The Economic History of Japan - Essay Example

The Economic History of Japan The History of “Scrap and Build” in Japanese Industries Japan became independent from American rule in 1952, and soon afterwards, the country started working on improving its economy. To achieve this improvement, Japan engaged in 3 phases of scrapping non-performing industries and building economically viable ones. Light manufacturing was replaced with heavy manufacturing and chemical industries. In the second phase, heavy manufacturing and chemicals were replaced by the machinery industry. The final phase witnessed more capital investments and modernization of products. It is during this third phase that Japan was hit by a recession triggered by the bursting of an economic bubble. During the American occupation, the Japanese had depended on exports from light manufacturing as the main source of revenue. When Japan attained independence, focus shifted from light manufacturing to the chemical and heavy manufacturing industries. As such, the light industrial products such as textiles and toys were replaced by heavy products including steel, cement, electric power, aluminum, petrochemicals, and shipbuilding (Burkett & Hart-Landsberg 107-108). Light manufacturing was scrapped off because products from this industry were no longer competitive internationally. The higher wages among workers working in the light manufacturing industry made it impossible for the products to compete with those of other countries whose workers did not have such high wages. As such, plants dealing with light manufacturing were gradually moved out of Japan and relocated to East Asia. Textile plants and electronics made via intensive labor, such as radios and tape recorders, were also relocated to East Asia. With the light-manufacturing products scrapped off, Japan was now able to build on chemical and heavy manufacturing industries. Products from the chemical and heavy industries exceeded domestic demand, thus forcing Japan to export the surplus production. These two industries depended on imported raw materials such as oil to keep them running. However, as Burkett & Hart-Landsberg write, during the1970s, the international prices of oil rose so high that Japan could not sustain the chemical and heavy manufacturing industries (113). Additionally, there was increasing political pressure to do away with the heavy manufacturing and chemical industries as they caused a lot of pollution and increased the cost of land. The increase in oil prices and pressure to reduce the cost of land and minimize pollution forced Japan to rethink its economic strategy. The 1970s witnessed another scrap and build process with the heavy manufacturing and chemical industries being scrapped off and replaced by new machinery and electronic products that were more advanced. Burkett & Hart-Landsberg state that by 1973, administrative infrastructure aimed at accelerating the creation of the advanced electronics and machinery was already in place (114). As such, the Japanese government started relocating the heavy manufacturing and chemical industries to East Asian countries such as South Korea. The newly formed machine industries focused on general machinery, electrical machinery, transport machinery, and precision machinery. As such, by 1980, Burkett & Hart-Landsberg write that Japan was producing office machines, semiconductors, and motor vehicles respectively. With the heavy manufacturing and chemical industries out of the way, the Japanese economy was unable to sustain the high wages paid to its workers, meaning that the domestic consumption of the new machinery products was low. Accordingly, once again, Japan became dependent on exports to sustain its economy. Burkett & Hart-Landsberg state that by 1980, approximately 62.8 per cent of Japan’s merchandise exports were from machinery (115). Most of the exported machinery, according to Burkett & Hart-Landsberg up to 60 per cent of motor vehicle exports, ended up in North America, the United States in particular(116). Considering that motor vehicles were highly valued, the United States felt that Japan was posing a threat to the economy of the former. The United States responded by forcing Japan to sign an agreement aimed at adjusting exchange rates (116). Consequently, the Japanese Yen appreciated by approximately 46 per cent, casting Japan into an economic crisis and subsequent recession. With the machinery industry in crisis, Japan was, for the third time since independence, forced to engage in a “scrap and build” process. However, instead of coming up with new industries, as was with the previous two phases, Japan relocated most of its manufacturing plants to other countries. According to Burkett & Hart-Landsberg the relocation allowed Japanese corporations to engage in increased capital investments, especially geared towards modernizing manufacturing plants (117). Focus was now on producing only the most technologically advanced machinery aimed for both local consumption and export. The balance sheet recession The Yen’s appreciation and subsequent inability to continue with the mass production and export of machinery, Japan went into a recession in 1990. Prior to the recession Japan experienced an economic bubble characterized by huge investment in the construction sector such that people owned large shares of real estate and financial resources (Burkett & Hart-Landsberg 116). Japanese banks were lending more money at very low rates without caring much for the financial credibility of the borrower. However, the bank of Japan saw the fault in the lending patterns and increased the lending rates between banks. With the lending rates increased, people were unable to repay their loans, causing the bubble to burst and the stock market to crash. Koo however, refutes this argument by stating that the Japanese banks never increased their lending rates and if anything, the lending rates in Japan since 1990 were at an all-time low (9). Koo adds that if the banks had increased their lending rates, the few serious corporations would have still taken the loans and continued investing (ibid). However, according to Koo the major problem that Japan faced was that its economy was too dependent on export rather than domestic consumption (5). As such, Japan suffered a supply and demand crisis in which the country was producing a lot of products which could not all be consumed. Asset prices fell drastically, beginning 1990, a phenomenon that created problems with the balance sheets of most private corporations. In relation to balance sheet problems, money made by businesses diminished, an occurrence which made Japanese companies insolvent (Koo 22). Instead of borrowing more money at lowered rates to pay their debt, these companies opted to use their earning to pay off the debts. Koo terms this strategy used by the companies as a “balance sheet recession”. A balance sheet recession according to Koo is characterized by private corporations choosing to save rather than borrow money and use for investment purposes. Such a move is economically dangerous since it stops cash flow as the corporate sector does not spend the money generated by households thus causing a reduction in total demand. By 2000, according to Koo, private firms were saving more than households, meaning that all the money that had been saved by households was held up in banks. However, as Koo writes, it is wiser for a company whose balance sheet is destroyed to seek debt minimization first rather than profit maximization (15). This was the case with Japan when after 1995, Japanese firms opted to save their money and use to repay debts rather than borrow more and use it for investments, even though interest rates were close to zero. By refusing to borrow and spend, Japanese firms forced the government to intervene and engage in huge fiscal stimulus. Using the fiscal stimulus policy, the Japanese government was actively involved in borrowing and spending in order to reduce the negative effects of non-borrowing from the private sector (Koo 24). The borrowed money was used in the economy-stimulating projects such as the construction of roads and bridges (ibid). Although the massive borrowing and spending left Japan with a very high national debt, it helped avert an economic depression. Works Cited Burkett, Paul, & Hart-Landsberg, Martin. Development, Crisis, and Class Struggle: Learning From Japan and East Asia. New York: St. Martin’s Press.2000.Print. Koo, Richard. The Holy Grail of Macroeconomics: Learning from Japan’s Great Recession. Singapore: John Wiley & Sons. 2011. Print. Read More