Japan in the Last 30 Years - Essay Example

Japan in the last 30 Years I. Introduction The Japanese economy had been depicted as a success before the 1990s. Calculated at 1990 prices, real GNP per capita in the country rose from US$1,230 in 1950 to US$23,970 in 1990 (Siddiqui 2009, citing Crook 1993). During the same period, average life expectancy increased from 50 to 75 years old for males and from 54 to 81 years old for females. Japan’s economic miracle in the 1950s and 1960s has been recognized although there are debates on how the miracle was achieved (Siddiqui 2009). Japan was the first nation to break the western monopoly over industrialization (Siddiqui 2009). An important indicator of that achievement is that Japan continues to be the only non-western nation to have had the ambition of ruling the world and the only non-western country to have implemented a policy of attempting to subjugate the whole world in modern history. II. Graphical Analysis Japanese economy has been described as a success in 1980s but the decade of the 1990s was a lost decade. However, data indicate that situation may have to be more accurately described. For instance, in Figure 1, we see that if gross domestic product or GDP per capita figures are not adjusted for inflation, it would appear that Japanese economy appears to be alright until the mid-1990s. However, beginning in the mid-1990s, the Japanese economy appeared to have plunged downward and started to recover sometime at the beginning of the 21st century, if not for the Fukushima nuclear and tsunami disasters of 2011. Figure 1. GDP per capita in $ not adjusted for inflation: US, Japan and China Source: Intellectual Takeout 2012 Figure 2. Japan’s GDP per capita in $ at current prices Source: IMF 2012a Figure 1 is a graph from the website of the Intellectual Takeout while Figure 2 is my own reconstruction of Japan’s GDP in $ at current prices based on data set of the International Monetary Fund. At least for Japan, the insight that can be obtained based on the GDP per capita in $ is that the key insight that can be developed from Figure 1 is correct: Japanese economy was on a steady rise from 1980 to around 1995 but nose-dived before slowly recovering upward. Figure 3. GDP per capita in current US$ of select countries Source: IMF 2012b Figure 3 compare the GDP per capita in current US$ of select countries and compare them with Japan. It is worth noting that Figure 3 suggests that in terms of GDP per capita, the overall context is that Japan still belongs to the bigger league of strong nations although Japan has been weaker in the last several years. In contrast, China may be a big economy (and some report the economy as the second biggest economy) but in GDP per capita dollar terms, the citizens of Japan appear to be in a better situation than China. Figure 4. World GDP per capita at current prices, 1960-2010 Source: Index Mundi 2012 Meanwhile, the key insight that can be derived from Figure 4 is that globally, the period 1995 to 2003 marks a situation in which GDP per capita in dollar terms at current prices worldwide is on a plateau and the data appear to indicate a situation affecting all countries worldwide. The World Trade Organization was founded sometime 1995 and all countries may have been adjusting at that time. Thus, there was a plateau in world GDP per capita growth around the period 1995 to 2003. Figure 5. Japan’s GDP per capita in Yen at constant 2000 prices Source: IMF 2012a Figure 5 shows Japan GDP per capita in yen at constant 2000 prices. From an average per capita GDP growth at yen values at 2000 prices of 3.36% between 1971 to 1979, Japanese per capita GDP increased to an average of 4.44% from 1980 to 1989 before decreasing to 1.18% from 1990 to 1999 until it decreased further to 0.48% from year 2000 to 2009. In 2010, Japanese per capita growth based in their yen values at 2000 prices was 4.40% but the Tsunami and Fukushima disaster of 2011 will probably bring down the most recent average or mean per capita GDP growth. Table 1. Japan’s per capita GDP growth based on yen values at 2000 prices Source: This author’s computation based on IMF 2012a Most important, what is suggested by is suggested by Table 1 is that we actually have two lost decades in Japan: 1990 to 1999 and 2000 to 2009. There may be a risk of three lost decades because of the Tsunami and the Fukushima disasters which affected Japan in 2011. Meanwhile, Figure 6 shows the real per capita GNP of Japan and the USA from 1890 to 1999 in terms of real GNP at 1990 PPP dollars. One way to interpret Figure 6 is that one may criticise Japanese policies for being protectionist or for its adherence to industrial policies but what cannot be denied is that the same policies enabled Japan to catch up with the United States. However, when Figure 6 is compared with Figure 4, it may also be argued that economic growth was the trend during the period anyway and, thus, Figure 6 could be interpreted to mean that Japanese economic growth could have happened regardless of the policies Japan has pursued as she was already a world power during World War II. Figure 6. Real GNP per capita of Japan and the USA, 1890 to 1999, at 1990 PPP Source: Alexander 2000 III. Japan in 1980s and Factors for Success There has been a significant debate on what factors Japan’s success during the 1980s can be attributed. One view has asserted that “openness to trade” was the significant factor (Lawrence & Weinstein 2001). However, there is also a view that Japan’s success, just like the success of the Asian miracle countries, can be attributed to actions that deliberately made prices wrong to emphasize that Japanese success during the 1980s was not due to the adoption of market-friendly policies (Lawrence & Weinstein, 2001). Lawrence and Weintein (2001) reported that economist Dani Rodrik was among those who have held the view that Japanese economic success during the 1980s can be attributed to industrial policy. In Rodrik’s view, “industrial policies played the most important role by creating a particularly favourable environment for domestic investment” (Lawrence & Weinstein 2001, p. 379). The government structure that played a significant role in Japan’s economy and industrial policy was a deliberative council that “was seen as a device to facilitate the exchange of information between the government and the private sector” (Okazaki 2001). Big business interests are transmitted to the government sector through industrial associations that interact with the deliberative council. From the deliberative council, big business interests are then transmitted to several bureaus and departments of the Japanese government (Okazaki 2001). The deliberative council is the Industrial Structure Council under the Ministry of International Trade and Industry or MITI that was organized in 1964 as “successor to the Council for Industrial Rationalization” (Okazaki 2001, p. 324). The Industrial Structure Council which was organized since the 1970s and which had directed the economic growth of the 1980s had “19 branches, seven of which were organized by industry” (Okazaki 2001, p. 324). The organization of the Japanese Industrial Structure Council is shown in Figure 7. Figure 7. Organization of the Industrial Structure Council Source: Okazaki 2001 based on Japanese MITI sources Okazaki reported that the Japanese approach for ensuring that government policies match the interests of business groups. As mentioned, “the Industrial Structure Council was a large deliberative council with 505 members” was operative in the 1980s in which “108 (21.3 percent) were representative of industrial associations” (Okazaki 2001, p. 325). Business interests participate in all branches of the council that relate to their industry as iron and steel industry interests, for example, also participate in the heavy industry branch or cluster (Okazaki 2001, p. 325). According to Okazaki (2001), however, in the pre-war or pre-World War II period, business interests were transmitted to government via the Zaibatsus which were business interest grouped according to geographic area. In contrast, post-World War II transmission of business interests into government policies are carried out through industry groups. The post-World War II business organizations are organized along industry lines although they cross over or link with related industries, unlike the area-based business organizations before World War II or the Zaibatsus. It must be clear, however, that not all of the members in the Industrial Structure council are industry associations. This is pointed out in Figure 8. Figure 8. Membership in Japan’s Industrial Structure Council Source: Okazaki 2001, p. 327, based on Japanese MITI sources Sakoh (1984) argued that Japan had promoted her economic growth by keeping her expenditures low and its deficits small. As economic growth was continuous prior to the 1980s, Japan was also able to keep her taxes low (Sakoh 1984). Citing OECD data, Sakoh (1984, p. 523) that “in 1980, tax revenue was 26 percent of GDP in Japan, 31 percent in the United States, 36 percent in England, 37 percent in West Germany, and 42 percent in France.” Despite criticisms that the Japanese economy used industrial targeting, subsidies and protectionism, Sakoh (1984, p. 537) pointed out that the Japanese economy has been “a basically free-market economy.” According to Sakoh, by 1984, the Zaibatsus or “cartels” were dissolved. Some of the elements that were supposedly responsible for Japanese success during the decade were Japan’s disciplined workers. According to Sakoh (1984, p. 539), Japanese workers save approximately 20 percent of their income, “thereby fuelling future investments.” Further, Sakoh (1984, p. 549) pointed out that unlike in other countries, “Japanese labour and management have been cooperative” and not adversarial. Another factor that has been responsible for Japanese success is that its businesses “have had a firm commitment to quality control” (Sakoh 1984, p. 540). Japanese entrepreneurs have commitment to statistical quality control and the Japanese notion of statistical quality control is not only about quality assurance but also about “cost reduction and higher productivity” (Sakoh 1984, p. 540). Thus, based on Sakoh (1984), quality for the Japanese is also about cost-efficiency and productivity. Japanese commitment to quality control is almost “fanatical” (Sakoh 1984, p. 540). Sakoh (1984, p. 541) explained that while the government of Japan contributed to the economic success of Japan, “its interference in the economy was sporadic and slight, including efforts aimed at industrial development.” While the Japanese government intervened in the economy, it did so “by maintaining a small and balanced budget, fairly low and stable interest rates, relative low rates of taxation, stable prices, brief and mild recessions, minimal defence and social welfare expenditures.” In other words, Sakoh (1984) argued that although industrial policy or Japanese government assistance to industry happened, the assistance could not have been very big in view of the Japanese commitment to balanced budget or low spending. IV. Japan in the 1990s In the early 1990s, it was believed that the Japanese post-World War II success can become the core ingredient of the East Asian Miracle (Okazaki 2001). According to Okasaki, even the World Bank had held to the belief for sometime. Okazaki (2001, p. 323) narrated that “industrial policy” was granted legitimacy for sometime and the World Bank as well as many experts “were inspired to revise the orthodox neoclassical view of development policy.” However, towards the end of the 1990s, “after years of economic depression and financial crisis, Japan’s economic crisis faced severe criticism.” According to Okazaki (2001, p. 323), from the earlier view that Japanese government’s strong role in the economy was a main factor for Japan’s economic success, “government intervention and regulation were regarded as sources of inefficiency, and the deliberative council was considered a linchpin of the notorious iron triangle, composed of the political, bureaucratic and business sectors.” Horioka (2006) attributes to the stagnation of investments, especially private investments, the prolonged slowdown of the Japanese economy during the 1990s. Horioka (2006) identified demand-side factors exacerbated by misguided government policies as the most important factors responsible for the lost decade of the 1990s. According to Horioka’s (2006) computations, the annualized Japanese real GDP growth in the 1990s averaged 1.2% which is lower than all of the G-7 countries: 3.4% for Canada, 3.2% for the US, 2.7% for the United Kingdom, 3.2% for France, 1.4% for Germany, 2.2% for the Euro Area, 5.3% for Korea, 3.8% for Australia, 3.3% for Spain, 2.9% for the Netherlands, and 2.6% for Mexico. Horioka blamed the Japanese “lost decade” to the stagnation of household consumption resulting from the collapse of land and equity prices as well as to the stagnation of disposable income. However, Horioka (2006) did not consider household consumption as the ultimate CAUSE of the prolonged slowdown of the Japanese economy during the lost decade of the 1990s but the factors that depressed household income. According to Horioka (2006), the main factors responsible for Japan’s economic stagnation were “the sharp curtailment in bank lending (the so-called “credit crunch”) and the increase in systemic risk, both which were caused by the financial crisis and proliferation of non-performing loans” (Horioka 2006, p. 19). Horioka (2006, p. 21) pointed out that in Japan, “monetary policy should have been tightened sooner during the period to prevent the persistence of such a pronounced bubble.” Horioka (2006, p. 21) also pointed out that “government should have done more to simulate private investment in housing and plant and equipment as well as household consumption.” Horioka (2006, p. 22) also echoed the findings of Hayashi and Prescott (2002) that “subsidies to inefficient firms and declining industries should have been discontinued since they presumably lower the overall rate of productivity growth.” Horioka’s (2006) view of declining investments in Japan is supported by a graph in Hayashi and Prescott (2002) Figure 9. Gross domestic investment as share of output in Japan, 1984-2000 Source: Hayashi & Prescott (2002, p. 212) V. Japan in early 2000s Scissors (2012) argued that there is no longer only but two lost decades in Japan. Unlike the points of view articulated earlier, Scissors (2012) argued that economic stagnation in Japan has persisted because of Japan’s reliance on Keynesian prescription to boost her economy and, yet, based on evidence available in Japan, Keynesian policies have not boosted Japanese economic growth. According to Scissors (2012, p. 2), measured in current yen values, the Japanese economy is smaller in 2010 compared to 1992 and, yet, over the same period, US GDP has more than doubled while the South Korean economy has quadrupled. The claims are indicated in Figure 10. Figure 10. Japanese economy is smaller in 2010 compared to 1992 Source: Scissors (2012, p. 2), citing OECD sources According to Scissors (2010), Japan’s nominal GDP was 480.8 trillion yen in 1992 while it is only 479.2 trillion yen in 2010. Yet, the Fukushima disaster and Japan’s great Tsunami had not yet happened. It is likely that the 2012 figures for Japan are worst. Siddiqui (2009, p. 1) informed that Japan has been “experiencing the worst economic crisis since Second World War and the government is attempting to avoid a return to the ‘lost decade’ of the 1990s when it was stuck in a deflationary spiral.” According to Siddiqui (2009, p.1), “to fight back recession, the Bank of Japan has kept the interest rate to 0.1% even lower than Bank of England’s 0.5%.” Japan has been experiencing “a severe economic recession since the early 1990s, despite a short lived recovery in between” (Siddiqui 2009, p. 2). VI. The future of Japan In this discussion we have shown that it is not true that there is only one lost decade in Japan. Our data which come from International Monetary Fund sources indicate that there are at least two lost decades in Japan: 1990 to 1999 and 2000 to 2009. Worst, it is also possible that there would be three not only two lost decades in Japan because of the Tsunami and Fukushima nuclear disasters. Yet, at the same time, there is a strong reason to optimistic. The Japanese economy continues to be one of the strongest economies in the world based on GDP per capita terms. Further, while the Fukushima nuclear and tsunami disasters are negatives, the two disasters can still turn out to be a boon as the spending and investments that can be boosted by the disasters may revive Japan’s economy. The factors for success responsible for Japan’s growth prior to the 1990s have basically remained in the Japanese economy and so there are still prospects for Japan to strongly rise up. Meanwhile, the Keynesian and industrial policies that were blamed for Japan’s stagnation in the 1990s and the 2000s will be inevitably evaluated for their role in the Japanese economy and mistakes will unavoidably be abandoned in the years to come. References Alexander, A., 2000. Japan’s economy in the 20th century. JEI Report No. 3, 21 January. Available from: http://www.jei.org/Restricted/JEIR00/0003f.html [Accessed 18 November 2012]. Crook, C., 1993. Survey of Japanese economy. The Economist, 326 (7801). March: London. Flath, D., 1991. Indirect shareholding with Japan’s business groups. Working Paper No. 59. Columbia University: Centre on Japanese Economy and Business. Horioka, C., 2006. The causes of Japan’s lost decade: The roles of household consumption. Working Paper No. N-002. New York University: Working Paper Series. New York University: Centre for Japan-US Business and Economic Studies. IMF, 2012a. EconStats. Available from: http://www.econstats.com/weo/V008.htm [Accessed 18 November 2012]. IMF, 2012b. Data mapper. Available from http://www.imf.org/external/datamapper/index.php [Accessed 10 November 2012] Hayashi, F. & Prescott, E., 2002. “The 1990s in Japan: A lost decade.” Review of Economic Dynamics, 5 (1), 206-235. Intellectual Takeout, 2012. GDP per capita comparison---China, Japan and USA, 1980-2010. Available from: http://www.intellectualtakeout.org/library/chart-graph/gdp-capita-comparison-china-japan-and-usa-1980-2010 [Accessed 18 November 2012]. Index Mundi, 2012. World – GDP per capita (current US$). Available from: http://www.indexmundi.com/facts/world/gdp-per-capita [Accessed 18 November 2012]. Lawrence, R. & Weinstein, D., 2001. Trade and growth: Import-led or export-led? In: Joseph Stiglitz, ed., Rethinking the East Asian Miracle. Washington: The World Bank, 379-408. Okazaki, T., 2001. The government-firm relationship in postwar Japan: The success and failure of bureau pluralism. In: Joseph Stiglitz, ed., Rethinking the East Asian Miracle. Washington: The World Bank, 323-342. Siddiqui, K., 2009. Japan’s economic recession. Research in Applied Economics, 1 (1), 1-25. Available from: http://www.macrothink.org/journal/index.php/rae/article/viewFile/218/120 [Accessed 18 November 2012]. Sakoh, K., 1984. Japanese economic success: Industrial policy or free market? CATO Journal, 4 (4), 521-548. Scissors, D., 2012. Japan’s national budget: Time to give up Keynesianism. Special Report No. 103. Washington: Asian Studies Centre, The Heritage Foundation. Stiglitz, J., 2001. From miracle to crisis to recovery: Lessons from four decades of East Asian Experience. In: Joseph Stiglitz, ed., Rethinking the East Asian Miracle. Washington: The World Bank, 509-526. Read More