Japan's Economy

Summary of Japan's Economy
Japan's Main Page

Overview

The second largest market economy in the world, Japan has a per capita income that ranks third.   In 1996, it registered a gross domestic product (GDP) of $4.63 trillion.  Following the collapse of the "bubble economy" in the early 1990's, growth in the GDP has slowed.  With the vision of creating a more efficient economy, Japan's government is currently promoting deregulation of numerous economic sectors.

HIGH-GROWTH ERA

Japan's postwar economy developed from the remnants of an industrial infrastructure that had suffered widespread destruction during World War II.  In 1952, at the close of the Allied Occupation, Japan was a "less-developed country," with a per capita consumption roughly one fifth that of the United States.  Over the next twenty years, Japan was able to become the first postwar-era country classified as "less-developed" to achieve "developed" status.  In 1968, Japan's economy became the world's second largest, behind only that of the United States.

The percentage of Japanese living in cities almost doubled between 1950 and 1970, thus increasing demands for services.  During the 60's, Japan's average for exports grew 18.4% per year.  This economic growth accompanied tremendous changes in Japan's industrial structure.  Whereas agriculture and light manufacturing used to be the mainstays of the economy, now it had shifted to heavy industry and services.  Dominating the industrial sector were iron and steel, ship-building, machine tools, motor vehicles and electronics.

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A MATURE ECONOMY

Although high growth rates were predicted for the 1970's, double-digit inflation, the Middle East oil crisis, and other factors, caused a recession which lowered future growth expectations.  This resulted in a reduction of private investment and economic growth slowed to an average of 3.6% from 1974-1979, a big drop from the 10% it had previously experienced.  There was a slight increase in the 80's to 4.4%, but it was not until recently that a positive change has come about, due to many factors, including the "bubble economy."

In spite of the oil crisis and what happened, Japan's major export industries remained competitive by cutting costs and increasing efficiency.  The energy demands were reduced and the automobile industry was able to improve it's position globally, by manufacturing lighter and more economical vehicles.  The second oil crisis in 1979 created a shift in Japan's industrial structure from emphasis on heavy industry to development of new fields, such as the computer, semiconductor, along with other technology and information-intensive industries.  This started a period of rapid growth.

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BUBBLE ECONOMY

Corporate investment rose sharply in 1988 and 1989.  New equity issues rose in value as a result of higher stock prices, thus making them an important source of financing for corporations.  In the meantime, banks sought for funds in the outlet of real estate development.  In turn, corporations used their real estate holding as collateral for stock market speculation.  A direct result of this was the doubling of land value prices and a 180% rise in the Tokyo Nikkei stock market index.

In May 1989, the government tightened it's monetary policies to suppress the rise in value of assets, such as land.  However, higher interest rates sent stock prices on a steady spiral down.  The Tokyo stock market had fallen 38% by the end of 1990, thus effectively wiping out 2.07 trillion dollars in value.  Steeply dropping land prices burdened financial institutions with bad debts and some of them even went bankrupt.  Others attempted to improve internal finances and managed to stay afloat by limiting the supply of capital to private businesses by being cautious in granting loans.  In October 1993, the recession bottomed out, but has been recovering slowly since then.

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THE INDUSTRIAL SECTOR

Some people expressed fears about the competitive capability of Japanese industry due to the slow growth of the economy in the late 90's.  Technological innovation has enabled Japan to regain a strong market position, in spite of the US's stand at the forefront of the computer and computer software industries.  Although the US is making a comeback in it's automobile industry, Japan has retained it's position as a leader in the semiconductor and automobile industries.

Influencing the slow recovery of the Japanese economy was the sharp rise in the value of the Japanese yen.  Although the yen has dropped since it's all time high in 1995, the steep rise caused many Japanese companies in key import industries to shift production overseas.  This is seen particularly in the automobile and electronics industries.  Assembly plants were opened in China, Thailand and Malaysia and other countries for manufacturers of electrical products such as TVs, VCRs and refrigerators.  This is because the work quality was high, whereas the labor was inexpensive.

The process of industrial and market globalization has resulted in increases in the export of both component parts and capital financing as well as in the import of finished goods.  Overseas production by Japanese manufacturers now accounts for 10% of total production and is quickly rising, although it is low in comparison to the US at 27% and Germany at 17%. 

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POSTWAR JAPAN

The primary characteristic of Japan's postwar economy is the 15-year period of high growth, beginning in the mid-1950's, that enabled it to catch up with the developed economies of Europe and the United States.  The reasons for this include high rates of both personal savings and private-sector facilities investment, a labor force with a strong work ethic, amply supply of cheap oil, innovative technology, and effective government intervention in private-sector industries.  Japan was a major beneficiary of the swift growth attained by the postwar world economy, under the principles of free trade advanced by the International Monetary Fund and the General Agreement on Tariffs and Trade.

During this period of high growth the competitive strength of Japanese industry rose steadily.  From the mid-1960s a current balance surplus was achieved throughout the year, with the exception of those years following the oil crisis of 1973.  In 1985, with net external assets of $129.9 billion, Japan moved ahead of the United Kingdom to become the world leader.  During this same period, the United States led the world in net external liabilities.  Except for 1990, when it was surpassed by Germany, Japan has maintained this position as world leader.

Though it is an understatement to say that Japan's economic growth was based on  its exports, it is a fact that exports and private-sector facilities investment played an important role during boom periods.  Regardless of overseas increases in demand, it is probable that the Japanese economy could be revitalized by the stimulation of domestic demand.

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PROBLEMS AHEAD

Japan's prolonged economic troubles have been attributed to its 50-year postwar economic system.  The Japanese government is presently taking forthright structural measures to deal with problems stemming from the bursting of the economic bubble and the need for thorough changes in order to accommodate industrial globalization.  The government is working to stabilize the nation's financial system and revitalize the country's sluggish economy.  After several prominent financial institutions declared bankruptcy in 1997, an implementation of measures began in part in 1998. 

Of concern is Japan's growing number of the elderly.  As the population of the aged increases in future years, the work force will be reduced.  It will mean an increase in social security demands as well as an increase in the tax burden that workers will be expected to carry. It is felt that an undermanned labor force is a possible factor in the reduction of potential growth.

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Information provided by the Japanese Embassy