea through the US (roundabout trade)
The latter possibility is consistent with the next finding
South Korea increased their import of hydrogen fluoride from the US and Taiwan and those of photoresist from Belgium
which is consistent with their reallocation of input sourcing from Japan to economies such as Belgium
their imports of semiconductor manufacturing equipment dropped from the Netherlands by 54.7% and from Germany by 72.6% respectively
This could reflect the fact that semiconductor manufacturing equipment
that is used complementarily with chemical materials in the production process
is no longer purchased due to the Japanese export restrictions of the chemical materials
supplies 75% of lithography (one of the production steps in semiconductor products) equipment in the global market and is the only company supplying extreme-ultraviolet lithography equipment in the world
which is required to produce the most advanced chips
high-quality photoresist is also used in the extreme-ultraviolet lithography step
which is restricted due to the Japanese export control
Semiconductor manufacturing plants need to combine the material with the equipment to produce semiconductor wafers
the South Korean exports of semiconductor manufacturing equipment to China seem to increase substantially at the time of the introduction of the Japanese export controls (bottom left in Figure 2)
This is consistent with the interpretation that these South Korean firms reallocate some of their production to China to securely source the necessary chemical materials under the export controls and require shipment of semiconductor manufacturing equipment to China
the production of the three chemical materials increased in Korean firms and Japanese affiliates in South Korea after the export controls
The former is consistent with the fact that the South Korean government announced 7.8 trillion won (about $6 billion) of investment over seven years to promote domestic production of strategic products (including the three chemical materials) in August 2019
the latter is consistent with the story that Japanese multinational enterprises (MNEs) shifted their production of these three chemical materials due to the export controls
In the modern global economy where global value chains are pervasive
trade policies for national security purposes can face unintended consequences through changes in firm’s sourcing strategy
and production decisions of multinational enterprises
This result suggests that the effectiveness of unilateral export controls is limited in the current global economy
Taking these effects into account when making policy decisions is necessary to mitigate the unintended negative effects of such policies
Further research should be done especially by using more detailed firm-level data to pin down the mechanisms
Editor’s note: The main research on which this column is based (Makioka and Zhang 2023) first appeared as a <a href="/en/publications/summary/23030011.html">Discussion Paper </a>of the Research Institute of Economy
This article first appeared on <a href="https://cepr.org/voxeu" target="_blank">VoxEU</a> on April 27
Japan’s new capitalism and mission-oriented industrial policy has been formulated to cope with changing global supply chains and to drive economic growth
The policy places emphasis on economic growth and income distribution but needs to address risks from China’s market transformation and climate change to succeed
Clear industrial targets for innovation must be based in high quality markets and on industrial inputs that are difficult to substitute
questions remain on how to interface with China in global trade and the degree to which government intervention may be necessary to combat climate change in sectors without current demand
Professor Richard Baldwin of Graduate Institute
Vice President of RIETI met online to discuss the current issues
The supply chain disruption caused by the COVID-19 pandemic reminded us how integrated our supply chains are
It highlighted the supply chain risks for automakers in particular as the necessary procurement of automotive parts and components was disrupted
the disruption to supply chains revealed how little we know about our own global supply chains and their hidden risks
which have been impacted by pandemic and geopolitical tensions
Decarbonization of the global supply chain is also a priority for decision making of business leaders
Products and services are in the end being selected by consumers and citizens around the globe who have become very sensitive about the carbon footprint throughout the supply chain
Geopolitical tensions and the increased importance of addressing economic security concerns required us to take a coordinated approach among like-minded countries but at the same time we need to strengthen the rule-based global and regional economic order and upgrade the free trade system to avoid fragmentation of supply chains
Digital technologies change the supply chain dramatically and how governments and private sectors can transform themselves in the data age is a huge challenge in every country
The NBER (National Bureau of Economic Research) working paper “Risks and Global Supply Chains: What We Know and What We Need to Know,” authored by one of our speakers
identifies the risks to and from global supply chains
how global supply chains have recovered from past shocks
and proposes a risk-versus-reward framework to evaluate whether risk policies are justified
Freeman also discussed how exposures to foreign shocks are measured and considered the future of global supply chains in light of the current policy environment
Heightened supply chain risk requires individual companies to respond to new risks by balancing the costs and risks of relying on global supply chains
the increasing uncertainty of global supply chains necessitates that governments also react to new risks and the challenges
new thinking on capitalism emerged in Europe and the U.S
Prime Minister Fumio Kishida announced new capitalism as the main pillar of his economic policy
I first invite Chairman Yano to share his perspective on the new capitalism and mission-oriented industrial policy
then Professor Baldwin will share his perspective
Prime Minister Fumio Kishida has proposed what he calls new capitalism as the basis of his policy agenda
he emphasizes the importance of income distribution
His initiative advocates the creation of a “good loop” of economic growth and income distribution
Kishida advocates controlling large corporations’ dominant market power over smaller companies
from which they purchase intermediate goods and services at low prices
as is the traditional Japanese business style
The policy aims to expand middle income families and to increase population
the government is to subsidize education and housing and assist in childcare
by increasing the number of nursery schools
This in particular has been noted as a problem because the small number of nursery schools is preventing women from both entering the workforce and remaining at work
Prime Minister Kishida advocates increasing wages for essential workers
This is partly because of the issues revealed during the current COVID-19 situation
the need for wage increases in nursing services and elderly care was evident even before the pandemic
Japan's wages in nursing and elderly care are low
the BBC has reported that the Japanese average wage has been stagnant for over three decades
whereas wage rates have generally increased in many countries such as Germany
this is partly a reflection of Japan’s GDP as a whole
I think that the administration perceives that by raising wages
it will create additional economic progress and economic growth
METI is now advocating a “moonshot.” This is a part of the new industrial policy
which aims to make policy more target-orientated
It differs from the old Japanese-style industrial policy
which set targets that had already been tested in more advanced economies at that time
This is in a sense similar to the current Chinese economic policies
although some of them are already more advanced than Japanese counterparts at this moment
Japan switched from the old industrial policy to structural reform and is now thinking of adopting a new style of industrial policy
which aims at targets that are untested and unknown
When a country is trying to catch up to more advanced economies
it is not difficult to decide what sort of technologies it should adopt
Once an economy achieves the top technological level
it is very difficult to determine what technologies to focus on; at that point
the economy fall into a state of confusion
Falling into such a state of confusion is unfortunately nearly inevitable for any country that stands at the front line of technological development
Japan has been in a similar state of confusion
it is very important to seek a new approach to industrial policy
promoting the development of brand new technologies in the world; this is how the U.S
managed to get out of its technological stagnation
by developing new technologies that now lead the world’s industries
I believe that it is a very good time for METI to create new industrial policy seeking the development of new technologies in this drastically changing world
METI identified three stages of industrial policy since the 1950s
METI states that the goal of the first stage industrial policy was to develop specific industries
and the underlying economic theory was to deal with market failure or infant industry protection
The innovation policy was more focused on application and catching up to the developed countries’ models and manufacturing in the past
and the promotion of manufacturing was a very important part
And during the second-stage structural reform period
Japan wanted to reform the market infrastructure
METI wanted to make a market-oriented economic policy and to deal with the government failings
with an innovation policy focused on attaining more basic scientific knowledge
Japan shifted away from manufacturing during the second stage
and I have thought that this was the correct approach
Japan has weakened its technological edge for this period
I believe that this has prompted METI’s current initiative
METI now wants to lead moonshot-type innovations
It wants to digitalize the industry as a whole and create or maintain new supply chains for the new digitalized economy
This new industrial policy is very similar to what Professor Richard Baldwin has emphasized during his past presentations at RIETI
discussing uncertainties of market creation
I agree with Professor Baldwin for the importance of pushing these issues
there is a huge difference between where Japan is and where Europe and the U.S
The idea of this new industrial policy remains a broad concept in Japan
but its success is not guaranteed if Japan simply follows the U.S
or European models from the past or present
The current targets being emphasized by the Japanese government are green technology
Japan wants to bring Taiwan Semiconductor Manufacturing Company (TSMC) to Japan and further their technology to develop logic chip production capabilities
I believe that it is important to set up a grand design and philosophy that supports these initiatives
Kennedy’s moonshot encompassed not just scientific knowledge but also commercial policy and targets
market-oriented goal-setting was pursued during that period
It is also clear from the development of the Internet and computer technology that a clearly-defined
market-oriented vision of the unfolding of these networks was evident from the beginning stages of the development of these technologies
Before launching the new industrial policy
we need to develop this type of clear vision on how the policy will use technology and what should be developed to enable such a vision of the future
Society has seen great changes in technologies
such as with the adoption of personal computers
The recent commercialization of space travel came as a real surprise to me
which are prerequisites for such developments
high-quality markets that laid the foundation for personal computers
This is in part due to the fact that what Japan is trying to develop is totally unknown
and it's unlike past transformations in industry
To develop such unknown technologies requires good markets
A market connects technologies to people’s lives
A market is a kind of dual-directional pipe where products go from technologies and resources to everyday life
Information or people's needs are connected through this pipe to technological development
Market quality can be seen as the quality of said pipe and the transfer of information through the pipe
given available technologies and consumer preferences
you can create a good loop between the production side and the consumption side of the economy
I believe that Japan does not have a good pipe connecting these two factors
I think that the target of such a policy should be something that is difficult to achieve
It will take about 30 years from when the ideas for the technology are being developed until actual commercial use of such technologies
Space rockets for example took about 60 or 70 years to reach commercialization
To make commercial use of those advanced technologies
it is important to develop high-quality markets
To make new technologies compatible to the market
I think that innovation must be needs-driven
Income distribution is particularly difficult to pinpoint as many and various opinions exist on the subject
a good market is essential to achieving such targets
Japanese industrial policy is still a borrowed concept from Europe and the U.S
European economies went through reforms successfully in the 1980s and 1990s
They created very strong infrastructure which seeded new technologies that allowed them to become commercial leaders three decades later
I would like to begin by differentiating between macro goals and micro goals
The idea of inequality leading to stimulation of demand
which leads to stimulation and growth could be a macro goal
on the micro side of new industrial policy
and childcare all seem to be very clear in that they may boost productive capacity of an economy
there is value for the country in having an educated society which is greater than the value for the individual
Housing is another area where policy can have an impact
because housing stock moves more slowly than demand for housing
childcare is another area where policy can be effectual because if the capacity for childcare were larger
more women would utilize it and plan for that possibility
distinctions between the new economic policy and the former ones
I agree that the old industrial policy was
based on the need to ‘catch up,’ so to speak
and it was easier to visualize that Japan needed industry development in steel
were moving toward price-oriented policies and limited government
it became evident that catch-up growth and steady growth are not the same
eventually reducing the attractiveness of that policy option
areas where there are targets that industry cannot cope with by themselves would be key
Another factor that affects the situation is the rise of China
Its industrialization progressed at a rapid rate in the span of about two decades
it imported from industrial intermediaries such as Japan
its trade-GDP ratio began declining as it imported less
It began substituting domestic production from its domestic industrial base in place of previously imported high-tech intermediates
Those previous exports to China are now fading
and it will not revert course because China’s trade-GDP ratio is converging to that of a large economy
The implication of this is that the policy that worked for the last 20 years will no longer be effectual
there are U.S.-China geostrategic tensions leading to industrial disruptions which have been driven by political factors
One example of this is the disruption in semiconductors
and China will dictate how aggressive these tensions will become
neither major political party is interested in a cooperative approach with China
President Xi is focusing on internal markets and developing their industrial base
These changes have fundamentally ended the status quo that has existed for the last 20 years
It is clear that there is a need to assess these trends; especially keeping an eye on what demand patterns for exports will evolve into in the face of diminishing demand from China
Companies surely have talented people working on what those targets should be
but it may require reorientation of production or concentration that would be better directed at the government policy level
so relevant targets necessarily incorporate this perspective
Policy targets must address areas where collective action is more effective than individual action in reorienting the economy as a whole
There will be a few decades in which to rescue ourselves from the damage that has been done and continues to be created
Actions for the mitigation of emissions and adaption to changes that are already happening will have serious implications for demand for manufacturing goods worldwide
This is a point that has already been made by many commentators
It is a very large transformation that many companies are undertaking
there are bottlenecks or coordination failures or externalities that can impact such transformation
One example of such a bottleneck is the adoption of electric vehicles
While policy makers can help prompt demand
companies like Tesla have solved the issue of adoption of electric vehicle technology by organizing the whole supply chain
electronic vehicles are relatively simple technology even compared to diesel or gasoline cars
Even for gasoline vehicles a moonshot was not necessary
carbon capture and other mitigating technologies require a more systematic push for development
If such climate mitigating technologies do come to fruition it seems that only a small number of companies and countries will develop the technology
but it will need to be deployed everywhere in the world
This is a massive reorientation of demand for high-tech manufacturing
which is where the G7 countries are still global leaders
such technologies will have demand for decades into this century
Other areas of change will be adaption to extreme weather
Precision irrigation and industrial agricultural equipment for planting that requires less water
and less pesticides are other examples of super-high technology that will be in demand around the world during this period of rapid climate change
incentives for industry such as in agriculture may be required in Japan
Another area of adaptation of markets will be in water treatment and water production
Fresh water is already a critical issue for many regions
water recycling and rain capture are examples of high-tech or medium-tech engineering and scientific solutions—the demand for which will also increase with climate change
It is clear that there is room for a micro-level industrial policy that might help avoid coordination problems and overcome certain externalities
Determining appropriate targets for the new industrial policy is particularly difficult because industrial policy tends to be captured by industry
Industry has more knowledge about the technology in question than the government will ever be able to inform themselves about in a policy-relevant timeframe
but it may have differing incentives compared to other stakeholders
and so targets should be general but clear
targets that address adapting to climate change and the changing manufacturing patterns in China are high-level enough that they should find significant public support and be implementable
the rapid deterioration of the U.S.-China relationship and trade disruptive policies do justify industrial policies that safeguard key components
The idea of certain sectors that are critical to many surrounding sectors is something that policy should embrace again
The first criterion for this determination is the question of how complementary these inputs are to other industrial inputs
forming trade communities for better coordination
and these sectors became linchpins for other sectors
and this has been made clear during recent supply chain disruptions
it was not common knowledge that the automotive industry would be so heavily impacted by supply chain disruption in semiconductors
The inability to substitute such an input is another key criterion in determining an appropriate target
is also related to how difficult or time-consuming it may be to establish a similar infrastructure if the supply is lost
Taiwan has facilities at an advanced technical level that others may find challenging to replicate
leading some to characterize the current shift as a mistake
the degree to which they are necessary seems to outweigh any such criticism
The importance of securing domestic supply is now clear
Another industry that may face overcorrection
is the production of medical equipment and vaccine production
This may lead to waste but likewise it may be important to secure domestic infrastructures and supply
You mentioned that industrial experts are more knowledgeable than the government in technology
you also mentioned the large role that government could have in an industry such as the semiconductors
there is a part of the production in industry that is very cyclical where a new product
but it becomes cheaper as production techniques are improved
This is an undersupply and oversupply situation
We are seeing a situation like this currently where the private industry is reluctant to invest due to this cyclical supply-demand structure
so government policy could be a kind of insurance to keep production going even when it may not be so profitable
Other industries such as education and healthcare also involve a government element because some parts of these industries are not profitable enough for private industry to maintain interest
such a target industry would have a lack of substitutable inputs
These elements would make it difficult for the industry to cover all costs
It is in situations like this that I think that if there are very clear reasons for public investment
there could be public and private return from such investment
Airbus could not enter the market as a private company because Boeing and McDonnell Douglas were already producing jets: a private company could not justify the risks involved in such a massive investment
I think that this public-private wedge that was used for Airbus can similarly be a justification for investment in semiconductors
Intel is completely private however the Taiwan authority is involved in TSMC and this involvement has led to a different form of industry
TSMC has accumulated technologies and development over time which are more diverse than other players
What is it particularly about semiconductors that means that the private sector cannot catch up by themselves
Here we are talking about getting a new production site or a new company producing the good
this may require continued support but in other cases it may not
Airbus is now a profitable company and does not require support
but it grew during the personal computer boom and was entangled with the growth of the Windows operating system
There are many products that were designed around—and in cooperation with—these chips
so the technology is self-sustaining at this point
It seems the Korean and Taiwanese semiconductor industries were influenced by government policy at one point but perhaps do not need it now
Japan is interested in manufacturing chips that do not currently exist
massive support from the government will be needed over many years
There is more of a need to establish the industry domestically
which has made trade between these states no longer free or guaranteed
I understand and agree with your suggestion that permanent subsidization should only be used in extraordinary cases
fire brigades are all examples of areas that require permanent subsidies because of the gap between public and private
there should be termination clauses if subsidization of an industry is going to work
that are based upon the evaluation of costs and benefits for society
it is also important to distinguish between startup help and permanent help
where massive government support was given to a semiconductor company to establish a cutting-edge manufacturing base
but eventually only a warehouse was built in Wisconsin
So private companies must also be forced to uphold agreements that they make
You mentioned that coordination in some cases may justify government industrial policy intervention regarding the rise of China and climate change issues
You also mentioned the need for the coordination among the like-minded countries
Could you explain what you mean by increased coordination that may be necessary
due to the changes in demand resulting from China’s new trade balance
The argument is for requiring least amount of government intervention
advanced cranes and construction equipment etc
when China was in its fast industrialization phase
The demand for all this equipment coming in was large enough to distort the world market
China has their own construction equipment produced locally
so the demand for high-tech capital goods and high-tech intermediate inputs is moving
Maybe industry can adapt fast enough to this change
but there is a real possibility that this change is large and systemic
there may be a need for coordination among G7 manufacturers to realize that the Chinese market is not coming back and is orienting itself towards other areas
It may well be that the private sector has sufficient incentives to do that
the manufacturing of this equipment takes many companies—and perhaps the government could help in coordination of the supply chain between nations
the changing patterns for sophisticated and manufactured goods are nowhere near as strong as the shifting patterns for semiconductors
Regarding the considerations on nuclear energy
France and the European Union announced that nuclear is one way of coping with global warming and that nuclear will remain in the picture
Angela Merkel decided to phase out all nuclear energy after the Great East Japan Earthquake and tsunami
I understand the concern for nuclear waste in the long term
there does not seem to be enough time to change to other sustainable technology
Nuclear energy is very low carbon and although it brings other problems and vulnerabilities
there may not be enough time before 2030 or 2050 to control carbon emissions without it
It may be the lesser of two evils right now
is a different case because it is geologically active
so the seismic activity might make it less attractive as an option
has been using nuclear power for a long time which has helped them adjust to climate goals
we should use all of the tools that we have
Nuclear (energy) is a tool which has a long-run costs but short-run benefits
Some say that China is no longer a viable trading partner for the U.S.
I think that China’s trading pattern is changing to that of a normal
mega-economy but that this change is not widely understood to be part of a permanent transition
The new equilibrium that we have arrived at will remain
The problem is the interface between China's type of capitalism and others
have come to terms with certain ways of interfacing with each other
Europe has a different capitalist system than the U.S
faced a great deal of conflict during the late 1980s and early 1990s until an interface was worked out
We must now find an appropriate interface for China
I am optimistic that we will find an interface that works because there is so much money to be made in finding it; it could be so disruptive
China produces intermediate inputs that are used widely in manufactured goods
and these are pervasive throughout the world’s value chains
to a degree that most people still do not comprehend
it will be very expensive and difficult to separate Chinese manufacturing especially for intermediate inputs
and there will be an imperative to find a way to cooperate
One example of such cooperation is the U.S
China is undergoing permanent change led by one administration
a manufacturing powerhouse exporting and making industrial parts themselves
U.S.-China tensions make reliance on China risky
and this type of risk is difficult to plan for
due to the escalations that are possible in such a situation
An example of this risky nature is the reactions during the Trump administration leading to heightened tensions
While the U.S.-Japan relationship had tensions during the 1980s
one factor that is different with China is the size of its economy
It is entangling political and economic powers at the same time
China’s population is far larger than the U.S.
It is never possible to separate economics from politics at that level
China has been successful at industrializing and has driven some U.S
industry as a whole is not suffering in terms of production or exports
The domestic market effects are leading to popular backlash against China
There are also political exploitations of the tensions to get votes
it may not be possible to separate these elements
Solving the issue of the integration of China into the world system is a difficult problem that I cannot address
we should deal with elements such as forced technological transfers
These elements are leading to changes in competitiveness at a product and firm level which are viewed as unfair
in commercial aircraft there was an agreement between the U.S
and Europe about how much financing could be given
This resulted in a series of industrial sector-level agreements and subsidy practices
there is a set of practical things that can be done on a commercial level that can solve some problems
It may be difficult to say if this will solve the larger problems
but they are not really for economist to solve
These issues are bilateral or plurilateral issues and not within the purview of the WTO
my suggestion would be for METI and other economists to focus on allegations of unfair trade and commercial tensions
These kinds of discussions occur regularly between Europe
but the way those subsidies and policies work in China is different
The old tools like countervailing duties may not be sufficient
so that is where we should focus the dealings
Richard touched upon a very important point by focusing on the need of interface with the state capitalism
we need to address economic security concerns and take a coordinated approach among the like-minded countries
but at the same time our economies are so interdependent that we cannot decouple the global economy
we have to bridge the different types of capitalisms and create an interface with their state capitalism
We have some tools in our toolbox already such as rules on industrial subsidies
we can upgrade and strengthen the free trading system and rule-based global and regional economic order
That is the very important point we should not lose sight of and that is where Japan and other middle-power countries caught in the middle of the superpower competition should play a role
For DOAN Thi Thanh Ha's full bio,<a href="https://cepr.org/about/people/thi-thanh-ha-doan" target="_blank">https://cepr.org/about/people/thi-thanh-ha-doan</a>
The Covid-19 pandemic and recent Russia-Ukraine war disrupted global supply chains and led to significant delivery delays
Firms exposed to such risks have been forced to rethink their production and inventory management from just-in-time to just-in-case
this column shows that relative to firms that purchase inputs only domestically
importers significantly and persistently increased their inventories of intermediate inputs
This suggests the possibility of a shift from just-in-time to just-in-case production after the pandemic
Inventory plays an important role in international trade
importers face severe inventory management problems
It is reported that importing firms have approximately twice the inventory of firms that purchase materials only domestically (e.g
Supply chain disruptions during the pandemic have garnered attention from researchers and policymakers regarding the role of inventory as a buffer against input shortages
The previous study shows that among French firms exposed to the Chinese lockdown
those holding more inventories ex-ante performed better in the aftermath of the shock (Lafrogne-Joussier et al
(2023) examine the aggregate effects of supply-chain disruptions in the post-pandemic period and show that firms optimally hold inventories that depend on the source of supply
little is known about global sourcing and inventory adjustments to supply chain shocks at the firm level
Figure 1 shows the quarterly movements in Japan’s manufacturing production and inventory ratio indices (seasonally adjusted) from Q1 2015 to Q2 2022
Manufacturing production was disrupted during Q1-Q2 2020 after the Japanese government took its first emergency measures in April-May in major economic regions
and their magnitudes were much larger than the decline in production
The inventory ratio declined quickly after Q2 2020 but it increased again after early 2021
It is worth noting that the inventory ratio remains persistently high even though production recovered by 2021
probably because of the Shanghai lockdown and the Russia-Ukraine war
in a recent paper (Zhang and Doan 2023) we explore a large-scale quarterly government survey of Japanese manufacturing firms over the period Q1 2015–Q2 2021 and examine firm-level inventory adjustments to supply chain shocks during the pandemic
focusing on firms that source inputs globally
Our data contain detailed quarterly information on each firm’s inventory of materials and supplies
Japanese firms are famous for their well-organised just-in-time production systems and international production networks
they provide an ideal setting for studying firm-level responses (i.e
inventory adjustments) to supply chain shocks
relative to firms that purchase inputs only domestically
importing firms tend to have higher inventory ratios (inventories over sales) and stocks in materials and supplies
While this relationship has been documented by Alessandria et al
we show that it is also present for Japanese manufacturing firms
importers significantly and persistently increased their total inventories (Figure 2) and inventories in materials and supplies
it is worth noting that there are substantial heterogeneities across all three types of inventories within each industry
with prevailing just-in-time production and inventory management
work-in-process inventories (intermediate goods) exhibited a sharp increase during the pandemic
suggesting the importance of parts and components in this industry
These results suggest the possibility of a shift from just-in-time to just-in-case production during the pandemic
We show that importers significantly and persistently increased their inventories
especially for firms with ex-ante higher import share and (multinational) firms that experienced supply chain disruptions in China
Figure 4 shows the relationship between ex-ante import share (defined as the average share of imported inputs in total sourcing from 2015 to 2019) and inventory ratio for the pre-Covid and post-Covid samples
There is a strong positive correlation between ex-ante import share and inventory ratio in both pre-Covid and post-Covid periods
Firms tended to increase their inventory holdings after the pandemic
especially those that relied heavily on imported inputs
Figure 5 shows the relationship between supply chain disruptions and ex-post inventory holdings
The horizontal axis represents the year-on-year changes in foreign affiliates’ exports to Japan in Q1 2020
and the vertical axis represents parent firms’ inventories after Q2 2020
The red triangles and fitted lines show that the lower the growth of exports to Japan by manufacturing affiliates in China in Q1 2020
the larger the inventories held by parent firms after Q2 2020
Japanese multinationals that experienced a sharp drop in sourcing inputs from China tended to increase their inventories after supply chain shocks
the blue dots and fitted line show the opposite pattern: the higher the growth of exports to Japan by manufacturing affiliates in other countries in Q1 2020
the larger the inventories held by their parent firms after Q2 2020
These results suggest that supply chain disruptions during the early stages of the Covid-19 pandemic had a large and persistent effect on importer inventory management
We further consider the potential factors affecting inventories
including the industry upstreamness in the production network
the prefecture-level severity of the Covid-19 infections
and firm-level uncertainties over economic and business outlooks
results show that importers always tend to hold more inventories relative to importers after the pandemic
Our study is expected to provide policy implications for the debate on the robustness and resilience of supply chains by providing evidence of firm-level adjustments to supply chain shocks and the relationship between global sourcing and inventory holdings
Relative to firms that exclusively purchase inputs domestically
importing firms tend to hold larger inventories
importers reacted to potential input shortages by increasing their inventories of materials and suppliers
This is more prominent for firms with higher ex-ante import share and multinational firms that experienced supply chain disruptions in China
These results suggest the possibility of a shift from just-in-time to just-in-case production after the pandemic
we cannot observe whether a firm adopts just-in-time or just-in-case inventory
firms that rely heavily on imported inputs
and firms that experience supply chain disruptions do increase their inventories of intermediate inputs after the pandemic despite large carrying costs
Inventories can act as buffers against supply chain disruptions and input shortages during pandemics and other supply chain shocks
increasing inventory is accompanied by increasing costs
which are crucial for firms with financial constraints
policies that relax financial constraints are required
especially for firms relying on international supply chains and imported inputs
policies in the post-pandemic era should support business efforts to build robust and resilient supply chains
It is also worth noting that because our sample period is until Q2 2021
it is premature to conclude that manufacturing firms have completely shifted from just-in-time to just-in-case production
It is necessary to monitor firm-level inventory adjustments and the macroeconomic inventory cycle
Authors’ note: The main research on which this column is based (Zhang and Doan 2023) first appeared as a Discussion Paper of the Research Institute of Economy
This article first appeared on <a href="https://cepr.org/voxeu" target="_blank">VoxEU</a> on September 1
dollar is the most dominant international currency in many aspects of international finance
It has the largest market share in international trade settlement and invoicing
the world's central banks hold more than 60% of their foreign exchange reserves in U.S
35-38% of global GDP uses the dollar as an anchor currency
no credible currency has emerged as a competitor to the U.S
The dollar's dominance in the international monetary system has created a world in which shocks to the dollar's issuer
monetary policy decisions and other economic and financial news as if it were its own policy and economic data
measuring the size of a currency's dominance zone is a rather tedious task
The dominant method of estimation is the subject of academic controversy
A recent paper by Ito and Kawai (2024) developed a new method for estimating the size of major currency areas: the U.S
This paper employs a simple econometric approach
first popularized by Frankel-Wei (1994) and further developed by Kawai-Pontines (2016)
to estimate the size of major currency areas
the depreciation rate of a country's currency X against a numerical currency (e.g.
the New Zealand dollar) is regressed on the depreciation rates of the five major currencies
This estimation yields estimated coefficients for each of the major currencies
By running this estimation in a rolling window
the time-variant share of each major currency is obtained
the estimated coefficient of the exchange rate against the dollar is 1 and the estimated coefficients for the other major currencies are zeros
the estimated coefficients are found to be (USD
if some of the major currencies are correlated with each other
the estimated weights are not statistically accurate
The Chinese yuan was explicitly or implicitly pegged until recently
many researchers use the estimated coefficients as weights for major currencies in a currency basket
but the statistical significance of the estimated results is usually not factored in
there is a risk that the size of the currency zone is overestimated
it has been argued that the size of the yuan zone has expanded in recent years
there do not appear to be any papers that discuss whether the estimation coefficients needed to estimate the size of that currency zone are statistically significant
the size of the RMB (or other) zone is likely overestimated
the RMB zone could be much smaller than many have been estimated
Ito and Kawai (2024) carefully address these two issues
For the issue of potentially high correlations among major currencies
they implement the Kawai and Pontines (2016) method to reduce bias arising from potentially high correlations among major currencies
defined by the Root Mean Squared Error (RMSE) of the estimation model
A higher level of the RMSE means a lower level of goodness of fit
a lower level of ERS (a more flexible exchange rate regime)
The estimated currency weights are multiplied with ERS so that the weights would be higher if the level of ERS is higher (i.e.
leaning toward more exchange rate stability)
whereas a higher RMSE means lower ERS (i.e.
overestimating the size of a particular major currency zone
the Ito and Kawai (2024) approach identifies both to what extent a country belongs to each of the major currency zones
and how statistically significantly that is
this approach can avoid overestimating the size of currency zones
and inevitably shows more flexible exchange rate regimes
By more delicately specifying the exchange rate regime
not only in terms of which major currency the home currency is stabilized to
but also in terms of how "tight" (or "loose") it should be considered statistically
this approach can present a picture that is more consistent with the current state of the international monetary system
Figure 1 provides snapshots on the evolution of exchange rate regimes over the past 50 years by focusing on anchor currencies and the degrees of exchange rate stability (or flexibility) for individual economies
Each economy in the world map is colored based on the anchor currency with the statistically significant
highest-estimated weight among the major currencies
and Thailand) are colored in dark blue because the estimated U.S
dollar weight is the highest and the level of the RMSE is small (or the ERS index is large)
each color is tinted in accordance with the level of the RMSE
which is categorized into three ranges of goodness of fit
An economy with a small RMSE (or a high degree of ERS) is represented in a dark color
while an economy with a large RMSE (or a low degree of ERS) is shown in a light color
Painting each economy with a different color density increases the nuance of the analysis
Many researchers who have implemented the Frankel-Wei or Kawai-Pontines method have failed to incorporate the degree of the goodness of fit into the information
their approaches do not clarify whether the regression results have sufficiently high explanatory power or not
Figure 1 contains several interesting points
the USD has been the most dominant anchor currency in the last five decades
In the aftermath of the collapse of the Bretton Woods system in 1973
major advanced economies have shifted to flexible exchange rate regimes
except for some that pegged their exchange rates to former colonial powers’ currencies
decided to continue to stabilize their exchange rates against the USD
many of the former Soviet Union republics began to adopt the USD as their anchor currency
the EUR (or DEM before 1999) solidified its hold in Western Europe and spread eastward in the 1990s and 2000s
Economies in western and central Africa which had pegged their currencies to the French franc began to choose the EUR as their exchange rate anchor
one does not observe the dominant presence of the EUR
Its sphere of influence is not comparable to that of the USD
the number of economies that have used the UK pound and/or the Japanese yen as anchor currency have been limited in the last five decades
the number of economies that stabilized their exchange rates against mainly the UK pound had diminished
Ireland and Sierra Leone appeared to assign the highest weight to the UK pound among major currencies
The Japanese yen also lacks its own sphere of influence
In 1985 when the Japanese economy was in its heyday
Singapore and Sweden) stabilized their currencies at least partially against the Japanese yen
the anchor currency role of the yen has declined
about 20 economies and 7 economies respectively used the yen as a partial anchor
China is treated as a major currency country from 1999
the maps show only a few economies that belong to the RMB zone
many researchers have identified several economies as belonging to the RMB zone
most of such economies loosely stabilize their exchange rates against the RMB as indicated by the weak explanatory power of the estimation
and Uruguay) are identified as assigning the highest weights to the RMB as anchor currency among the major currencies
so that their currencies are judged to be not closely tied to the RMB
If the goodness of fit were not considered
highly flexible exchange rate economies such as Brazil and Russia might be categorized as RMB-zone economies
Ito and Kawai (2024) also investigate what factors contribute to or prevent countries from belonging to each of the five currency zones
The first hypothesis is that the weight of the currency basket is influenced not only by the structural characteristics of the economy
and financial ties to the major reserve currency countries and regions (i.e.
The second hypothesis is that the weights of the major currencies in a currency basket are determined by the shares of the major currencies in terms of other financial transactions
The USD weight is influenced by the USD involvement in other types of financial assets
and financial ties to the major reserve currency countries and regions
Empirical analysis yields several interesting results
the USD weight is positively affected by the share of trade with the United States and the U.S
dollar shares in export invoicing and cross-border bank liabilities
the EUR weight is positively affected by economies’ shares of trade with the Euro Area as well as the euro shares in export invoicing
The RMB weight is not greatly affected by shares of trade with
or inward FDI stock or borrowing from China
there are few statistically significant determinants of RMB weights
These results provide evidence for the existence of network externalities
even if the country in question does not have close economic and financial ties with the United States
and because of these externalities and network effects
dollar will continue to play a dominant role in the international monetary system
Recent years have seen interest grow once again in industrial policy
specifically micro-interventionist industrial policy
A search of the Nikkei Keizai Shimbun database produces a greater number of hits for the keywords "industrial policy" and "policy &amp; system" for the period beginning 2016
showing a particularly high increase since 2018 (see graph)
In international academic circles of economics also
there has been a notable increase in interest in industrial policy
the European scholarly publication Journal of Industry
compiled a special issue on industrial policy that was guest edited by Professor Karl Aiginger of the Vienna University of Economics and Business and Professor Dani Rodrik of the Harvard University
Both pointed out in their editorial notes "Rebirth of Industrial Policy and an Agenda for the Twenty-First Century" that "After a period of decline in interest and premature predictions of demise
This academic interest in industrial policy has also extended to the United States
The American Economic Association's Summer 2019 issue of the Journal of Economic Perspectives included an article by Nicholas Bloom
Professor of Economics at Stanford University
and two other authors entitled "A Toolkit of Policies to Promote Innovation." Predicated on a survey of relevant empirical studies
they evaluated evidence for the effectiveness
as well as other outcomes related to a total of nine policy tools that included R&amp;D grants
and patent boxes (preferential tax systems on revenues generated from patents)
This same trend has also manifested in the topics of articles published in the so-called "top five journals," which are regarded as the most authoritative journals in the field of economics
An "industrial policy" keyword search found only one article in the American Economic Review (AER) for the period between 2000 and 2009
but generated six AER hits and a total of eight articles overall for the period between 2010 and 2019
The article by Professor Aiginger and his co-author points out that this increased interest in industrial policy is due to a growing demand in the developing world for changes in industrial structure
long-term labor market malaise and financial crisis in advanced economies
Moreover they cite the presence of China looming behind all these trends
China has not sought to merely expand its economy
as implied in its strategic plan "Made in China 2025" issued in 2015
the nation has employed industrial policy targeting advanced technology sectors in its aim to be the world leader even in terms of state-of-the-art technological development
the Trump administration has been so concerned with China's industrial policy
The above graph also shows the number of hits when the keyword "China" has been added
Such a correlation may imply that the recent increase in articles on industrial policy is related to China
the reality of the current situation is not the only factor behind the high interest in industrial policy in economics
The development of methods for conducting empirical research founded upon econometrics has been a key in enabling scholars to rigorously and quantitatively identify and evaluate the effectiveness of industrial policies
It is this point that I would like to explain in more detail using examples from specific articles
In a 2014 Quarterly Journal of Economics (QJE) article by Patrick M
both of the Department of Economics at the University of California Berkeley
the authors evaluated development policies for the Tennessee River Valley in the United States over the period of the 1930s to 1950s
The Tennessee Valley Authority (TVA) was a core part of President Franklin Delano Roosevelt's New Deal
It is also a typical example of a place-based industrial policy similar to Japan's new industrial city construction and regional revitalization policies
the TVA's effectiveness had never been rigorously evaluated before the research by Kline and Moretti
The professors' paper utilized an empirical research method known as a "natural experiment" to evaluate the policy's effectiveness
The original reason why the Tennessee River Valley was chosen as the object of development policy was its severe underdevelopment and other unique attributes
which made it particularly suitable as a target of development policy
Due to its unique characteristics there was difficulty in isolating policy effects in terms of economic changes in the region before and after policy implementation compared to other regions not targeted under development policies
The authors therefore performed an econometric analysis for comparison using six other regions for which development policies similar to the TVA were proposed but not implemented due to political reasons as controls
Their findings showed that the growth rate of manufacturing employment was relatively larger in the Tennessee River Valley not only during the period when public investment was provided
but also after the investment ended; whereas the growth rate of agricultural employment
despite being high while public investment was the greatest
fell below other regions after public funding was terminated
These effects show that regional development policies where public investment is intensively furnished to a specific region are able to produce sustainable positive effects in industrial growth through the effect of agglomeration
Assistant Professor at the NYU Stern School of Business
employed a method known as a regression discontinuity design (RDD) to evaluate the effects of R&amp;D grants
Department of Energy (DOE) research and development grant program
During the selection process for companies to whom grants would be provided
the DOE ranked companies based upon their applications
Although there is continuity in the rankings
discontinuity occurs where companies above the threshold for a particular award receive grants and those below do not
A regression discontinuity design examines whether there is any discontinuity in the number of future patents or other innovation outcomes before and after the award is granted
The results of the analysis found that the award significantly increased subsequent cite-weighted patents as well as the chances of receiving venture capital funding for the recipient companies
The natural experiment and regression discontinuity design which were employed in these two articles have been widely utilized in recent years in the field of economics as empirical analysis methods to identify causal relationships
These methods have provided a solid empirical basis for evaluating industrial policy effectiveness
which was the major factor determining the creation of the TVA
accelerating innovation is a crucial challenge facing the Japanese economy
which has grown at a very slow pace for over 30 years
Industrial policies may be a powerful tool in resolving this issue
The important thing is that recent research has not only provided insight into the effectiveness of industrial policy
but also effective methods for implementing such policies
Assistant Professor Howell's article demonstrated that R&amp;D grants are more effective when allocated to younger companies and to companies in new industries
Harvard University Professor Philippe Aghion and his co-authors used a dataset of enterprises in China to verify the type of cases where industrial policy was most effective in raising productivity
Their results showed that industrial policies can foster productivity growth to a larger extent in cases where they are designed to promote competition among companies
such as cases where benefits are allocated to many companies within one sector or to younger and more productive enterprises
it is important not only to conduct interim and retrospective evaluations of effectiveness
but also to design effective policy implementation schemes or frameworks in advance that are based on relevant insights
<a href="/jp/papers/contribution/okazaki/08.html">&gt;&gt; Original text in Japanese</a>
Komiya was the first director general of the Research Institute of International Trade and Industry (MITI/RI)
and served as its leader for 10 years until 1997
MITI/RI was the predecessor to the Research Institute of Economy
Komiya laid the “foundation of the foundation” of RIETI’s current research system
Komiya recollected that it was like “a bolt from the blue” when he was asked to become the director of MITI/RI
as he was known for his critical stance on the policies of MITI during several phases of the period of rapid economic growth
The fact that MITI invited a first-class economist with critical views toward MITI to serve as director general of MITI/RI is a testament to the insight and open-mindedness of MITI at that time
Komiya established a procedure whereby research results are published as discussion papers
which are then peer-reviewed by external experts
and a system whereby university-based economists are invited to participate in research activities as visiting research fellows
The current RIETI has maintained these systems
when it was not possible to easily download journal articles from the internet
the researchers also benefited from being able to browse through the past English-language economic journals owned by Dr
I became a senior researcher at the institute
Komiya as my “boss.” When I was a university student
I studied using textbooks on microeconomics and international economics that he had co-authored
but that was the first time I had met him in person
I was nervous at first because he was a well-known economist who wrote controversial articles on economic policy
but his warm personality soon made me comfortable and we often had lunch or dinner together
he believed it was important to visit the actual sites of economic importance around Japan
and he was a careful reader of the “Survey of Production Areas,” a document published by MITI
I had the opportunity to accompany him on a tour of a local factory
and he was a man of wide-ranging curiosity
most of the full-time researchers at MITI/RI were assigned researchers from MITI or private firms and organizations
For the researchers who lacked an academic research background
Komiya provided cordial and detailed instructions on how to write papers based on his teaching experience
I strongly remember that he emphasized (1) the need to have a clear hypothesis when writing a paper
and (2) the need to have a proper list of references formatted and organized correctly
He did not highly value any research that only consisted of analysis of data that presented observed facts without hypotheses
This form of research is called “anatomical” research
he highly valued research that led to conclusions that differed from the accepted wisdom
I have been more involved in guiding and reviewing thesis writing
Japan’s trade surplus was strongly criticized by the U.S.
Komiya argued that it was wrong to regard a trade surplus as a problem
based on the idea of a savings/investment balance (Komiya
1995 saw the rapid appreciation of the yen
and interest in the policy field was growing
I had the opportunity to co-author a paper titled “How Exchange Rates are Determined?” Later
it was included as a chapter in An Economic Analysis of Japanese Industry and Trade (Komiya
which is a compilation of papers written by Dr
Komiya’s theories and became valuable on-the-job training for me
but one point is that the real exchange rate reflects the terms of trade in the long run
which is also important when considering the recent depreciation of the yen in Japan’s economy
Japan’s industrial policy attracted worldwide attention
and research by economists became more active around 1980
This was a time when the Japanese economy was doing well before entering a prolonged period of stagnation
and when research on the theoretical basis for industrial policy
such as new industrial organization theory
have written as much about industrial policy as Dr
in the introduction to Industrial Policy of Japan (Komiya
the first comprehensive book on industrial policy in Japan
he describes “what industrial policy is,” “theoretical foundations of industrial policy,” “excessive competition,” and “decision-making process of industrial policy.” In An Economic Analysis of Japanese Industry and Trade (Komiya
“Japan’s industrial policy in the 1980s” and “Japan’s industrial adjustment assistance” are directly related to industrial policy
Komiya defines industrial policy as “those aspects of government economic policy in which policymakers use various means to influence the allocation of resources among industries
whether to address so-called ‘market failures’ or for other purposes
restrain or promote certain types of economic activity in the private sector” (Komiya
The basic argument is that Japan’s postwar economic development was achieved mainly through the creativity and vitality of private companies
and that the role of industrial policy was marginal
the report does not deny that industrial policy has a role to play
as it lists various policies such as the protection of infant industries
information effects of policy taxation and finance
and environmental protection as industrial policies that correct for market failures
By organizing industrial policy using common and well-understood economic concepts as a “common language,” the dialogue between researchers and practitioners was established
and it led to RIETI’s current principle of building bridges between academic research and policy practice
he stated that it is difficult to evaluate the effects of specific industrial policies on industry and the economy
and that he would not attempt to undertake these evaluations
This would have been a natural decision at a time when methodologies for elucidating the causal effects of policies were in their early stages and high-quality empirical research on industrial policies was limited
Komiya where the problems of the current Japanese and global economies lie and how he would evaluate recent economic policies
but unfortunately that is no longer possible
With technological advances in econometric analysis and greater availability of data than at the time
the scope for research that can be useful in evidence-based policy formation has expanded
There is a growing understanding of the importance of such research among policy practitioners
Komiya’s kindness by conducting objective and neutral research and making good policy recommendations
As a result of an interest rate hike implemented by the Federal Reserve Board (FRB) in March 2022
amid the yen’s downtrend which began in 2020
the interest rate differential between Japan and the United States widened
resulting in the yen’s further depreciation
the difference in the monetary policy direction between Japan and the United States has been pointed out as a factor behind the yen’s depreciation
this article analyzes how much of the yen’s depreciation is accounted for by the change in the Japan-U.S
it examines the yen’s depreciation under the lens of various indicators
A RIETI research project called “Exchange Rates and International Currency” calculated and published industry-specific real effective exchange rates regarding 25 countries
it calculated and published the value of the Asian Monetary Unit (AMU)
which represents the weighted average of the values of a basket of East Asian currencies
which show the degrees of overvaluation or undervaluation of those currencies
the article examines the yen’s depreciation -from an industry-by-industry perspective and also looks at the yen’s value relative to other East Asian currencies
Figure 1 shows the trends in the yen’s nominal and real effective exchange rates
which represent the Japanese currency’s value relative to foreign currencies in general
Unlike the nominal effective exchange rate
the real effective exchange rate takes into consideration the inflation rate trends in Japan and other countries
there is divergence between the trends in the two effective exchange rates
If the inflation rate in Japan is lower than the rates in other countries
the yen’s value as measured by the real effective exchange rate is lower than the value as measured by the nominal effective exchange rate
with the margin of difference corresponding to the difference in the inflation rate
In addition to the change in the nominal effective exchange rate
the relatively low level of the inflation rate in Japan compared with the rates in other countries is also a factor behind the downtrend in the yen’s real effective exchange rate
It has been pointed out that the yen’s depreciation against the dollar since March 2022 is attributable to the widening of the difference in the monetary policy between Japan
where the Bank of Japan has maintained its monetary easing policy
where the FRB has launched a round of interest rate-raising with a rate hike on March 16 (followed by hikes on May 5 and June 16)
Figure 2 shows that only a small part of the recent change in the exchange rate is attributable to the change in the Japan-U.S
most of the change in the exchange rate is attributable to the change in either the expected future exchange rate or the risk premium
the change in the expected future exchange rate is presumably attributable in large part to expectations of a future widening of the Japan-U.S
the change in the expected future exchange rate reflects expectations about the difference in future monetary policy direction between Japan and the United States
the change in the risk premium is attributable to factors such as an increase in exchange volatility risk and a decline in risk tolerance against the volatility risk
and a change in the ratio of the balance of yen-denominated bonds to the balance of dollar-denominated bonds
Given the absence of a significant difference between Japan and the United States in the uptrend in the size of fiscal deficit or in the balance of government bonds
it can hardly be presumed that the change in the exchange rate is attributable to a change in the risk premium
let us look at the yen’s depreciation in terms of industry-specific real effective exchange rates
The factors behind a decline in a real effective exchange rate include (i) a fall in the nominal effective exchange rate
and (iii) a rise in foreign inflation rates
If Japanese products face intense competition with foreign products
product prices have to be lowered by reducing profit margins
If price declines occur in addition to a fall in the nominal effective exchange rate
the yen’s real effective exchange rate drops further
If we look at industry-specific real effective exchange rates (Figure 3) under these premises
with the same rate of change in the nominal effective exchange across industries
we recognize the presence of industries with relatively high or low real effective exchange rates
In industries where there is a relatively strong tendency to lower prices by reducing profit margins due to intense competition
the yen’s real effective exchange rate tends to decline as a result of price falls
Table 1 shows changes in industry-specific real effective exchange rates as of June 30
compared with the beginning of 2020 and with the beginning of 2022
According to the comparison with the beginning of 2020
relative to the all-industry real effective exchange rate
the real effective exchange rates in the following sectors declined by a larger margin: food
the real effective exchange rates in the food and transportation machinery industries declined by a larger margin relative to the all-industry real effective exchange rate
in the case of the transportation machinery industry
it is presumed that in addition to a decline in the nominal effective exchange rate
price falls implemented through the reduction of profit margins had a relatively large impact on the decline in the real effective exchange rate
let us look at the yen’s value relative to other East Asian currencies in reference to the AMU and AMU Deviation Indicators
The AMU represents the weighted average of the exchange rates of a basket of East Asian currencies (the currencies of ASEAN+3 [Japan
China and South Korea]) against other major currencies (the U.S
The AMU Deviation Indicators measure changes in the relative values of the individual East Asian currencies in terms of changes in those currencies’ basket weights in the AMU since the base year (2000-2001)
Figure 4 shows the AMU’s exchange rates against the dollar
and the dollar-euro basket (the exchange rates weight-averaged by the shares of trade with the United States [65%] and the euro area [35%] in East Asia’s overall trade with the rest of the world)
Although the AMU’s value was on an uptrend around the time of the global financial crisis
it has been trending downward since the end of 2012
Figure 5 shows the trends in the AMU Deviation Indicators regarding the East Asian currencies
The trends have been asymmetrical among the East Asian currencies since 2008
the Chinese yuan and the Indonesian rupiah have been on an uptrend
while the yen and the South Korean won have stayed relatively stable
the ASEAN currencies other than the Indonesian rupiah have depreciated significantly since 2020
the yen has not necessarily depreciated relative to other East Asian currencies
In emerging countries into which capital tended to flow from the United States due to interest rate differentials when the FRB was implementing the zero-interest rate policy
capital outflows have occurred as a result of the FRB’s policy interest rate hikes
resulting in the significant depreciation of those countries’ currencies
The yen’s recent depreciation is attributable in large part to the change in the future expected exchange rate (expectations of a future yen depreciation)
rather than to the widening of the interest rate differential between Japan and the United States
The future expected exchange rate is presumed to reflect market participants’ expectations that the Japan-U.S
interest rate differential will continue to widen because of the difference in the monetary policy direction between the two countries
From the industry-specific real effective exchange rates
it may be presumed that in the transportation machinery industry in particular
price falls due to the reduction of profit margins
in addition to the decline in the nominal exchange rate
has had a relatively large impact on the decline in the real effective exchange rate
In terms of the AMU and the AMU Deviation Indicators
the weighted average of the East Asian currencies relative to the dollar and the euro has been on a downtrend since the end of 2012
The Chinese yuan has been trending upward against other East Asian currencies
the ASEAN currencies have depreciated significantly
This suggests that capital is being withdrawn from emerging countries as a result of the FRB’s policy interest rate hikes
careful consideration should be given as to which currency should be used as the benchmark for judging whether the yen’s value is falling
Relative to the all-industry exchange rate
industry-specific exchange rates for some industries are depreciating while the rates for other industries are not
if foreign exchange market intervention is to be conducted as a countermeasure against the yen’s depreciation
it should be targeted at the all-industry exchange rate
rather than industry-specific exchange rates
given that the depreciation of emerging country currencies has become conspicuous
Japanese companies that have developed international production networks in East Asia should pay careful attention not only to the yen’s depreciation but also to the significant depreciation of the East Asian emerging countries’ currencies
This article presents a descriptive analysis and discussion of the results of a survey on standardization in 2020 on advanced technologies [1]
When an advanced technological field emerges
the impact of standardization on the acceptance of that technology is of interest [2]
The relationship between economic growth and standardization brought about by technology is particularly of interest
standardization is believed to play a major role in enhancing economic and academic value [3]
In discovering the Honda-Fujishima effect on photocatalysis [4]
the international standardization of methods for measuring and evaluating photocatalytic performance contributed to the formation of a commodity market for photocatalysis
because of the formation of a commodity market for photocatalysts
the economic value of photocatalysis increased
leading to a further increase in the academic value of this discovery
This section presents the differences in the responses regarding the importance of standardization of artificial intelligence technology by industry (Tables 1 and 2)
The survey asked about the importance of “artificial intelligence”
about 36% of respondents indicated that standardization of artificial intelligence technologies is “important” or “relatively important”
these two categories are approximately 30%
indicating that awareness of the need for standardization of artificial intelligence has improved [1][5][6][7]
Table 3 lists the technical areas that are considered critical for the standardization of artificial intelligence technology
and ethical aspects were considered the most important
These results indicate the urgency for benchmarks to evaluate the performance of artificial intelligence technologies
Products and services can be distinguished by setting standards for evaluating performance
Standardizing ethical aspects is important in order to prevent social and legal abuse of artificial intelligence technologies to establish trust in the technology
respondents were asked about the importance of standardization in reference to “quantum computer-related technology”
The percentage of respondents who answered “important” or “relatively important” was about 19% (Table 4)
higher than around 14% in the previous year
but lower than the responses for standardization of artificial intelligence technologies
The increase in the percentage of respondents who answered “important” in 2019 may indicate a possible increase in the demand for the general marketization of quantum computing technologies [1][7]
The results for the industrial sector are presented in Table 5
Standardization serves as a vehicle for effective technology collaboration across industry sectors and features of general purpose technology (GPT) [8] can be considered standardized technology
GPTs can plays an important role in economic growth
Steam engines and electricity are examples [9]
Considering that the progress of standardization coincides with the transition to GPT
the rising need for standardization of quantum computer technologies may suggest that this technology is becoming equipped to function as a GPT
and computational algorithms are considered the main areas in which standardization is important
Methods of evaluating performance allow for performance comparisons between different quantum computers
Standardized terminology plays an important role in the communication of new technological concepts
when nanotechnology emerged as a new technology
the basic terminology used to describe it was standardized [2]
The need for the standardization of computational algorithms indicates that efficient algorithms for this technology are being sought
and disseminating technologies that will lead to economic development in this new era are important policy issues
Given that GPT is considered technology that leads to economic growth
research and development beyond the traditional framework of industries is important from a policy perspective
joint projects are being undertaken across industries
Standardization also enables the cross-disciplinary use of technology
This function of generalizing technology is considered an important economic function of standardization that has yet to be emphasized
much is discussed about the economic impact of exchange rate fluctuations
it has been somewhat simplistically argued that a weaker yen is good for the Japanese economy because it lowers the price of its products in the global market and increases sales and profits for exporting companies
we often hear the argument that a weaker yen is not necessarily good for the Japanese economy
especially large multinational corporations
often produce parts and unfinished products at their overseas production bases in China and East Asia
and then export the final products to markets in Europe
In this kind of industrial and trade structure
a weak yen could have a negative impact on the real economy by raising production costs and worsening corporate profits
It is also argued that since Japan relies on imports for most of its food and energy
a weak yen is said to reduce corporate and personal consumption
the impact of exchange rate movements on the economy cannot be easily summarized
It varies from industry to industry and from company to company and depends on whether one is considering the impact on consumers
The trade balance and the current account balance should not be regarded as equivalent to each other although some observers sometimes mix them up
Trade balances often get politicized as we have seen between the United States and Japan in the 1980s and 1990s and between the U.S
A misunderstanding of trade and current account balances can lead unnecessarily to political division and confrontation
when discussing the impact of exchange rate fluctuations
very little is said about the so-called “valuation effect” of exchange rate fluctuations on Japan's external wealth
Trends in the current account balance and exchange rate fluctuations affect Japan's financial assets and liabilities to foreign countries
the accumulation of Japan's external wealth
this mechanism has not been discussed much in the Japanese media
the discussion overly concentrates on the relationship between the exchange rate and the trade balance
and there is little discussion of Japan's external wealth accumulation
This paper aims to explain the valuation effects of exchange rate fluctuations
while describing international macroeconomic accounting
we would like to answer the following three questions
(1) Why is it necessary to focus on the current account balance rather than the trade balance
(2) What does Japan's balance sheet look like
and (3) What effect do yen exchange rate fluctuations have on Japan's external wealth
According to the “trade deficit is bad” argument
a trade deficit means that Japan imports more than it exports
which means that more money flows out of Japan than it receives from foreign countries
They expand their argument to claim that Japan's trade deficit drains the country's wealth out of the country
From the perspective of international macroeconomics
This type of argument used to be common in the U.S
a similar argument is now being made in Japan
The current account consists of the trade balance, the primary income balance, and the secondary income balance (<a href="#note3" id="ref3">Note 3</a>)
Current account = trade balance + primary income balance + secondary income balance (1)
The trade balance captures payments (imports) and receipts (exports) from transactions in goods and services
The primary income balance (also called net income transfer) includes interest and dividend payments coming from abroad and earnings of companies and workers operating in foreign countries
if a Japanese person owns shares of Apple Inc
which is counted as an income transfer (receipt) to Japan
Some economic commentators explain the trade balance and the current account balance as if they were identical
there are many opportunities for migrant workers to send money home to their families in their home countries or to receive dividends and interest from companies located abroad
the greater the share of net income transfers and the more important role they play
Figure 1 shows the current account balance
and primary income balance as a percentage of nominal GDP for Japan
the difference between the two solid lines
the current account balance (blue) and the trade balance (red)
is generally small until the early 2000s (though the difference started diverging as early as the early 1990s for Japan)
the distances between the two lines tend to increase
the trade balance has been 2-3 percentage points lower than the current account balance since the early 2000s
Its trade balance turned negative in 2011 for the first time since the early 1980s due to increased import demand for national resources and materials needed for reconstruction following the Great East Japan Earthquake
The trade balance turned positive again in 2016 and 2017
Japan's current account balance has never been negative during the sample period
This is because dividends and interest incomes from foreign investments by Japanese citizens as well as companies
have been returned to the Japanese economy (primary income balance is in surplus)
The current account balance of the UK is the exact opposite of that of Japan
Both the trade and current account balances have been in deficit throughout the sample period
the current account deficit has exceeded that of the trade balance
The difference between the two is due to the deficit in income transfers
which reflects the large amount of profits and dividend payments from companies located in the UK to foreign countries
as well as the remittances of migrant workers in the UK back to their home countries
Although Poland is different from the UK in terms of the level of development (the UK's GDP per capita is about 2.5 times that of Poland)
a similar explanation can be given to characterize the current account
The gap between the current account balance and the trade balance
has widened since Poland joined the EU in 2004
The country’s primary income balance has been in deficit
It is a typical case that shows once a country becomes more open to foreign investment
its gap between the current account and trade balance gets larger
Figure 2 shows the sum of external assets and liabilities worldwide divided by world GDP
and can be used as an indicator of the degree of financial globalization
The figure illustrates that financial globalization has deepened since around 2000
The orange line represents the extent of U.S
but the gap between the two lines has been widening
indicating that the deepening of financial globalization is not solely due to the U.S
the role of cross-border income transfers increases
which can make the trade balance and the current account balance diverge
the correlation between the current account balance and the trade balance should become lower
the correlation coefficient between current account balances and trade balances averaged about 90% before 2000
the current account balance is the sum of the trade balance and income transfers (i.e.
equation (1) with the secondary income balance omitted)
If we consider exports as money flowing into the home country (i.e.
residents) and imports as money flowing out to foreigners (i.e.
the sum of exports and income receipts equals the total amount of money flowing in
and the sum of imports and income payments equals the total amount of money flowing out
the current account balance is a net flow of money
Current account＝Capital inflows－capital outflows＝net capital inflows		(2)
Its debt amounts to about 70-80% of the U.S
or $17-20 trillion (Figures 3(b) and 4(b))
hold surplus capital in the form of financial assets such as U.S
which in effect means that they are lending capital in the form of investments (for example
Treasury bonds as assets is the same as lending money to the U.S
have to borrow from the rest of the world because they hold more payments than they receive
current account surplus countries are net lenders and current account deficit countries are net borrowers
Figure 4 illustrates cumulative current accounts and NIIP for Japan and the U.S. (<a href="#note5" id="ref5">Note 5</a>) Figures 3 and 4 make it clear that Japan has consistently increased its net foreign assets by running current account surpluses whereas the U.S
has increased its net foreign debt by running a current account deficit
A country's balance sheet is a compilation of the “external assets” and “external liabilities” of the citizens belonging to that economy
he or she has the right to insist that the U.S
government is obligated to provide the bondholder with cash
government bond would appear on the asset side of the Japanese balance sheet and on the liability side of the U.S
Japan's balance sheet includes all foreign assets and liabilities owned by Japan
including Microsoft stock owned by the Japanese (an asset for Japan)
bonds issued by Toyota to raise funds and owned by non-residents (a liability)
Australian dollars owned by the Japanese (an asset)
Japanese government bonds held by non-residents (liabilities)
shares of foreign companies owned by SoftBank (assets)
and foreign exchange reserves such as Chinese yuan
and euros owned by the Bank of Japan (assets)
The balance sheet is disaggregated into categories such as foreign direct investment (FDI)
and foreign exchange reserve assets (foreign currency denominated assets held by the central bank) as shown in Table 1
We saw in Figure 4 that the NIIP can be explained by the accumulated current account balance
The figure also shows that although the accumulated current account balance represents the trend in the balance of net external assets
the accumulated current account balance does not necessarily explain the balance of net external assets completely
as can be seen in the gap between the two lines
the change in net external assets balance is composed of the following three components
Change in NIIP = current account + exchange rate fluctuations + movements in the price of assets 			(3)
The effect of exchange rate fluctuations on foreign net assets is called the “valuation effect.” How exchange rate movements affect foreign wealth can be understood by considering a country as an investor holding a portfolio similar to the one shown in Table 1
it is relevant whether the country of concern holds more direct investment assets than equity assets
how much it owes to foreign investors in terms of bonds or bank loans
the currency composition of each asset class or liability category also affects the valuation effect
Japan holds much of its external assets in foreign currencies
It also holds a large amount of liabilities denominated in foreign currencies
but the amount is relatively small in relation to its overall portfolio
Japan has a long position in foreign currencies
This characterization also applies to many advanced economies
In economies that take long positions in foreign currencies
when the value of the home currency declines
the foreign currency assets held by the economy increase in value
and the net foreign assets balance tends to improve
Since most of its external liabilities are denominated in its own currency
a depreciation of the dollar has no effect on the value of its external liabilities in its own currency
but it does increase the value of its external assets in terms of dollars
depreciation of the dollar has the effect of improving the U.S
NIIP appears to be less negative than the accumulated current account balance from 2000 to about 2019
This is due to the trend of persistent depreciation of the dollar during that period
many developing countries hold large amounts of external debt
about 60% of which is denominated in dollars
Federal Reserve raises policy rates to reduce inflation
it will cause the dollar to appreciate and the local currency to depreciate
which may increase the debt burden in the local currency for developing countries
a weaker local currency could worsen their net external assets position
The tendency of developing countries to rely on foreign currency-denominated debt (especially bonds) is called the “Original Sin” in international macroeconomics (Eichengreen et al.
Foreign currency-denominated borrowing can potentially lead to a “currency mismatch” especially for developing countries (i.e.
the borrower's currency differs from the lender's currency
and the borrower has difficulty repaying the debt due to a shortage of hard currency)
Many developing countries are viewed as risky due to their macroeconomic instability and fragile financial systems
making it difficult for them to raise funds in their own currencies in overseas markets
According to data from the Bank for International Settlements (BIS)
the share of foreign currency-denominated debt in the international bond market hovers around 90%
with the share of dollar-denominated debt hovering around 60% for the last 30 years
and the share of euro-denominated debt around 15 to 20% (Ito and Rodriguez
The large amount of foreign-currency-denominated debt means that these currencies are more vulnerable to policy changes and other external shocks in developed countries
This vulnerability to spillovers becomes apparent when the home currency depreciates
which in turn causes a further deterioration in the NIIP of developing countries and the values of their currencies
This vicious cycle can eventually lead to a financial calamity
Japan does not bear the “original sin.” This is because its external assets exceed its external liabilities and its external liabilities denominated in foreign currencies are relatively small
Let us examine again the impact of a yen depreciation on Japan’s net external assets
Japan’s external assets are $10.9 trillion (1,242 trillion yen) at the end of 2021
while its external liabilities are $7.3 trillion (832 trillion yen)
thus its net external assets are the difference
The composition of Japan's portfolio is such that it has about $2 trillion in outward FDI
which is much larger than its FDI liabilities (inward FDI
Assuming that outward FDI is denominated in the currency of the country in which it is invested
we assume that inward FDI is denominated in the Japanese yen
and about half (53%) of outward equity investment is dollar-denominated
Since most purchases of Japanese equities by foreign residents are assumed to be yen-denominated
almost all inward equity investment can be assumed to be yen-denominated (as was the case with inward FDI)
54% of outward bond investments are denominated in dollars
As for “other investments,” mainly loans (assets) and borrowings (liabilities) by financial institutions
assets amounted to about $2.1 trillion and liabilities to about $2.6 trillion
with the currency share in loans being 52% in dollars
a decline in the value of the yen would increase its holdings of assets denominated in foreign currencies when converted to yen
having relatively few liabilities denominated in foreign currencies would allow a weaker yen to have a positive impact on net external assets because liabilities are unlikely to grow rapidly as a result of a weaker currency
Figure 6 illustrates the weights of the valuation effects of six major currencies (the U.S
and British pound) for the period from 2001 to 2021
there are several interesting observations drawn from the figure
all of the major currencies have positive weights
This means that a country's external wealth increases when other major currencies appreciate (i.e.
when the domestic currency (= the yen) depreciates)
The dollar’s share was around 20% from the late 2000s through the 2010s
but shows no sign of catching up to the dollar share
The shares of other currencies are also even lower and show little change
Let us quantify the magnitude of the valuation effect caused by exchange rate fluctuations using the calculation method based on Lane and Shambaugh (2010) and Bénétrix
Table 2 and Figure 7 show the valuation effect as a percentage of GDP if the value of major currencies depreciated 1% against the yen
Since the calculations are based on actual exchange rate fluctuations
the valuation effect would be positive when the yen depreciates
The annual average valuation effect of the dollar over the entire sample period 2001-2022 is 23%
During the subsample period from 2008 to 2011, which is characterized by the global financial crisis (GFC) in 2008 and followed by the euro crisis in 2010-11, the yen appreciated against all major currencies (<a href="#note9" id="ref9">Note 9</a>)
resulting in the valuation effect of -2.2% for the dollar and -1.0% for the euro
Shinzo Abe was reelected as prime minister and Haruhiko Kuroda became governor of the Bank of Japan (BOJ)
The prime minister and the BOJ cooperated to implement the ultra-easy monetary policy known as “other-dimensional” monetary easing
This has alleviated the long-running trend of the strong yen and weakened the currency against other major currencies
the dollar’s valuation effect averaged 0.9% of Japan's GDP and that of the euro 0.3% of GDP
With the start of the COVID-19 pandemic in 2020, the yen lost value against the U.S. dollar, especially after 2021, and fell significantly in 2022. Reflecting this, the valuation effect in 2022 is quite large over the three-year period 2020-22 (<a href="#note10" id="ref10">Note 10</a>)
with an annual average of 31% for the dollar and 14% for the euro
The estimated level of impact is as high as 2.1% (as a percentage of 2021 GDP) for the dollar (10.7 trillion yen) and 0.7% for the euro (3.9 trillion yen)
Exchange rate fluctuations and their valuation effects can also affect the lives of those who may not appear to be interested in FX investments
A prominent example is Japan’s National Pension Plan and Employees’ Pension Plan
These pension funds are managed by the Government Pension Investment Fund (GPIF)
Its investment returns are comparable to those of other major pension funds in the world
GPIF invests the accumulated funds in domestic bonds (e.g.
the proportion of pension funds invested in foreign assets had been kept low because they were viewed as high-risk
in response to a recommendation from experts that in order to increase returns on pension investments
the portfolio was substantially changed from a conservative stance centered on domestic bonds to one that includes higher-risk assets such as foreign bonds and stocks
the pension fund portfolio consisted of 68% domestic bonds
the GPIF portfolio has a target ratio of 25% for each of the four asset types
The pension reforms related to portfolio management have caused exchange rate fluctuations to have a greater impact on fund management
has more positive impacts on the yield of pension funds
the GPIF's investment returns have risen in the last few years
the yen may well return to an appreciation trend
in which case the investment returns of the GPIF and financial institutions could be negatively affected (like what happened in the aftermath of the GFC)
many financial institutions have experienced capital losses as bond prices fell due to repeated Fed rate hikes in 2022 and 2023
The collapse of Silicon Valley Bank in March 2023 is the best example
and the GPIF's rate of return also declined somewhat in FY2022
while the rate of return has somewhat declined
it should not necessarily lead to the argument that the GPIF should lower its tolerable risk level
I can conclude that currency fluctuations have a greater impact on our wealth and our lives
This is not a matter that should simply be left to FX investment experts
While commentators have been discussing the decline in Japan’s national strength and wealth
I recently feel that there are misunderstandings and baseless exaggerations about Japan’s balance of trade and net foreign assets
It is quite common for misunderstandings and lack of knowledge to lead to disputes between countries or political divisions among citizens
I have attempted to clarify the definitions and relevant data about the balance of payments and Japan's external wealth in a way that is as easy to understand as possible for those who are not specialists in international macroeconomics
It was a difficult task since the subject is not easy to understand even for economic experts
it is often pointed out that Japan seems to pursue a “low-risk
low-return” strategy in its balance sheet management
The country’s tendency to have low risk tolerance may be due to the traumatized experience of the bursting of the bubble economy in the early 1990s
The aftereffects of this tendency seem to be lingering
as exemplified by the fact that about 93% of Japan’s government bonds are owned by Japanese
As the birthrate continues to decline and the population ages
not only labor income but also interest income and pensions are becoming increasingly important issues
I hope this report provides some food for serious thought
and the final disposal of radioactive wastes from nuclear power stations are a type of policy challenge from which the current generation of people can gain no benefits even if they pay the costs for resolving them
but which will bring benefits to future generations
If existing intergenerational problems are discussed from the viewpoint of a hypothetical future generation—people in a world 50 years from now
for example—different policy decisions may be arrived at compared to when the problems are discussed from the current generation’s viewpoint
I introduced readers to the future design initiative
being led by researchers and practitioners who are studying this matter and trying to reflect future generations’ interests in policymaking by local governments
I will discuss what kind of approach may be taken toward intergenerational problems from philosophical and ethical perspectives
To achieve the sustainability of the global environment
it is necessary to establish intergenerational ethics
Intergenerational ethics is a discipline that explores the question of whether the current generation can pay the cost of resolving intergenerational problems when they cannot expect to benefit from those costs
Toshiaki Hiromitsu of the Policy Research Institute under the Ministry of Finance dealt with this matter squarely in his book
Citing an argument by Professor Samuel Scheffler of New York University
Hiromitsu asserted that there is a relationship of mutual public benefit between current and future generations as follows
People would feel that most of what they achieved in their lives would be meaningless if they knew that society would come to an end soon after their death
the continued existence of society is our greatest concern
The continued existence of society is a value that can be shared by both current and future generations
Protecting that value is an act that is mutually beneficial for both current and future generations (Hiromitsu calls this “public reciprocity”)
If the current generation pays the cost of protecting that value
they may appear to be making an unrewarding self-sacrifice
they do so in anticipation of contributions from future generations (see the upper panel of the figure below)
The altruistic behavior between generations is said to be possible because of a sense of connection with the humans of future generations
allowing current people to treat the interest of the future generations as their own
I would like to propose the concept of “public recognition” as an idea that is mutually complementary with the relationship of public reciprocity outlined above
According to the Hegelian philosophy as interpreted by Professor Axel Honneth of Columbia University
human history is the struggle for recognition
Both individual persons and nations struggle for recognition from others in order to satisfy their own desire for recognition
Francis Fukuyama’s “end of history” theory
which was based on a similar historical perspective
maintained that liberal democracy is the ultimate form of government because it is a political system that maximizes mutual recognition between the people
it is not that recognition from others in itself has a fundamental value
the persons who give me the recognition that I value also themselves need to gain recognition from others
If we trace this chain of recognition through time
we arrive at recognition from yet-to-be-born generations in an infinite future
Scheffler’s argument—that we are unable to find meaning in our life unless we believe that society will continue to exist after our death—can be understood to mean that individuals’ purpose in life has meaning only if we can expect to gain recognition
The concept of public recognition holds that the basis of the value of what we pursue
is recognition from yet-to-be born generations in an infinite future
Individuals who have an awareness of public recognition are more strongly tempted to behave altruistically for the sake of future generations when their desire to serve their own interests is stronger
That is because people who seek recognition for selfish reasons have a strong desire to gain recognition from future generations (see the lower panel of the figure above)
It is natural for us to have a sense of connection with future generations who satisfy our desire for recognition
This natural connection for future generations forms the basis of the relationship of public reciprocity
the connection with future generations further increases the value of recognition gained from them for our generation
Public reciprocity and public recognition mutually complement each other
In order to invigorate public reciprocity and public recognition
it is desirable that the current generation’s preferences change
The deliberative democracy initiative can be considered to be an effort to make that happen
With respect to the argument that citizen deliberation—deliberation at civic gatherings and mini-publics events
there has been a controversy between proponents who emphasize the impact that citizen deliberation has had on important policy decisions regarding matters such as climate change (e.g.
Professor James Fishkin of Stanford University and Professor Hélène Landemore of Yale University)
while acknowledging the significance of citizen deliberation
assert that its role should be nothing more than supplementary (e.g.
Professor Ian Shapiro of Yale University and Professor Cristina Lafont of Northwestern University)
In the arguments over deliberative democracy
deliberation among the current generation is the main focus
The arguments lack the perspective of future design
which looks at things from the perspective(s) of future generations
deliberative democracy coupled with future design will help to complement democratic decision-making so that it can deal with inter-generational problems
There are also several initiatives aimed at influencing the current generation’s preferences by creating some kind of institutional system or organization
One of them aims to provide a legislative basis for the formulation of intergenerational sustainable development plans
the Well-being of Future Generations Act is a pioneering example of this
According to a recent book by Project Professor Tsuyoshi Saijo of Kyoto University of Advanced Science
provides guidelines for the Welsh government’s formulation of development plans in order to increase the appeal of the region’s natural environment
Another example is the establishment of independent fiscal institutions
which are becoming more and more common in Europe and the United States
Independent fiscal institutions are neutral entities that present long-term fiscal projections for the next four or five decades to the people and governments
Establishing such an agency is expected to increase information about the future that is available to the people and help to incorporate consideration for future generations into the current generation’s policy decision process
An ideal institutional system is one that brings about the kind of outcome depicted by The Fable of the Bees
where the people’s actions based on the selfish motives unintentionally strengthen the sustainability of society
One example of an institution that could produce such an outcome may be an electronic money system based on carbon emission credits
A currency system based on the gold standard could cause a gold rush among greedy
if emission credits can be used as currency
people are expected to try to create credits due to the profit motive
They will voluntarily engage in forestation activity and develop technology to reduce carbon emissions
would lead to public good activity through the activities that are necessary to create emission credits
Emission credits would circulate as currency in a situation similar to the popularization of crypto asset mining which advanced despite the absence of government regulation
If the people believe that yet-to-be-born generations in an infinite future will recognize the value of emission credits as currency despite the absence of a strong regulatory measure
such as the imposition of governmental restrictions on emission volumes
This means that an emission credit-turned-currency would in essence become a present embodiment of the public recognition
Intergenerational problems are difficult for any existing political system to resolve
It is imperative to create a new political philosophy and decision-making mechanism that complement our democratic systems
he stormed to 9.77 and 9.82 (© Lorenzo Sampaolo)