MONETARY AND FINANCIAL RELATIONS WITH JAPAN (Communication from the Commission to the Council)

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COM (86) 171



Vol. 1986/0063

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COMMISSION OF THE EUROPEAN COMMUNITIES
C0MC86) 171 fin a l
Brussels, 3 April 1986
COM (86 .) 171 f i n a l
HOHKTAHY «HD F3HAHCJ ·*& BKLATIOHS WITH JAPAN
I. INTRODUCTION
The growth of the importance of Japan in the world trading system
is now being ‘ollowed by an increas-L^g role of Japan in the monetary and
financial fields. In the monetary field, although the yen is relatively
little used in trade, the yen exchange rate has become a significant rate
in the international monetary system both because of its implications for
trade and because of the growth of the importance of Japan in financial
transactions and in world capital flows. The importance of the yen in the
international monetary system will continue to grow as both developments in
yen markets and pressure from foreign authorities has led to a declared
policy of the Japanese authorities to increase the international role of
the yen and this is becoming increasingly effective under the pressures of
events and of liberalisation. In the financial field the outstanding feat­
ure in recent years has been the growth in the role of Japanese banks and
other financial institutions in the international markets. Thus Japanese
banks' external assets are now the largest in the world and Japanese finan­
cial institutions are among the top ranked in international securities bus­
iness. Furthermore Japan has become the largest single exporter of capital
in the world and Japanese sales and purchases of securities in domestic and
international transactions have become important in determining develop­
ments in these markets.
However, the progress of Japan in these fields has given rise to
concern among Japan's partners in a number of respects. There has always
been a certain reticence in Japan to accept the full responsibilities of
its increasing international role and a tendency to concentrate only on the
consequences for Japan of international events and developments. However,
it is also necessary, as the influence and importance of Japan increases in
the international monetary and financial fields that a broader more
international approach is accepted. There are also concerns that parallel
those which have occurred in relation to the development of Japan as a
major merchandise trade partner i.e. uneven access to each others'
markets. It has been suggested that a strategy of the type pursued in the
expansion of Japan's merchandise exports is now being pursued in the field
of financial services; there has been a dramatic expansion in the external
activities of Japanese financial institutions while access to Japanese
domestic financial markets for foreign financial institutions has remained
effectively inhibited. Furthermore as the internationalisation of the yen
progresses the Japanese banks are in the best position to handle yen
business in the international markets as a result of the limited access to
yen markets of foreign financial institutions.
As Japan has increasingly emerged as a major financial centre,
the international monetary and financial system has been subject to
strains. The floating exchange rate system has not yielded the stability or
the effectiveness of adjustment that might have been expected and exchange
rates have been volatile and subject to prolonged misalignment. These deve­
lopments have led to both official action and discussion on the working of
the exchange rate system with a possibility that improvements to the exist­
ing arrangements could be agreed. So too the LDC debt problem has posed a
threat to the stability of the international financial system which requi­
res constant monitoring and assessment. Again also the rapid developments
in financial market technology, and the internationalisation of markets
poses potential problems of control and supervision as interpenetration of
markets develops.
- 2 -
These developments point to the need for a close coordination at
the international level. Such coordination already occurs in the framework
of the various multilateral and international meetings. However in terms of
bilateral relations, while both the Community and Japan have well developed
bilateral relations with the United States, their bilateral relations with
each other have remained relatively underdeveloped. In view of the emerging
role of Japan, of its currency and of the influence and weight of its fin­
ancial institutions in the international financial system the Community
should seek to develop more enhanced bilateral relations in these fields
not only with a view to discussing mutual bilateral problems but also in
order to increase mutual consultation and cooperation on the broader issues
facing the international monetary system.
II. Community relations with Japan
Existing Community relations with Japan have centered mainly on
trade issues and the persistent and growing trade imbalance of the Commun­
ity with Japan. These issues have been discussed at the twice yearly "High
Level Consultations" which since 1972 have been the regular forum in which
economic and industrial issues between Japan and the Community have been
discussed. These have been supplemented by discussions in the Trade Expan­
sion Committee and by the recent interministerial meetings between Commis­
sioners and Japanese Ministers as well as by regular contacts between
officials and during high level visits. While the major concerns in these
contacts have always been centered on the question of the trade imbalance
there have also been discussions of a broader nature on economic policy and
financial issues particularly as they related to the trade imbalance ques­
tion .
Within this framework the Community has in the past formally pre­
sented requests to the Government of Japan on the question of access of
European financial services to the Japanese market. These were first pre­
sented by the Commission to the Japanese authorities in december 1981 in
the form of a "Request List" which was drawn up after close consultation
with the Member States. The Request List was revised in November 1982 and
April 1984 and continued to be discussed with the Japanese authorities in
the regular consultations and meetings.
In 1984 as a result of bilateral negotiations between the US and
Japan the Japanese authorities announced a series of measures to increase
the international role of the Yen and which also would have the effect of
altering the framework in which foreign banking and financial institutions
would be able to operate in the Japanese market. This development and the
obvious influence which the US could exert on Japan led to fears in the
Member States that the qualification criteria negotiated with the US for
their financial institutions in Japan would not, in practice, be equally
applicable to European financial institutions whose structure was different
to that of US financial institutions. The result was that a series of
bilateral Member State/Japan financial negotiations were instituted which
paralleled the continuing US/Japan discussions. These discussions (with the
UK, FRG and shortly with France and Italy) have centered on specific
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bilateral issues with a view to ei uring that the opportunities for the
financial institutions of the Member State in question would not be
disadvantaged by developments in the Japanese markets. The Commission also
opened bilateral discussions with the Japanese the basis of which were more
general and which were concerned with the overall opportunities for finan­
cial institutions in the European and Japanese markets and with relations
between japan and the Community in the monetary and financial fields.
The relative lack of success of the Request Lists and the subse­
quent development of parallel bilateral Member State/Japan negotiations
have been due to a number of factors. One reason was that the framework in
which discussions on financial services took place was basically part of
the wider trade problems with Japan and in which interest centered mainly
on the trade issues particularly for manufactured trade. A second reason
was that the Japanese have always preferred to negotiate on the basis of
reciprocity which from their point of view was best achieved by individual
negotiations with the Member States.
The development of individual Member State negotiations, however,
will not necessarily achieve the best results for the Community. While each
Member State which has opened negotiations with Japan has the prospect of
obtaining some limited access to the Japanese markets for its institutions,
particularly when a reciprocal Japanese problem of access to that Member's
markets existed, in practice Japan has been able to satisfy the require­
ments of individual Member States on a tailored basis without effectively
opening up its markets in general. Thus although tailored solutions arising
out of bilateral negotiations such as the US/Japan negotiations may be the­
oretically available to all, in practice the different nature of financial
institutions in the different countries often means that tailored solutions
effectively only apply to the institutions of the country which negotiated
them. Even if the tailored solutions have a more general application they
still have not represented a real pressure on Japan to have as equal an
access to its markets as Japanese institutions have in European markets.
Individual Member State negotiations have weakened the capacity of the Com­
munity to put pressure on the Japanese to respond to the demands of the
Community and have enabled the Japanese to maintain the strength of their
position by playing upon the competition which undoubtedly exists between
Member State's financial institutions in world markets and thus weakening
the Community's overall position.
Thus in the field of financial services and access to Yen markets
the Community has been relatively unsuccessful in its relations with Japan.
Similarly also in the broader field of monetary relations the Community has
had little influence on Japan and Japanese policy particularly when compar­
ed to the pressures which the US authorities have been able to exert from
time to time. Nevertheless, as Japan emerges as a more powerful force in
the monetary and financial fields there is a need to develop a broader
based relationship between the Community and Japan in which can be encom­
passed specific issues such as relative access to each others financial
markets. This implies developing relations to include the broader questions
of the respective roles of the Community and Japan in the international
monetary system and in relation to international financial developments. It
is also necessary in developing relations with Japan in the monetary and
financial fields that the full weight of the Community be brought to bear
because it is only on this basis that the Community can hope to achieve
real effects.
A Community level relationship does not necessarily imply that
individual Member States would be prevented from maintaining bilateral dis­
cussions with the Japanese on matters that concern them but these individ­
ual discussions would be strengthened if they took place within an overall
Community level approach to Japan in which there was close coordination
between the Member States.
III. Monetary relations
Monetary relations between the Community and Japan can be seen in
both bilateral and multilateral terms. The most important aspect of monet­
ary relations concerns the exchange rate relationships which are a primary
influence in governing both commercial and financial relations.
Exchange rates
From a bilateral viewpoint exchange rate relations between the
Community and Japan are weak. There has been a common tendency in both
areas to regard currency relationships with the $ as being the most impor­
tant. Thus, for example, the recent G-5 agreement of September 1985 was
concerned with the relationship of the $ to the non $ currencies as a
whole. However, this has led to a situation in which the value of the yen
with respect to Community currencies has been a residual one resulting from
developments in the respective currencies' relationships with the dollar.
This has reduced the importance of exchange rates as potential instruments
of adjustment between the two areas. It is unlikely that the Community's
trade relations with Japan can be put on a satisfactory basis unless there
is an appropriate exchange rate relationship between the two areas. In this
respect the almost exclusive concentration of the Japanese authorities on
the yen/$ relationship needs to be changed and the Community should seek to
influence the Japanese authorities towards giving a greater recognition of
the importance of the yen/EC currency relationships as a vital element in
the bilateral relations between the two areas. The parallel developments of
the yen and EC currencies since early 1985, particularly against the $
should be a matter of consultation between the Community and Japan.
The_ Internationa^ m°net_ary_s^ s_tem
From a multilateral point of view the yen/ECU exchange rate also
has an important role. The exchange rate system has workeü imperfectly.
Volatile exchange rates have made international trade and investment more
difficult and misaligned exchange rates have led to sustained payments im­
balances which in turn are threatening the international trading and monet­
ary system. Although the Community through the EMS has attempted to avoid
some of the main distorting consequences it has been unable to avoid the
consequences of external instability. For this reason the Commission has
always argued in favour of some degree of multilateral management of the
exchange rate system. The consequences of exchange rate variations are too
widespread in their effects on the economy to ignore or to accept that the
level of the exchange rate shoul ' be determined merely as a residual
resulting from economic and financial developments. It Is essential not
only for individual economies but also for the international monetary
system that the exchange rate be incorporated fully into the economic
policies of the main industrial countries. Since the exchange rate is also
the fundamental economic variable in the relations between countries it
should be the subject of mutual or international discussions.
In recent international discussions the Japanese authorities
have remained relatively reticent with regard to further institutional
developments in the international monetary system. They are unwilling to
support target zones or the use of the exchange rate as an objective indi­
cator, they do not wish to see any automatic system of consultation and are
not in favour of greater publicity in the surveillance process. However as
a result of the G-5 meeting in September 1985 Japan cooperated fully, under
the threat of increased protectionism emanating from the US, in an agreed
adjustment of exchange rates. In fact historically Japan has never been
prone to laissez faire policies for its exchange rate and its policy ap­
proach has been much more in favour of seeking a degree of management of
exchange rates but only on a unilateral basis and with respect to their own
policy objectives for the yen. Greater mutual consultation on a bilateral
basis between the Community and Japan could lead to a better understanding
of the requirements for an improvement in the working of the floating ex­
change rate system and help to contribute to the continuing evolution of
the international monetary system and to influencing developments in the
markets. The EMS is not only an internal arrangement of the Community but
is a part of and a contribution to the international monetary system and
with the growing potential evolution of the yen as an international curren­
cy closer consultation between the Community and Japan should enhance the
prospects for a more orderly and stable evolution at the international
level.
_The ^en ctnd the ECU
In the framework of the present international monetary system it
can be argued that too much is being demanded of the US$. The predominance
of the $ makes domestic US policy have important implications for the rest
of the world in terms of exchange rates, interest rates and international
liquidity. On the other hand the US authorities have had difficulty in in­
corporating an appropriate international dimension into their domestic pol­
icies. In the long term, therefore, a broader based international monetary
system with less dependence on the US$ and a greater sharing of the inter­
national currency role would be desirable. An expanded international role
for the yen is being encouraged by the authorities with the support of the
US and the Community. The use of the ECU has, too, expanded in the inter­
national markets and the ECU is increasingly being seen as a financial ins­
trument representative of the Community economy. As the Community completes
its own financial integration the role of the ECU will increase. Thus ful­
ler financial integration in the Community parallel with the development of
the internal market will increase the need for stability of exchange rates
within the Community which in its turn will reduce the significance of
individual currencies when considering external relations. Thus the ECU as
a composite unit made up of the Community currencies is likely to take on
an increased significance as a measure of Community exchange rates and as a
focus of policy in the development of Community external relations in the
monetary field.
- 6 -
A broader based international monetary system in which the yen
and the ECU have a fuller role will require close cooperation with Japan
both bilaterally as well as in the multilateral fora.
IV. Financial relations
In spite of the liberalisation and deregulation measures that
have been announced since 1980, and especially following the "yen/dollar ad
hoc Committee report" of May 1984, the financial services market in Japan
remains highly regulated, segmented and internationally isolated. The ever
lengthening list of decisions taken by the authorities to deregulate the
market is more impressive as a measure of the extent to which the market
was and still is restricted than as a sign of the genuine liberalisation
achieved. The timescales envisaged for additional market opening measures
are ne.i ther sufficiently progressive nor suffiently reforming to promote
the viable operation of foreign banking institutions in Japan.
Banking
With regard to the banking sector the Japanese authorities have
not facilitated the penetration of foreign banks into their domestic mar­
kets whilst, to a large extent Japanese banks operate in foreign markets on
relatively equal terms with other banks and have made substantial inroads
into overseas markets, capturing market shares at the expense of Western
banks. A recent BIS report indicates that the Japanese have overtaken the
US in international banking for the first time. Up to end-September 1985,
Japanese institutions granted more international credit than US banks. The
BIS report shows that roughly 26% ($ 640 bn) of all international claims of
the banks reporting to the BIS were on the books of Japanese institutions.
(The claims of US banks - $ 580 bn - represented 23.4% of the market. In
third place were the French banks with 8.9%, followed by the British with
7.4%. The German banks share was 6.7%. ) In the UK, for example, Japanese
banks control approximately 22% of all liabilities/assets of banks resident
there and, in 1984, held roughly 70% of the London Floating Rate Note mar­
ket (USA 4.6%). This compares extremely unfavourably with the 0.97% of all
deposits and 3.10% of all loans and discounts of all foreign banks in Japan
during the same period. As a further demonstration of the growing interna­
tional powers of Japanese banks, it can be seen that in 1980 there was only
one Japanese bank in the top 10 world banks, ranked by assets, and 13 in
the top 50. In 1985 the figures were 5 and 18 respectively. The US have 19
banks in the top 100 compared with 26 Japanese banks.
With regard to the domestic market in Japan, foreign banks are
not competitive essentially because of the low cost deposit base available
to Japanese banks and the very fine margins over libor and other market
funding costs which they offer on lending. This particular advantage en­
ables the Japanese banks to fund their assets at substantially lower costs
than those available to fore gn banks. One result is that for all intents
and purposes, the foreign anks in Japan largely operate as off-shore
institutions and their pretence in the domestic markets appears to be
strictly marginal.
/
- 7 -
In order to offer a reasonable capacity for the foreign banks in
Japan to compete with the domestic banks it is necessary to significantly
accelerate market opening measures, especially with regard to interest rate
deregulation (this would apply to all deposits, i.e. all size/maturities so
the interest rate is a market rather than a regulated price) and to develop
an interank market (i.e. banks being able to actively deal with each other
on an uncollateralised basis, with no restriction on period and with a
wider variety of instruments). There is also a need to allow foreign banks
to raise fixed rate yen (i.e. deregulation of the arbitrary distinction
between short and long term domestic markets) and to have greater redis­
count facilities at the Bank of Japan. Fiscal barriers, e.g. the withhold­
ing tax on foreign currency borrowing abroad would also need to be abol­
ished. Taken in total, the above would necessitate the establishment of a
deregulated short and long term money market where all prices are market
related (operating on the concept of supply and demand), where there is
trading on name and rating and where the collateral requirements are total­
ly abolished.
On the other hand there is little question that the banking envi­
ronment in Tokyo is highly competitive; Japan is overbanked. There is pres­
ently insufficient demand from the corporate sector to satisfy market par­
ticipants. With the present situation of the domestic business environment,
banks will increasingly turn their attention to fee related and more speci­
alised business activities and it is here that the European bank has a dis­
tinct competitive edge. Thus for example European banks are among the most
experienced in the management of portfolios and pension funding but have
relatively restricted access to Trust Banking. Action needs to be taken to
ensure that the fundamental advantages enjoyed by European banks are not
frustrated during the liberalisation process which appears to be manipulat­
ed by the Japanese authorities to the advantage of the indigenous banks.
There is the danger that the present strong competitive advantage enjoyed
by foreign banks will continue to be eroded as Japanese financial institu­
tions relentlessly gain universal banking experience abroad; as the domes­
tic market is gradually liberalised and deregulated, which is an inevitable
but piecemeal process, such banks will repatriate their new-found expertise
and once again, as has happened in other sectors, squeeze the capacity of
the market to the absolute detriment of foreign competition.
An important barrier to the capacity of foreign financial insti­
tutions to operate in the Japanese markets results from Article 65 of the
Securities and Exchange Law. This law effectively prevents commercial banks
from opening securities company subsidiaries in Japan which are 100% owned.
Recently, for foreign banks the authorities relaxed their interpretation of
this Article but application is still subject to individual assessment. The
introduction of the "49,9% rule" is wholly cosmetic. The argument for the
complete repeal of this Article is that Japanese banks are able to offer a
full banking and securities service, say for example, in London and other
European markets, but foreign institutions - many of which are universal
banks - are effectively denied such access to the Japanese markets, albeit
in line with lo al banking laws.
CajDi_ta_l Markets
While the pace of liberalisation of interest rates is extremely
slow more has been achieved in the freeing of capital markets. Thus access
to the domestic capital markets for foreign borrowers (Samurai) has been
- 8 -
Improved and the Euroyen bond market has been liberalised. However, the
tendency in Japan has been to liberalise access to the long term markets
(equities and long term securities) but there has been very little progress
in developing the shorter term markets (although the recent introduction of
a short term government funding instrument is a step in the right direc­
tion) . Well developed short term markets are essential if the yen is to
take an increased international role. However, because of the regulated and
administered nature of the markets, Japanese short tern markets are non
existent or, where they exist, very underdeveloped.
The absence of developed short term markets has been the primary
factor in recent years in preventing an enhanced international role for the
yen. External investment into yen assets, apart from equities and long term
bonds, can only be directed into regulated bank deposits (except for exter­
nal official monetary institutions) or into the regulated C-D market or the
repurchase market. As pointed out above there is no interbank market, many
markets are controlled and there is as yet no developed Treasury bill or
yen denominated commercial paper market. Recently under the liberalisation
programme a banker's acceptance market has been established but this is
mainly of interest to domestic importers.
As a result of the absence of developed short term markets there
has been no real external access to yen assets with the consequence that
the yen exchange rate has never fully reflected the fundamental strength of
the Japanese economy. "External financial institutions, as well as the for­
eign financial institutions in Tokyo, have little or no access to yen as­
sets or to a yen funding base. Hence they have not developed an interna­
tional market in yen or yen assets. A further result is that as the inter­
national use of the yen begins to increase, with the liberalisation of the
Euroyen markets etc., the Japanese banks will have a substantial advantage
in yen business as they have, naturally, access to yen assets.
Thus without deregulation of the domestic yen markets the extent
of growth in the international use of the yen will be inhibited and such
expansion as may occur will be largely the prerogative of Japanese banks.
Capital flpws
An outstanding feature of Japan's external payments' position is
that Japan is now the biggest single exporter of capital in the world.
These capital outflows have the effect of increasing the potential influen­
ce of Japan on international capital flows. At present the bulk of the
capital outfow consists of portfolio investment mainly directed at the
United States. These outflows are a partial offset to the payments imbalan­
ces on current account which are particularly pronounced in Japan and the
ÜS. They are also the result of the more fundamental imbalances in the US
and Japanese economies with the excess of savings over investment in Japan
financing the deficiency of savings in relation to investment in the US.
Changes in these flows of capital could have repercussions on the world
economy and on Europe. Thus if Japanese portfolio capital flows were to
switch from the US e.g. to Community currency assets the balance of eco­
nomic activity and the stability of exchange rates could be affected. Apart
from their impact on the macroeconomic balance, movements in Japanese capi­
tal flows could create difficulties in other countries capital markets and
create regulatory problems that might require an international dimension in
their solution.
- 9 -
One of the characteristics of the Japanese economy is that the
external sector is basically $ denominated. This applies to both current
account and capital flows. While the situation is slowly changing and the
yen is used increasingly in the denomination of Japanese exports and in
loans to the LDCs, nevertheless if the yen is to play a greater role in the
international monetary system it will be necessary to encourage a greater
use of the yen for denominating trade and capital flows.
A further important element in capital flows is the nature and
the geographic distribution of the flows. There is scope for Japan to play
a bigger role in the financing of the LDCs both through an increase in
Japan's ODA and by increased contributions to the multilateral bodies as
well as in the form of direct investment in the LDCs.
Even the Community is a capital importer from Japan especially
in the form of direct investment. However Japanese direct investment in the
Community raises a number of issues as to the respective benefits as bet­
ween the importing countries and Japan (low technology transfer, investment
aimed at facilitating Japanese imports etc). There is also the question of
reciprocal access - in practice foreign investment in Japan is relatively
small and access to purchases of substantial equity participation, take­
over, mergers etc. are, despite formal liberalisation, difficult.
Direct investment in Japan would have the benefit for the Commun­
ity of allowing European industry to have access to Japanese know how and
technology. It is natural however for foreign investors, particularly small
and medium sized companies, to look to banks of the same nationality as the
investor for the financial services necessary to support the investment.
Thus in the Community both US and Japanese firms have found US and Japanese
banks who can offer them a full range of banking services. The same is not
true of European banks in Japan; foreign investment into Japan is made more
difficult by the inability of European financial institutions in Japan to
offer the range of services necessary to encourage direct investment pro­
jects. The attractiveness of Japan as a market for direct investment would
be enhanced if there was a dynamic European financial services sector
capable of offering a full range of services. The reverse would also be
true namely that a larger flow of direct investment from Europe to Japan
would help to create an environment and a market for European financial
service activity so that there is a certain interdependence between foreign
financial service activity and the flow of direct investment into a coun­
try.
V. Conclusions
The Community, in the fields of money and finance has not devel­
oped its relations with Japan sufficiently. Both the Community and Japan
tend to emphasise their bilateral relations with the United States. This is
understandable in the light of the influence of the United States on the
world economy and of the predominance of the $ in the international monet-
ary system. However the growth of the role of Japanese financial institu­
tions in the international banking and securities markets and the recently
developed role of Japan as a major exporter of capital have increased the
importance of Japan in the monetary and financial fields. Furthermore these
./·
- 1 0 -
recent developments may only be a beginning as Japanese banks and other
financial institutions expand and begin to offer a wider spread of financi­
al services, as the yen is internationalised and increases its role in
capital and foreign exchange markets and as Japanese external direct in­
vestment has an increasing influence on production capacity and technolo­
gical quality in the recipient countries. It is necessary to recognise how
far Japan has progressed in terms of the development of its provision of
financial services in the international economy and of the strong probabil­
ity of this continuing.
At the same time there is not a similar reciprocal development in
the capacity of the Community to provide financial services to Japan, to
have access to yen business internationally and domestically in Tokyo or to
influence Japanese monetary and financial policies, at least in so far as
they affect the Community. There is a need for the Community to develop
close relations with Japan in the exchange rate, banking and capital fields
with a view not only to protecting the interests of the Community but also
with a view to developing consultation and cooperation on the mutual prob­
lems facing Japan and the Community in the context of the international
system and its problems.
The develo] ment of a more enhanced relation?· hip with Japan should
be based on a Communxty approach. There are a number ■ f reasons why this is
important. Firstly the Community's own monetary arrangements form part of
the broader international monetary system and are not simply an internal
arrangement of the Community; this is already recognised by the existing
coordination at Community level in relation to international monetary dis­
cussions. The external dimension to Community exchange rate arrangements
and the future development of the international monetary system are matters
of coi mon concern to the member states as also are external bilateral rela­
tions which form part of the broader framework of the monetary and finan­
cial scene.
Secondly, the Community's position would be strengthened. This is
true both at the broad or general level and at the specific level where, by
dealing individually with the member states on bilateral issues Japan can
maintain the strength of its position and succeed in penetrating Community
markets on an individual basis without an effective liberalisation of its
own markets.
The need to develop a Community position in relations with Japan
in the monetary and financial field becomes all the more important as
liberalisation of exchange controls and capital markets proceeds within the
Community. The penetration of individual member states' financial markets
by external financial institutions will increase the capacity for external
financial institutions to operate over all Community markets as liberalisa­
tion proceeds. Complete freedom of financial service activity on a Commun­
ity wide basis, as agreed as an objective for 1992 in the recent Luxembourg
Agreement, will also make it necessary to develop a Community approach to
external relations as is already recognised in the Treaty (art.70).
• · · /...
In defining a Community approach to monetary and financial rela­
tions with Japan the Community needs to establish a framework within which
both the broader questions in the monetary field and the more specific
questions in the financial field can be encompassed. Such a framework
should define the objectives which the Community is seeking in its rela­
tions with Japan and should establish also the specific questions and
demands that the Community might have in relation to the international role
of Japan and the imbalances in financial services between the Community and
Japan. Such a framework would form a useful basis on which specific issues
of a bilateral nature between the individual Member States and Japan could
be encompassed. It would lend a Community weight to the existing individual
Member State negotiations with Japan. It would also provide a more balanced
situation with regard to financial services by bringing the full weight of
the Community to bear on these issues.
Another aspect of Community relations with Japan is the need for
enhanced monitoring of developments. Thus there is a need for a better ex­
change of information between the Member States on developments in their
relations with Japan and of the role of Japanese financial institutions in
their markets. This could be arranged within the framework of Community
consultations in an existing Community institution such as the Monetary
Committee. There is also a need to establish an enhanced monitoring of the
scope for European financial services activity in Japan. The Commission has
already suggested in its recent communication on relations with Japan the
establishment of a monitoring group to survey the development of relations
between Japan and the Community. This proposed forum might be a useful
means of developing a dialogue with the Japanese in this area not least
with a view to achieving effective action towards a more balanced com­
petitive situation.
Table 1
JAPAN
Current Balance
Trade Balance
Exports
Imports
Services and Transfers
Long Term Capital
Assets
Liabilities
--- Short Term Capital
Errors and Omissions
Overall Balance
: Balance of payments If
1980 1981 1982
-10.7 4.8 6.9
2.1 20.0 18.1
126.7 149.5 137.7
124.6 129.6 119.6
-12.9 -15.2 -11.2
2.4 -9.7 -15.0
-10.8 -22.8 -27.4
13.1 13.1 12.4
3.1 -1.0 1.6
-3.1 0.5 4.7
-8.4 -5.4 -5.0
1-1985
$ billions
1983 1984 1985
20.8 35.0 49.3
31.5 44.3 56.0
145.5 168.3 173.9
114.0 124.0 117.9
-10.7 -9.3 -6.7
-17.7 -49.7 -64.8
-32.5 -56.8 -82.1
14.8 7.1 17.3
0.0 -4.3 -0.7
2.1 3.7 3.9
5.2 -15.2 -12.3
Table 2
Monthly average exchange rate indices
1985 YEN/ECU YEN/USD ECU/USD DM/USD
January 100.0 100.0 100.0 100.0
February 101.4 97.5 96.3 96.2
March 102.3 98.4 96.1 95.9
April 97.8 101.0 103.2 102.8
May 98.3 100.9 102.6 101.8
June 97.7 102.0 104.3 103.4
July 95.7 105.2 110.1 108.6
August 94.2 107.0 113.8 113.6
September 96.1 107.5 111.9 111.7
October 99.2 118.3 119.3 119.9
November 102.6 124.4 121.4 122.2
December 100.7 125.2 124.4 126.0
1986
January 99.9 126.9 126.9 129.7
February 104.2 137.7 132.1 135.9
March 105.9 145.0 136.9 102.8
Table 3
Role of the Ten
Ten denomination of Japanese trade % 1983
Exports 35.0
Imports 3.0
Ten share in official foreign exchange reserves % 1984
$ 65
DM 12
Yen 5
External assets of banks in Japan $ billions Sept. 1985
Total 116.0
of which Yen denominated 57.2
Yen share in Eurocurrency markets % Sept. 1985
$ 69
DM 12
Yen 3
ECU 3
Yen share in Eurobond issues % 4th Q 1985
$ 63
DM 11
Yen 7
Table 4
International assets of banks by nationality - Sept. 1985
$ billions % share
Japan 640 26
U.S. 580 23
E.C. 822 33
Belgium 44 2
Luxemburg 10 -
Denmark 14 1
France 221 9
FRG 165 7
Italy 92 4
Netherlands 67 3
Spain 26 1
U.K. 183 7
Ireland )
Greece ) n.a.
Portugal )
Total 2477 100
Source : BIS
Table 5
Japan : External long t e n Capital 1980-1984
$ billions
Inflows
1980 1981 1982 1983 1984
Direct investment 2.4 4.9 4.5 3.6 6.0
Trade Credits 0.1 2.7 3.2 2.6 4.9
Loans 2.6 5.1 7.9 8.4 11.9
Securities 3.8 8.8 9.7 16.0 30.8
Other ............... ... 1.4 1.3 2.0 1.8 3.2
Direct investment 0.3 0.2 0.4 0.4 -0.0
Trade Credits -0.0 -0.0 -0.0 +0.0 +0.0
Loans -0.2 -0.2 -0.2 -0.0 -0.1
Securities 13.1 13.2 11.9 14.1 7.2
Other -0.0 -0.1 0.3 0.2 0.0
Net assets abroad
$ billions
1985 1986
1981 1982 1983 1984 estimate forecast
Japan 11 25 37 74 120 175
USA 143 150 106 4 -120 -250
FRG 19 21 21 28 40 55
UK 63 71 82 82 85 90
Table 6
JAPAN : External Long Term Capital Flow· by Raglan 1984
$ billions
Inflows
Direct investment
Trade credits
Loans
Securities
Other
U.S.
- 0. 1
+0 . 0
-0.0
0.7
0.0
E.C.
+0.0
0.0
- 0.0
3.4
0.0
Other
OECD
+0.0
0.0
- 0 . 0
2.5
0.0
LDCs
-0.0
0 . 0
+0.0
- 0.8
0 . 0
OTHER
-0.0
0.0
0.0
1.3
0.0
Outflows
Direct investment
Trade credits
Loans
Securities
Other
3.1
0.2
0.4
11.3
0.4
0.8
0.7
1.6
10.9
0.4
0.2
1.5
3.4
5.5
0.0
1.9
2.5
4.6
0.6
0.2
0.0
0.0
1.9
2.5
2.2
TABLE 7
JAPAN : ODA
$ billion
% GNP
1980
3.4
.32
1981
3.2
.28
1982
3.0
.28
1933
3.8
.33
1984
4.3
.35


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