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JAPAN'S ECONOMY.
Term Paper ID:26714
Essay Subject:
Assesses growth since 1970s, downturn in 1990s, wages, trade, monetary policy, credit, banking, role of govt.... More...
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Paper Abstract:
Assesses growth since 1970s, downturn in 1990s, wages, trade, monetary policy, credit, banking, role of govt.
Paper Introduction:
The Economy of Japan
Japan has the second largest economy in the world. Its Gross Domestic Product (GDP) totaled $4,193US billion in 1997 ($33,317US per capita). Thus, the Japanese enjoy a very high standard of living. Japan’s foreign exchange reserves are the largest in the world ($203.22US billion in 1998) and Japan is the world's largest creditor. Labor productivity is one of the highest in the world and the labor market is regulated by the 1947 Employment Security Law. The Ministry of Labour seeks to prevent excessive dislocation or job mobility among workers, and employment services (such as employment agencies) are therefore tightly controlled.
Despite these successes, the Japanese economy has experienced a downturn in the 1990s. Growth has slowed, average annual GDP growth falling
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Thus, Japan's economynow presents a picture in which there is an overlap of the completion ofthe catch-up process and the downturn of economy's growth.[32] As the Japanese economy caught up with other industrialized nations,it had to rely more on its own technological innovation rather than onimporting foreign technologies. [35] Ibid. Economistshave suggested the following methods of cost control: (a) Lowering wages from the world's highest levels. [11] WICR, 17. [17] Kojima. [39] Ibid. The country's rapid economic growth untilthe mid-197 s was largely attributable to its low wages and low laborcosts. [26] Ibid. [37] Kojima. Intriligator, M., Braguinsky, S., Bowen, J., Tullock, G., Root, H."The Social Contradictions of Japanese Capitalism." The Atlantic Monthly.(June 1998): 86. [2 ] Ibid. (b) Altering production systems in Japan by importing parts, etc. fromcountries where they can be produced at lower cost. (July 13, 1999): 2. The Economy of Japan Japan has the second largest economy in the world. The law increased theBank's autonomy from the government and strengthened its powers in settinginterest rates.[34] The law also gives the bank the goals of achievingprice stability and orderly conditions in the financial system.[35] The Japanese economy faces several challenges in its attempt tonormalize its economy. Generally, corporations treat these prices as the cost ofservices or goods input into their production activities, thus driving theprices upward.[37] For Japanese corporations, which have to pay the world's highestwages, this competition for cost control is extremely tough. Japan has had a trade surplus since the 196 s. However, in the last decade of the 2 th century, Japan'seconomy has struggled. 17. Due to this economic stagnation,non-performing loans eroding banks' capital bases, and the increase in thecredit risk of firms, private banks have been increasingly cautious aboutextending loans since late 1997.[29] Unfortunately, this has made it harder for small and medium-sizedbusinesses to obtain credit, which has exacerbated the economic downturn.It has also stifled the start-up and entrepreneurial spirit such businessmight generate. Its history of government intervention is contraryto classical economic free-market theories that would argue the economyshould be left unregulated so that it could correct itself. The Japanese system presents one of the most strikingdifferences between the way capital markets in most other developedcountries and in Japan. [2] Ibid. [14] Kojima. Japan has been notoriously relianton banking finance in the past, with over 6 per cent of corporate fundingcoming from bank loans compared to less than 1 per cent in the USA. [21] Intriligator, 84. In today's global economy, greater importance isplaced on entrepreneurial and venture business activities. "Foreign Investors Sniff Recovery." Financial Times (London). The problems were a result of several factors,including the aftereffects of the bubble economy, the completion of thecatch-up process, the global market economy domino effect and the arrivalof mega-competition. Its Gross DomesticProduct (GDP) totaled $4,193US billion in 1997 ($33,317US per capita).Thus, the Japanese enjoy a very high standard of living. [6] Ibid. However, suchactivities are inherently riskier than the industrial technologies theJapanese financial system was created to encourage. (June 1998): 86. [18] Ibid. (July 13, 1999): 2. [28] Ibid. Consequently, Japan's costadvantages based on its low wage level disappeared and the high wage levelbecame a heavy handicap. [34] WICR, 17. [7] Ibid. [9] Ibid. While Japanesegovernment intervention may have been necessary in the post-war period, itsartificial schemes may now hinder it progress. This was the moment when the environmentsurrounding Japan's economy and corporations entered into a new phase: thebubble economy.[19] The entry into the bubble economy also coincided withseveral other processes that would require Japan to adjust its post-warcatch-up policy. On the onehand, unique features of the Japanese economy were the driving force behindits catch-up with other industrialized nations in the post-war period.[12] However, on the other hand, many mainstream economists in the UnitedStates and in Japan maintain that Japan developed in the post-war periodnot due to but despite of what they consider to be a "backwardinstitutional structure," which was characterized by too strong emphasis onlong-term relationships and too much government regulation at the expenseof market competition and economic efficiency.[13] The first phase of Japan's catch-up process ended in the late 197 s,by which time Japanese industrial capacity had caught up with that ofadvanced Western economies.[14] The sogo sosha (general trading companies)played a key role in Japan's foreign trade, handling about half thecountry's exports and around 55 per cent of its imports. "Scenario for Revival of Japan's Economy." Paper forJapan, the U.S. Clearly, the regulations were by andlarge successful. As a result, in 1997Japan found itself in its worst recession since World War II.[3] Theslowdown in the Japanese economy has been not only more severe but has alsolasted longer than expected.[4] With the downturn in the economy, the Japanese government was underpressure to make specific changes to its policies. Japan's financial system was an asset in its postwar catch- because itmarshaled the savings of the Japanese people into a closed system.[24] Thebank's maintained an artificially low rate of interest and channeled thesavings into selected industries.[25] This aided Japanese competitivenessbecause it gave certain industries, namely, steel, machine tools, autos,shipbuilding, electronics, access to a pool of cheap money.[26] Theseindustries then invested the money in bigger and newer factories and hiredmore workers to run them, the workers banked their money at low interestrates, the system funneled the workers' money into the priority industries,and the priority industries continued to add more and more productivecapacity.[27] However, when Japan did in fact catch-up with the advanced nations,the financial system became a liability. The country wasdetermined to become equal to if not to surpass the strength of theadvanced industrialized nations. Yet, the Japanesegovernment continues to set the prices of services, in particular theprices of utility services such as the prices of electricity,communications services, and highway tolls. [12] Intriligator, M., Braguinsky, S., Bowen, J., Tullock, G., Root, H. The government determinesthese prices by adding what is called reasonable profit margins ontocosts.[36] Because of this price determination process, costs, even ifthey are unreasonably high, can be reflected in the prices. "The Social Contradictions of Japanese Capitalism." The Atlantic Monthly. The government-led financial systems earned were successful afterWorld War II. [3] Ibid. (e) Lowering investment costs as a whole. and China Conference. The revised lawstates its goals as independence and transparency. [31] Ibid. and China Conference. In1998, bad loans were estimated to total at least Y77, billion, and in1998/99, Japan's nine biggest commercial banks sold off Y3, billion-worth of bad loans.[28] Many economists maintain these numbers are only afraction of the total value of bad loans. Tett, Gillian. This created a tendency to make projectrisks more idiosyncratic and greatly reduced the importance of government-organized coordination Japan has attempted the address the issues caused byits financial system. ----------------------- [1] World of Information Country Report (WICR), September 7, 1999, Comment & Analysis; Country Profile; Statistics; Tables; Forecast; Pg. Bibliography World of Information Country Report. (d) Lowering total costs by innovating production processes andrestructuring the organization including indirect (administrative)divisions. (c) Transferring whole production systems to countries where wages andcosts are low to utilize foreign countries' low cost advantages. The solution to these problems will require a farmore outward-looking philosophy than the catch-up process followed by thegovernment. However, they as the economy has changed, thegovernment's philosophy has lagged. [24] Ibid. The Ministry of Labour seeks to prevent excessivedislocation or job mobility among workers, and employment services (such asemployment agencies) are therefore tightly controlled.[2] Despite these successes, the Japanese economy has experienced adownturn in the 199 s. However, these relationships may now be dated and a liability tocontinued Japanese economic progress. For example, Japan mustcontrol its costs to compete with global prices. First, the banks needed to clean up bad debts thatresulted from the collapse of the bubble economy.[5] Second, corporatemanagement had to take steps to deal with the effect of having to pay theworld's highest labor costs, which resulted from the strong yen pushing upJapan's average wages to the highest in the world.[6] Third, Japaneseindustry was facing increased competition due to the globalization of theworld economy and the emergence of newly industrialized economies such asAsian countries who were catching up with Japan as inexpensive labormanufacturing countries in this business environment.[7] Fourth, Japanesegovernment and industry needed to accept and institute policies to dealwith the changing environment of competition resulting from a recovery bythe U.S. [15] Ibid. [38] Ibid. [32] Kojima. Patterned after the Reichsbank law of Nazi Germany, the 1942 Bank ofJapan Law consummated the wartime institutions for the control of financialactivities, and today it remains in existence as a fundamental part of theJapanese financial system.[22] This Japanese "main-bank" system is based onhistorically specific relationships between large commercial banks ("citybanks") and corporate clients mostly from large firms in manufacturingindustries.[23] It is the historical policy of these two institutionsworking in concert that allowed the Japanese economy to its post-warrecovery. For instance, the world supply structure changeddrastically at the end of the cold war and the global market economy dominoeffect began to advance. The yen is afloating currency, although the government will intervene to preventexcessive fluctuations.[21] Until recently, the Japanese banking systemwas widely regarded as one of the strongest in the world, but it has sinceplunged into turmoil. Comment & Analysis. In December 1998 there was a 1.6 per cent decline in reallending, year-on-year, a record fall that resulted in renewed concern thatthe economy is experiencing a 'credit crunch'.[3 ] The economic recessionand credit crunch in 1998 resulted in new bad debts coming onto the banks'books at a rate higher than annual aggregated profits.[31] Japan's financial system functioned effectively during the catch-upprocess of Japan's economy but it has become an inhibiting factor in thepost-catch-up phase. [13] Ibid. The sogo sosha wasestablished in the nineteenth century to counteract the predominance offoreign trading firms in Japan and they played a key part in rebuilding theJapanese economy after the Second World War.[15] They bought and sold inhuge quantities generally preferring long-term contracts and they wereessential conduits for feeding technology and know-how into the Japaneseeconomy.[16] In its early catch-up phase, Japan's average wage level was much lowerthan those of Western economies. Growth has slowed, average annual GDP growth fallingto 1.4 per cent (1991-95). industries of their competitiveness.[8] And fifth, the economywould need to deal with the effects of the global shift from an industrialtechnological to more information integrated and knowledge integrated typesof technologies.[9] Japan's economy was devastated by World War II. [25] Ibid. This will depend chiefly onthe Japanese government's efforts in its policy making.[38] The Japanese government has stated that rectifying the problems ofhigh cost is the objective of its political efforts.[39] The force behindJapan's catch-up process was a philosophy of overcoming the poverty thatdevastated the Japanese economy after World War II. Since the 198 s,however, other countries have applied increasing pressure on Japan to limitits export growth and open its domestic markets to foreign competition.[11] The institutional structure of the Japanese economy is controversial,given the role it has played in country's economic development. Japan's foreignexchange reserves are the largest in the world ($2 3.22US billion in 1998)and Japan is the world's largest creditor.[1] Labor productivity is one ofthe highest in the world and the labor market is regulated by the 1947Employment Security Law. "Foreign Investors Sniff Recovery." Financial Times(London). [4] Ibid. [1 ] Ibid. "Scenario for Revival of Japan's Economy." Paperfor Japan, the U.S. [16] WICR, 17. The government attempted to stimulate theeconomy in the early 199 s through public spending, but this served only toput public finances in an unsustainable position. [29] Ibid. Thus, in the 194 s,the government instituted a policy of "catch-up" to make Japan's economyequal to and competitive with the larger industrialized Western nations.This catch-up process involved a process of economic and industrialdevelopment in which Japan followed the West's advanced economies as itstarget.[1 ] It involved, in particular, a level of government interventioninto the economy that, while productive in the past, may now be hinderingJapan's economic progress. [8] Ibid. Because ofthis, cost control suffers and government controlled prices becomeexorbitant. Economists suggestedseveral significant structural adjustments that should be made to theJapanese economy. [22] Tett, Gillian. Then, the world trade environment, in which free trade wasguaranteed, benefited Japan and Japan was able to become the strongestexporter of industrial products in the world.[17] The second phase of the catch-up process ended with the "Plaza Accord"of the five major countries in September 1985.[18] The drastic devaluationof the yen triggered by the agreement doubled Japan's average wages, makingthem the world's highest since the late 198 s. [5] Kojima, Akira. [3 ] WICR, 17. [19] Ibid. [33] Ibid. [27] Ibid. (September7, 1999): 17. [23] Intriligator, 1 9. In addition, direct investments increasedexplosively throughout the world and production capabilities andtechnologies began large-scale movements beyond borders.[2 ] The Bank of Japan is responsible for monetary policy. Kojima, Akira. If anything, the main-bank system became harmful atthis stage because of its inflexibility and poor disclosure.[33] Japan did revise the Bank of Japan Law in April 1998. [36] Ibid. Growth in the post-war period was driven by exports and publicinvestment.
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