try were definitely improved as a result of effective control over production and increased demand in both domestic and foreign markets. Exports of rayon yarn increased about 30 percent on a quantity basis over 1935, while the quantity of rayon-cloth shipments advanced about 20 percent. Many rayon producers turned to the manufacture of staple fiber, under the stimulus of Government encouragement and because of the temporary cessation of imports of wool from Australia during the period of the trade disagreement with that country. Construction projects are expected to increase staple-fiber production capacity to 200 tons per day by the close of 1937.

HEAVY INDUSTRIES

The iron and steel industry again established an all-time production record. The year's output of fabricated steel increased 15.6 percent over 1935, but production of pig iron did not keep pace, gaining only 5.5 percent. Interest during the year was centered on meeting the heavy domestic demand as a result of the expansion in heavy industries, stimulated by the military replenishment program. Exports showed a satisfactory gain, and imports of finished steel were further reduced as a result of the diversification and improvement in domestic production. Scrap-iron imports declined as a result of the markedly higher prices in America and other foreign sources of supply. Continuation of the upward trend in production is expected for 1937, but it appears probable that domestic consumption will be greater than production and that imports of fabricated steel will continue in fair volume.

The machinery industry experienced a boom of major proportions during 1936, owing largely to the heavy Government expenditures for armaments and related products. The shipbuilding boom and the rapidly expanding export trade also contributed materially to the prosperity prevailing in practically every branch of the industry. Renewed efforts were made to improve and to increase the domestic manufacture of precision instruments and machinery, admittedly still behind other branches. Fully 70 new corporations were organized to engage in the machinery industry, while the total amount of new capital, 108,000,000 yen, exceeded the amount in 1935 by 53,205,000 yen. Exports of machinery and parts set a new record and exceeded the 1935 total by 22 percent and were 30 percent larger than in 1934. Whereas in 1934 fully 90 percent of all machinery exported from Japan went to Manchuria, Kwantung, and China, largely for Japanese enterprises, by 1936 the share destined for these markets had dropped to 78 percent, pointing to the opening up of new markets. Imports of machinery, however, continued to exceed exports, largely because of the heavy demand for machine-manufacturing equipment.

Marked expansion occurred in the chemical industry during the year. The goal of self-sufficiency was almost attained in industrial chemicals, but it was still necessary to import fairly large quantities of crude chemicals. Sizeable gains were shown in the production of other chemicals, with particularly noteworthy increases in drugs and coal-tar products. A number of new products were developed during the year. An important feature of the industry was the application of the Major-Industry Control Law to the production of chemical fertilizers. Progress was recorded in the production of power alcohol and of fuel substitutes by coal liquefaction, in line with the Govern

ment's policy of attaining self-sufficiency with respect to liquid fuels. Profits of chemical producers were quite substantial, although somewhat below the levels of 1934 and 1935.

AGRICULTURE

Several factors contributed to some improvement in the agricultural situation during the year. Somewhat larger production, substantially higher prices, lower land taxes, curtailed interest charges as a result of the easy-money policy, and various governmental relief measures tended to lighten the hardships of the farming classes. Estimates indicated an advance of 12 percent in the average price of principal agricultural products, against an advance of only 7 percent in the general price level. Of primary importance was the continued upward trend in raw-silk prices, influenced by heavier purchases by the United States, the principal consuming market, and higher cocoon prices. The price of raw silk averaged 773 yen per bale, a gain of about 8 percent over 1935. Average rice prices for the year were the highest since 1929, and showed an increase of 2.8 percent over 1935. The value of agricultural production as a whole for 1936 is placed at 3,850,000,000 yen, or 13 percent above the previous year. While this is a very encouraging improvement it hardly indicates a return of prosperity, since the production value is still about 18 percent below the 1919-28 average, which, in turn, was not a really prosperous period. Basically, agriculture is no better off than it was 20 years ago, whereas industrial production has more than tripled and foreign trade for 1936 was some 12 percent over the earlier peak year of 1925. The lack of balance between agriculture and industry is perhaps the most unfavorable feature of Japan's present economic structure.

COMMODITY PRICES WAGES AND EMPLOYMENT

A general upward trend prevailed in both wholesale and retail prices in 1936. Crop shortages brought higher prices for certain agricultural products practically throughout the year, but the greatest general price increase occurred during the last quarter. Wholesale prices in December showed a 12-percent increase over the end of 1935 and represented the peak since 1929. The average for the year gained 7 percent against a gain of 4.5 percent in 1935 over 1934. Improved demand from the United States for raw silk and the shortage in the supply of pig iron were factors contributing to the sharp price advance. Retail prices moved upward in sympathy with wholesale commodities. The average for the year advanced 5 percent against 2 percent in the previous year.

Notwithstanding increased living costs, wage rates failed to advance, but, according to average indexes, actually declined slightly. Actual earnings also failed to register any improvement, the average for the year showing practically no change from the 1935 level. Factory employment was fairly constant, but general employment showed encouraging increases.

FOREIGN TRADE

Higher raw-silk prices, increased exports of sundry products, and heavier arrivals of raw cotton were factors mainly responsible for an increase of 9.8 percent in the value of the Empire's foreign trade in

1936, compared with 1935. Total trade reached a record high value of 5,726,000,000 yen notwithstanding a number of unfavorable factors, including increased trade restrictions against Japanese products in foreign markets. Despite trade obstacles, exports from Japan proper advanced to a value of 2,693,000,000 yen, or 7.8 percent over 1935, although the gain was considerably below the 15 percent increase recorded in 1935 over 1934. Imports, valued at 2,764,000,000 yen in 1936, represented an increase over 1935 of nearly 12 percent. The trade improvement, however, was not reflected in a more favorable trade balance as was the case in 1935, for imports exceeded exports by 71,000,000 yen for Japan proper and slightly over 130,000,000 yen for the Empire. In 1935, Japan proper actually had a favorable merchandise trade balance of 26,800,000 yen, while the Empire's trade showed a comparatively small import excess of 14,700,000 yen. The sharp rise in the 1936 import excess, coupled with the fact that the large 1937-38 budgetary allotments for defense purposes would cause an even greater inflow of imports during 1937, were very important contributing factors to the promulgation of the new Exchange-Control Regulation which became effective on January 8, 1937.

It is noteworthy that, according to estimates of the Yokohama Specie Bank, Japan had a favorable balance in invisible trade accounts of about 120,300,000 yen. There was also an export excess, totaling 28,500,000 yen, in the specie and bullion trade. According to these estimates, therefore, the favorable balance in invisible trade for 1936 more than offset the import excess in merchandise trade, and the international trade balance was actually favorable to Japan to the extent of 20,000,000 yen. This compares with a net loss for 1935 of 61,361,000 yen.

The definite trend prevailing during the past few years toward lessening export dependence upon fiber products continued in 1936. The combined export value of raw silk, silk tissues, rayon tissues and yarn, and cotton textiles and yarn dropped to 43 percent of the total export trade value, as compared with 46 percent in 1935, 50 percent in 1934, and 60 percent in 1931. On the other hand, sundry manufactured products made an appreciable gain of 13 percent, despite the further spread of restrictive measures abroad.

Import gains were confined primarily to raw materials, particularly raw cotton, crude rubber, and crude oil, and to foodstuffs. Iron, aluminum, and copper imports were all far short of 1935 values. Manufactured goods accounted for 10.6 percent of the total imports, compared with 11.5 percent in 1935. The largest decline occurred in machinery and parts, indicating the rapid strides Japan has made in the past few years toward attaining greater self-sufficiency in this item.

While there were no radical changes in the geographical distribution of Japan's trade during 1936, several significant and interesting developments took place. These were, in the main, a reflection of Japan's barter policy, applied particularly to the smaller countries, and the continued search for raw materials. There was a deep penetration into several comparatively new markets for both export and import products. For instance, it was anticipated that the collapse of negotiations for the renewal of the abrogated Japan-Egypt commercial treaty would be reflected in a noticeable reduction in trade with Africa. Exports to Egypt alone did lose 24 percent and imports 11 percent, but total exports to Africa rose by 7.5 percent and imports by the striking amount of 56 percent.

The amazing increase in imports from Africa merely followed the energetic drive Japan is making for new sources of supply for raw materials. Two items represent practically the entire increase-raw cotton and wool. Instead of confining purchases of African cotton to Egypt, as in the past, the scene of active buying was shifted to Kenya, Uganda, and Tanganyika to the extent of 27,500,000 yen against 677,000 yen in 1935. The trade disagreement with Australia forced the exploration of other sources of supply for wool, with the consequence that the Federation of South Africa sold Japan 17,389,000 yen worth of that commodity during 1936 against 1,872,000 yen in 1935. Wool purchases from Argentina were more than 10 times as large as in 1935, having a value of 6,582,000 yen in 1936, compared with only 612,000 yen in the previous year. Uruguay also participated in Japan's extended demand for raw materials, as its total contribution (chiefly wool) was valued at 9,600,000 yen, against 4,500,000 yen in 1935. Chile experienced the same profitable turnover as Uruguay. Canada more than recaptured that portion of its export trade with Japan lost in 1935 over tariff disputes, and purchased 100 percent more Japanese goods. Exports to Manchuria and the Kwantung Leased Territory increased nearly 17 percent, while imports from these areas gained 11 percent.

Exports to the United States were featured by a sharp increase in sundry goods, which accounted for about 19 percent of Japan's total shipments to the United States in 1936, compared with 15 percent in 1935 and only 7 percent in 1934. Raw silk, though still the outstanding item in exports to the United States, accounted for but 56 percent of the 1936 total, against 61.5 percent in 1935 and 71 percent in 1933. The United States did not share extensively in Japan's increased imports of raw cotton, purchases of the American product advancing less than 1 percent while imports of Indian cotton increased by 26 percent and purchases from other countries advanced sixfold. On the other hand, sharp increases occurred in imports from the United States of mineral oils, sulphate of ammonia, dyestuffs, wood pulp, rails and fish plates, automobiles, and lumber.

FINANCE

Although uncertainty over Government policies prevailed throughout most of the year, the general financial situation remained remarkably calm. Stock prices recovered from the sharp declines suffered early in the year, deficit bond issues were absorbed without causing harmful inflation, and yen exchange was maintained at the desired level of $0.29 and 1s. 2d., even at the cost of greatly depleted foreign balances. Furthermore, bank and trust-company deposits and postalsavings accounts registered healthy advances. The money market ruled comparatively easy throughout the year, despite the unusual demand for funds for industrial expansion.

The outstanding financial feature was the enormously expanded budget planned for the 1937-38 fiscal year, in order to provide funds for an extensive national-defense program and a number of other projects. Budget estimates were raised to an unprecedentedly large figure, which naturally necessitated drastic measures to increase revenue. Plans were made, therefore, for a widespread increase in taxes and import tariff duties, prices of monopoly commodities were raised, and the deficit bond issue increased to almost 1 billion yen. None of the plans were carried out in 1936, however, and, with a change in

Government in January 1937, the budget was revised downward and other measures proposed by the former administration were withdrawn from the Diet. The budget for 1937-38, as finally approved by the Diet in March 1937, called for total expenditures of 2,815,000,000 yen. While this figure is about 10 percent less than that proposed by the former Government, it represents a considerable increase over the working budget for 1936-37 or for any previous year. Deficit bond issues are placed at 915,000,000 yen, or 128,000,000 yen more than in 1936-37.

Only a small increase occurred in the Bank of Japan's average note issue for the year despite the Bank's heavy purchases, increased foreign trade, higher commodity prices, and the general expansion in industrial activities. The outstanding national debt at the end of the year, however, reached a record high of 10,811,673,000 yen, including short-term rice bills, and represented an increase of 809,282,000 yen over the end of 1935.

Source: Mitsubishi Economic Research Bureau simple index of 12 commodities.