The Foreign Exchange Allocation Policy in Postwar Japan: Its Institutional Framework and Function

In this paper we will make clear the institutional framework and function of the foreign exchange allocation system in 1950's Japan. Until trade liberalization progressed in the first half of 1960's, MITI executed de facto import quota by means of this system, which generated substantial amount of rent. In order to restrain rent-seeking activities, MITI set clear and objective criteria for foreign exchange allocation by firm, which were in many cases based on export performance and production capacity of each firm, and announced them publicly. This method caused competition to acquire rent thorough foreign exchange allocation among private enterprises, and promoted export and investment. We will quantify the criteria using firm-level data of foreign exchange allocation and also analyze their function through estimating export and investment functions.