INDONESIA * Section 8 is an abridged version of Section 6 of the Indonesia country report included in the Department of State's Country Reports on Human Rights Practices for 1990, submitted to the Congress January 31, 1991. For a comprehensive discussion of worker rights, please refer to that report. 6/ January August, annualized. 7/ ODA flows (net disbursements); Japanese government 10/ (Domestic total fixed capital formation plus domestic inventory investment)/nominal GNP. The Japanese economy, rebuilt from post-World War II ruins, was in 1990 the world's second largest. Gross national product (GNP) in nominal terms of $3.0 trillion is 58 percent that of the United States. Persistently large external trade imbalances have evoked mounting international economic and political pressures on Japan to adopt policies that promote balance of payments and other structural adjustment. Frustrated trading partners point out that Japan is also home to inefficient transport, agricultural, construction and distribution sectors which it hesitates to expose to foreign competition. Transition to greater competition in these sectors is underway, too slow to satisfy trading partners but remarkably rapid in Japanese eyes. Since 1987 Japan has recorded 16 quarters (through 1990) of generally strong real economic growth, highlighted by low inflation and low unemployment and led by strong domestic rather than external demand. Imports are increasing averaging about 20 percent year-to-year growth in 1990s first half and the share of manufactured goods has risen from about 20 percent in 1982 to about 50 percent. Japanese external surpluses peaked in 1986. They declined in yen terms in 1987; and in dollar terms since 1988. Japanese monetary policy played an important role through 1989 in sustaining expansion of Japanese domestic demand, while falling import prices and a measure of deregulation kept inflation at bay. In response to worsening asset inflation, Japan reversed its easy money policy in late 1989. The subsequent climb in interest rates brought capital costs from historic lows to levels comparable to those in the United States, which together with a change in earnings expectations prompted reduced net capital outflows from Japan. Japanese monetary tightening coincided with two distinct periods of broad equity market devaluation, the first in the early spring of 1990 and the latter following the Iraqi invasion of Kuwait. Troubled stocks and more stringent monetary policy have not yet dampened perceptibly the robust growth in all components of domestic demand, except housing. Consumer spending and corporate investment are the mainstays of the current boom. Japan has pursued relatively tight fiscal policies since 1982 to constrain growth in government debt, which had expanded to about 35 percent of nominal GNP by that year. However, under pressure from other summit countries to contribute to the reduction of international imbalances, the Japanese government in June 1987 initiated a $35 billion multi-sector public works spending package and followed up with tax cuts worth about $10 billion. Building on economic growth which began in late 1986, that package helped to reduce fiscal drag in the economy. In the June 1990 report of the U.S.-Japan Structural Impediments Initiative, the Japanese government agreed to formulate a ten year plan to boost significantly social infrastructure spending. The Japanese government reduced personal and corporate income tax rates and introduced an indirect VAT-type consumption tax in April 1989. The consumption tax, intended to broaden the tax base and thereby improve the government's JAPAN ability to respond to growing claims on the national purse in one of the world's fastest aging societies, evoked widespread popular opposition. The measure became the focal point of February 1990 elections for the Japanese legislature's upper house, which resulted in defeat for the ruling Liberal Democratic Party. In the short term the impact of the new tax on imports was not severe, and imports have continued to rise strongly since its imposition. In recent years, Japan's economic policy has reflected efforts at policy coordination with the six other economic summit countries. In cooperation with the United States, Japan is playing a leading role in increasing Official Development Assistance (ODA) flows, and has become the world's largest donor in 1990. Japan has committed to double ODA to at least $50 billion over the five years 1988-92 and to improve the "quality" of that aid by boosting the share of grant and untied aid. Japan also is stimulating new financial flows to highly indebted countries through its $20 billion "yen recycling" program, which includes loans to debtor countries as well as increased funding for international financial institutions and multilateral development banks. Japan's private sector continues to play the major role in recycling Japan's large current account surpluses; during 1989, net long-term capital outflows amounted to $89.2 billion, of which $44.1 billion were overseas direct investments. Japan ended most foreign exchange controls in the 1970s, culminating in a major simplification of the foreign exchange and foreign trade control law in 1980. Currently, pursuant to the international understandings launched under the 1985 Plaza Accord and refined since then, Japan discusses economic policy coordination with the United States and its other Group of Seven (G-7) partners. The appreciation of the yen since 1985 has increased the competitiveness of U.S. products and is contributing to the reduction of Japan's enormous external imbalances. At this point, although import price reductions have had some impact in moderating domestic price levels, there remains room for further pass-through of these benefits to consumers. This could stimulate additional demand for imports. The Japanese economy is undergoing marked structural change. Fast-growing domestic demand, currently fueled by both personal consumption and capital investment, supplanted external demand as the engine of Japanese economic growth in 1986-90. This has primarily been a market-driven response to the fundamental exchange rate realignment of the last five years. Another central factor has been the focus on deregulation of the economy, particularly the privatization of public telecommunications and railway companies and simplification of product standards. Despite progress in this area, Japan's economy remains heavily regulated, reinforcing JAPAN business practices that restrict competition and thus keeping prices high. Price controls remain on certain agricultural products, and bureaucratic obstacles to the entry of new firms into businesses like trucking, retail sales and telecommunications also have slowed the economy's structural adjustment. To accelerate structural adjustment, on July 14, 1989 President Bush and Prime Minister Uno launched the Structural Impediments Initiative (SII) to identify and solve structural problems in both countries that stand as impediments to reduction of payments imbalances. The talks are a two-way street; the U.S. side identified six areas of concern in Japan's economy: savings and investment, land use, distribution system, pricing mechanism, exclusionary business practices, and affiliated-company (keiretsu) relationships. The Japanese side in turn proposed study of U.S. policies in seven areas that bear on U.S. competitiveness. In the SII Joint Report, issued June 28, 1990, both sides agreed to carry out reforms in these areas. Japan committed to spend 430 trillion yen from 1991-2000 to address social infrastructure needs, which will help correct Japan's chronic shortage of investment relative to saving. Vigorous implementation by Japan of the competition-oriented domestic economic reforms, such as toughening anti-trust enforcement, easing of limits on large stores, land tax reform and more corporate disclosure, should help translate Japan's growing productivity into higher living standards and stimulate greater demand for imports. Already, liberalized rules for large retail store openings have led to a flood of new store applications, including outlets planned by several major U.S. retailers. Government spending policy has given an indirect boost to the competitiveness of a number of Japanese industries. In the past the government directed considerable public and private resources to targeted priority areas, but has been moving away from such industrial policy measures, partly in response to criticism of export-oriented policies by Japan's trading partners. The Japanese government continues to promote high technology cooperation among firms and plays a direct role in organizing these efforts, using off-budget resources and small amounts of appropriated funds to contribute to investment projects and government private sector efforts. 4. Debt Management Policies Japan is the world's largest net creditor. It is an active participant together with the United States in international discussions of the developing country indebtedness issue in a variety of fora. 5. Significant Barriers to U.S. Exports Over the past few years, Japan has removed most formal barriers to the import of goods and services. Import licenses, which are still technically required for all goods, are granted on a pro forma basis with limited exceptions (fish, leather goods and some agricultural products). Japan's average tariff rate is one of the world's lowest (at around |