While the United States invests more than Japan in research and development (R&D), Japan's R&D investments relative to the size of its economy are slightly larger than those of the United States. In 1994, for example, Japan invested 2.6 percent of its gross domestic product (GDP) in R&D compared with 2.5 percent by the United States. With a GDP that was only 39 percent of that of the United States ($2.1 trillion versus $5.3 trillion in constant dollar terms) in 1994, Japan's overall R&D expenditures were 41 percent of those of the United States$54 billion versus $133 billion. Japan's proportion of GDP invested in overall R&D began to surpass that of the United States in 1989 and has continued for several years. (From 1975-88, the United States invested a relatively larger amount in R&D than did Japan.) (See table A-1.)
Japan's effort in basic research, however, has been somewhat lower than that of the United States, but this area is currently receiving special attention in Japan. From 1976-88, Japanese spending on basic research, relative to the size of its economy, generally remained at about 80 percent of U.S. levels (Papadakis and Jankowski, 1991) and was conducted mainly in industrial laboratories. From 1980-92, average annual rates of growth in investments in basic science in Japan outpaced GDP growth rates by 5.9 percent versus 4.2 percent, respectively. By 1992, Japan's basic research expenditures reached about 84 percent of those of the United States, representing about 0.38 percent of GDP. In that same year, U.S. basic research expenditures represented 0.45 percent of GDP. While Japan has traditionally invested a smaller percentage of its overall R&D in basic research compared with the United States (table A-6), since 1992, Japan has adopted the goal of improving its basic research and innovation capacityparticularly in universitiesthrough increasing government support of R&D.
To understand the context of this recent shift to focus on basic science, the development of Japan's science and technology (S&T) policy can be briefly summarized in three main phases: the well-known catch-up phase following World War II; the initiatives for innovative technologies in the 1970s following the oil crisis; and the new funding programs of the 1990s to change the culture of science in Japan and promote breakthrough research.
Following World War II, Japan rebuilt its economy by consciously investing in quality engineering to improve on imported technologies. From 1945-72, Japan successfully carried out a technology policy of importing Western technology and investing large amounts of R&D funding on adaptive technology (Tamura and Peck, 1983). Initially significant in this post-war development period were the policies of the Natural Resources Section  and the Scientific and Technical Divisions of the Occupation Forces. The latter played a key role in rehabilitating Japan's capacity for scientific inquiry (Yoshikawa and Kauffman, 1994). The process of catching up after the war included the selection of technologies developed overseas, long-term investment in adaptive research, and marketing of improved products. The Japanese government assisted in this catch-up phase, most notably by adopting trade policies that protected Japanese firms from competition and by restricting foreign investment in Japan (Odagiri and Goto, 1993, and Goto, 1995).
The serious environmental problems of the 1960s and the energy crisis of the early 1970s motivated Japan to advance to a second phase of S&T policy: building its capacity for indigenous and innovative technology for sustainable development. The Japanese S&T White Paper in 1973 began urging a restructuring of research toward this end. This S&T document provided a vision of a new focus for Japanese R&Dthat of performing basic research related to the goals of developing environmentally sound technologies for the nation (Science and Technology Agency (STA), 1973). The ensuing 20 years saw a gradual evolution of science structures and the introduction of new programs for the support of innovative research, including a competitive grants-in-aid program in the universities, new mechanisms for funding young scientists from industry and universities on fixed-term appointments, and a redirection of national laboratories toward long-term basic research.
The third phase of S&T policy began in the 1990s with the growing awareness among Japanese S&T decision makers that continuing their formerly successful strategy of emphasizing research to adapt imported technology would not provide the capabilities required in new and rapidly developing technologies, such as biotechnology, gene therapy, and software for computer networks (Ichikawa, 1996). Competition from Asian emerging economies further increased Japan's awareness of the need for ever more advanced industries based on fundamental science.
In 1992, therefore, Japan's Cabinet called for a doubling of the government's R&D budget as soon as possible, and expanded funding of new programs and mechanisms for innovation research. The S&T policy document of that year recommended a major renewal of facilities and equipment in the universities and national research institutes and an expansion of competitive research grants. Subsequently, in 1995, the Science Council of Japan created the legislative support to increase the science budget through the Science and Technology Basic Law. The S&T Plan of 1996 suggests that the government of Japan invest 17 trillion yen in R&D from 1996-2000, equivalent to $74 billion in 1987 constant dollars. This would represent a sizable increase (35 percent) over the amount spent in the previous five yearsapproximately $51 billion in constant dollars from 1991-95 (table A-4). To this end, the Japanese government increased its R&D budget in 1996 by 12.5 percent and the Cabinet-approved 1997 R&D budget has an additional 6.8-percent increase.
Despite Japan's economic recession, the Science Council managed to generate unanimous support in the Diet to use the sale of construction bonds to increase science funding. The notion of restructuring the economy through knowledge and education is widely held throughout the Japanese culture (Rohlen, 1992). Those Japanese over age 50 have lived through the reconstruction of Japan from devastation to become a leading world power. Those Japanese under age 50 are told repeatedly that in a country with few natural resources, education and S&T must be key national resources for prosperity.
The passage of this new Science and Technology Basic Law indicates that improving Japan's S&T capacity for innovative research is a national priority. Mobilizing strategic basic research is deemed essential for recovery from recession and for the long-term sustainable development of Japan. In the summer of 1996, the Science and Technology Basic Plan required national science agencies, as well as local governments, to submit 5-year plans on how they will accomplish this transition to a higher standard of S&T in Japan.
Although increasing the government science budget received unanimous support in the Diet, the tactic used to generate new research funding through the issuance of construction bonds remains controversial. The Science Council and the science community have argued that this investment in innovative research will yield breakthroughs for future industries, increasing the tax base and allowing repayment to the public for all the bonds floated. Japan's Ministry of Finance and some Diet members are concerned, on the other hand, about whether or not the bonds will be paid back in a timely manner (Ikeda, 1996).
A deeper concern is whether or not this new money will actually improve the quality of basic research and innovation. Research scientists and science policy decision makers alike cite the need to change the culture of science in Japan to provide a more competitive research environment and to increase human resources for science. (Kitazawa, 1996). Appropriately, the Science and Technology Basic Plan (July 1996) and the White Paper on Science and Technology (1996) focus on steps to be taken from 1996-2000 to improve the climate for basic research in Japan (STA, 1996).
This report provides comparisons of U.S. and Japanese science resources and some initial evidence that Japan is expanding the human and financial resources for science, while improving the environment for basic research. The data cover S&T trends in overall R&D from 1975-94 as well as more recent changes in government and university research in Japan. It also covers research trends in private industries and the training of personnel within Japanese companies and in American universities. The report concludes with the implications of these changes to the U.S. and international research community and the need for further research.
 All dollar amounts in this report are in 1987 constant dollars using purchasing power parity (PPP) conversions. PPP conversion rates for Japanese yen are given in table A-1. PPPs are used to convert a country's national currency expenditures to a common currency unit that allows real international quantity comparisons to be made. PPPs are based on "market basket" pricing exercises. See Methodology and Notes on Data Series for details on why PPP conversions are preferable to market exchange rates.
 The Natural Resources Section of the Occupation forces reported on Japan's natural resources, as well as resource requirements for Japan to recover and advance to the highest economic level (Yoshikawa and Kauffman, 1994).
 Basic Policy for Science and Technology (approved by the Cabinet, April 1992) based on the 18th Recommendation of the Council for Science and Technology (January 24, 1992), a report on the Comprehensive and Basic S&T Policy: Toward the New Century.
 Still pending Diet approval.
 The use of construction bonds required Ministry of Finance approval.