A Macroeconomic Analysis of Japan
A contemporary analysis of Japan’s economy demands the understanding of its socio-economic context through the lens of historical facts. Japan was a part of the axis forces during World War II and experienced vast nuclear devastation in the cities of Hiroshima and Nagasaki, caused by the United States of America. In 1945, the Japanese post-war economy experienced triple-digit inflation, a gross lack of raw materials for Japanese industries, and disappearance of overseas markets for Japanese exports. Most experts were of the opinion that Japan should lose all hope of being a modern economy and should instead focus on adopting ‘subsistence agriculture’ to anchor the economy. However, Japan had the benefit of having educated and skilled workers, serviceable industry and financeable infrastructure, and the support of the allied nations. It would seem odd that the allied nations support an axis force immediately after the war; but in the case of WWII, the allied forces came to the conclusion that the world economy would not survive another war should the axis forces retaliate once again and instead reached settlements with most of the axis nations.
In the 1950s, the Japanese economy was pulled back on track by way of the Korean War, U.S.A’s military procurement needs in the South Asian region, gave impetus to the Japanese manufacturing sector. By 1954 Japan had revived itself to its pre-war economic state. Japanese national income grew at a whopping rate of 9.1% per annum. By the 1960s Japan was touted to be a ‘miracle economy’ which bounced back from the ravages of a lost war with unprecedented speed.
This economic boom in the ’50s and ’60s was possible due to several reasons, one of which was their inward-looking strategy which aimed at import substitution and export promotion, similar to its South-Asian counterpart — India. Several scholars also believe that Japan was given a ‘free ride’ to economic prosperity by the United States of America. This is because Japan was pulled out of the economic crisis by the Americans during the Cold War. This essentially meant that in order to maintain allegiance and foreign ties, the Americans footed the majority of Japan’s defense expenditure and maintained its defense forces. Thereby, only a very small portion of Japan’s total revenue was allocated to defense, and could instead be channelized towards infrastructure development.
A few other significant reasons for the Japanese economy’s revival were its cooperative trade unions; the establishment of the open-world trading system which gave Japan access to several international markets to promote its exports; several entrepreneurial firms such as Sony, Nintendo, and Honda; as well as the fact that the Japanese are deemed to be the world’s biggest savers along with being the world’s biggest spenders. Their fast growth was possible despite heavy saving and heavy expenditure because of high levels of efficient domestic investment patterns along with extraordinary technological advancements such as the invention of the high-speed bullet train.
Certain unique structural features of Japan are important to consider as well. The Japanese Employment System is one such feature. In this system, a high-school or college graduate has a job waiting for him or her in a firm where he or she will have permanent employment till the age of retirement. It then follows the seniority structure, wherein each new employee will be given consecutive promotions which come with increments in income. The employees ceded political roles to the authority of Company and Trade Unions which played a strong role in determining managerial decisions. One could argue that job changes and differences in experiences are instrumental in improving the quality of the skilled workforce in an economy. Therefore, the Japanese firms would compensate for experiential skill improvement with targeted high-quality training. In most cases, firms are apprehensive of investing in employee training because of the possibility that employees leave the firm after. However, in this case the employees are guaranteed lifelong employment and increments in income basis performance, so the number of people who leave significantly reduces.
The Japanese concept of ‘Keiretsu’ is an important factor to consider as well. Keiretsu means ‘conglomerates or financial groupings’ in the post-WWII era. These are collections of business firms that are tied together by interconnected directorates and shared stock holdings, in addition to informal understandings of a symbiotic co-existence. Each large bank would have a constellation of firms affiliated with it. It relates to the system of corporate finance and banking. As a result, in post-war Japan, the economy’s firms didn’t need to turn to the equity market but instead to the banks in their Keiretsu.
With respect to the Japanese political system, the Liberal Democratic Party (LDP) has controlled the state, especially in the post-war period. They fostered a conservative, pro-business, and macroeconomy oriented goal. The Japanese people bought into the idea of high GDP growth to propel the economy with the trade-off of domestic housing conditions, negative effects of industrialization, and the authoritarian regime of the LDP Government. The popular phrase used to describe Japan at the time was — “Rich Japan, poor Japanese”.
The OPEC oil strike of 1973, meant that hydrocarbon poor and import heavy Japanese economy, came to a screeching halt. However, the recovery of the Japanese economy was fast and strong. The resurgence was through the high-powered exports of automobiles, VCRs, and Walkman — mostly imported by the U.S.A. Reeling from the strike themselves, they welcomed the low fuel consumption, high. Mileage, good quality, and significantly cheaper automobiles. In addition to this were Japan’s electronics with sophisticated designs and good prices. Japan had cracked the concept of ‘volume trade’ in the global economy. In 1976, the USA’s trade deficit with Japan was USD $4 billion, it increased to USD $10 billion by 1978 and a whopping USD $40 billion by 1985. In the 1970s, the annual growth rate of Japan’s National Income slowed and dropped to 5% from the post-war 9%. However, it stayed constant at 5% for several years, which was good in an era of American stagflation.
The collapse of the miracle economy was also met with an end to the erstwhile idea that the cost of high growth rates would be the Japanese people. Towards the ’70s and ’80s, public angst mounted and mass protests ensued with the people no longer prepared to trade-off social security for national growth. This took the shine off of the LDP’s regime.
The 1980s were known as the ‘Big 80s’ in Japan. Japan had the wealthiest population, most educated, and longest living population in the world. There was a popular saying which said ‘Japan won the Cold War’. Few experts concluded that the value of the acres of the Imperial Palace in Japan was more valuable than all of California’s land and that the real-estate value of Tokyo was higher than the total real estate value of the United States of America as a whole. It is perceived that with this amassing of wealth, the Japanese youth’s ethics eroded and expectations expanded. The current cost of living in Japan is USD $2700 per day.
1994 to 2019 has been named the ‘The Great Stagnation’, with the Japanese economy stabilizing and stagnating at USD $5 trillion. Japan’s extremely low birth rate and high life expectancy — Japan have a very low replacement rate and the youth working to support an increasingly dependent population of the elderly, leading to low net productivity and growth. Apart from this, the Japanese automobile manufacturers have been challenged by their South Korean counterparts.
As a response to this, the Government of Japan has implemented monetary and fiscal policy reforms. By way of monetary reforms, they have regulated the Keiretsu and large banks to have low-interest rates to cause more consumption and higher inflation in the economy. However, it could result in the economy falling into a liquidity trap.
In the mid-90s, Japan’s market rate of interest (‘i’) was just 6%. The CPI and WPI were not improving despite this low-interest rate and there was massive deflation. When deflation happens, it’s superficially beneficial to the common man because they will hold onto their money, mostly as cash reserves, and wait for prices of a currently expensive good to drop, and then purchase it. For example, instead of using ‘x’ amount of money to buy an inferior automobile ‘A’, the average consumer will hold onto their cash reserves/ savings and buy luxury automobile ‘B’ for the same amount of ‘x’ at a later date. This implied that there was very low spending in an economy experiencing deflation, which led to a recession. The government of Japan resorted to ‘Quantitative Easing’ i.e. fiat money which increased the amount of money in circulation to boost consumption and get business cycles to have an upward swing on the path of recovery.
In the mid-90s, Japan’s market rate of interest (‘i’) was just 6%. The CPI and WPI were not improving despite this low-interest rate and there was massive deflation. When deflation happens, it’s superficially beneficial to the common man because they will hold onto their money, mostly as cash reserves, and wait for prices of a currently expensive good to drop, and then purchase it. For example, instead of using ‘x’ amount of money to buy an inferior automobile ‘A’, the average consumer will hold onto their cash reserves/ savings and buy luxury automobile ‘B’ for the same amount of ‘x’ at a later date. This implied that there was very low spending in an economy experiencing deflation, which led to a recession. The government of Japan resorted to ‘Quantitative Easing’ i.e. fiat money which increased the amount of money in circulation to boost consumption and get business cycles to have an upward swing on the path of recovery.
By way of Fiscal Policy, the Govt. lowered income tax rates to increase disposable income and money circulation in the economy. The newly available money circulating in the economy can also be channelized into public works projects and infrastructure development, which will have lasting benefits apart from the short-term stimulation of the economy. However, with excessive outflows and limited inflow, Japan had a high rate of savings depletion which put the nation into heavy debt. National debt to the USA amounted to USD$11 trillion dollars plus interest rates. As a result, Japan couldn’t take fresh loans, the workforce has low productivity, and once pioneering industries have been overtaken by South Asian counterparts.
Japan fell prey to the Classical economic idea that supply will create its own demand and growth will go on forever. With its key manufacturing industries becoming inferior to Asian competitors in the market, Japan must incentivise work-force replenishment in the economy by way of implementing benefits for families with more than 1 or 2 children, accompanied with educational reforms to include professional training courses. In addition to this, Japan must create a favourable educational and industrial climate to attract Foreign Direct Investment by way of student influx and lucrative job opportunities.
