THE RISE AND FALL OF JAPAN’S ECONOMY
Macroeconomic policies are used by the government to influence the overall performance of
the economy. The economic expansion, employment rates and inflation of the nation may be
significantly impacted by these policies. Its crucial to keep in mind that macroeconomic
policies can have both intentional and unforeseen effects. For instance, a fiscal stimulus
strategy that is meant to increase the economic growth may end up increasing inflation or a
monetary policy meant to lower the inflation may actually trigger a recession. This is why,
before putting macroeconomic policies into effect, governments should carefully assess any
potential repercussions.
Japan currently is one of the top five largest economies in the world. However, its growth has
been stagnant for over 30 years. It was once a leading country in technology and innovation.
Japan’s government in 1986 adapted some changes in their macroeconomic policies which
destroyed the Japan’s economy or lead to the downfall of the economy.
By the time, US was done retaliating for what Japan had done to Pearl Harbour. Japan had lost
93% of its steel industry, over 30% of its industrial machinery and over 80% of its ships.
Following the World War II Japan’s economy was in ruins. The infrastructure of the nation was
in the state of shambles as a result of the war’s devastation. The country’s economy was mostly
dependent in imports and the industrial sector was declining. Gross National Product had
crumbled, the Japanese yen was useless for all intents and purposes and Japanese citizens were
poor.
But miracle of miracles had happened, a mere ten years after this devastation, Japan had fully
recovered from the war. Just after 20 years, it had begun to give US sleepless nights as it became
the 2nd largest economy in the world. Economists refer to it as the period of rapid growth
between 1953 and 1970’s. Keiretsu refers to those huge business conglomerates consisting of
banks, industrialists and trading companies all traded by the government of Japan. The
government’s role was quite revolutionary. Individual Japanese companies were able to grow
stronger financially by Keiretsu and had developed ties that made it virtually impossible for
foreign rivals to break into Japan and overtake. This is how Japan shifted from being a provider
of a labour-intensive products such as toys, textile and Christmas ornaments to becoming the
world’s number one exporter of steel, ships, automobiles and electronics. For example,
Panasonic, Sony, Sharp, Mitsubishi, Suzuki, Toshiba, Hitachi and Toyota. The government of
Japan had slashed traffics by 30% this meant that the Japanese economy was more liberalized.
Japanese entrepreneurs were able access foreign technology more easily. US played a huge role
in the ‘Japanese miracle’ as it provided economic support during the Cold war, in order to stop
the spread of communism in Asia.
By 1960’s Japan was swimming in trade surplus this meant that the country was exporting
more than importing. Japanese yen was devalued which defiantly helped since it made
exporting more attractive to producers. In 1970’s, Japan’s per capita income was on the same
level of the other advanced capitalist economies in the world. Unemployment and inflation rate
was low and foreign reserves were growing so large that they were at risk of becoming a
liability. Standard of living in Japan was better than most countries. People lived longer and
infant mortality was nearly non-existent. Wealth in Japan was one of the most evenly
distributed the world had seen.
But this growth wasn’t the result of sound economic policies. The Japanese economic bubble
burst in the early 90’s. The Japanese asset bubble was period of economic growth from1986 to
1991. Asset values, including those for stocks and real state, reached unsustainable heights
during this period. In 1992, the bubble ultimately exploded resulting in a long period of
economic stagnation. Land values crashed, the stock market follows suit and Japanese
economy pretty much shut down which meant corporations has stopped investing and people
had stopped spending. One of the reasons for the Japan’s asset bubble was the Plaza accord. In
1985, the presidents and the central banks of US, Germany, France, UK and Japan met at the
Plaza Hotel in New York. The Accord was successful in depreciating the US dollar value. This
led to sharp appreciation of Japanese yen which contributed to the Japanese asset bubble in
1986. These five countries had agreed to intervene in currency markets. This Accord had a
significant impact on the US and Japanese economy. It remains an important event in the
history of international finance.
Japan become less dependent on US after the rise in yen and instead started trading with its
neighbours in East Asia. Yen was appreciating strongly to the point that at the end of 1986, it
was 30% against the dollar. This wasn’t good for Japan’s export-heavy industries because as
more expensive your currency is the more expensive your goods become to your customer
abroad and the less, they want to buy from you. So, the lesson is that a stronger currency isn’t
always a good thing. The government saw this and implemented tax cut and printed more
money and with this everyone went crazy over with their spending. Corporations were building
massive structures and mansions this skyrocketed the real estate by 167% the stock market
doubled and Japan was growing at a rate by 5% every single year. This was too good and to
fast, which meant it wasn’t good. The government failed to noticed this and decided to raise its
interest rates, as a result real estate value fell. This is how the bubble busted which led to
economic growth in Japan to be stagnated.
It’s been decades and the country is yet to make any significant recovery. What’s is the reason
behind the economic downturn or stagnation? There are three popular theories. The first has to
be banks, they printed so much money. People had access to money they spent it on assets,
which meant that the price of land had increased. By the time the bubble burst, banks were not
willing to lend money, there was no money to lend. People stopped believing in the economy
to pick up, this led to investment to stop and the economy fails even more. From 1990 to 2014,
Japanese yen rising and falling constantly and hence startups couldn’t survive. Technology
advancements slowed until it pretty much stagnated. Ironically, it was the same macro
principles which lead to the growth of Japan’s in 60’s and 70’s that were now coming to bite
Japan in the neck. Japan’s neighbours like Taiwan and South Korea had better monetary
policies. Their less expensive currency cut down on labour costs, which enabled companies
like LG, Samsung and Hyundai to rise. Next problem was the Japan’s aging population. Japan
is said to have one third of its population aged more than 65 by 2050. A segment of the
population is called ‘The Lost Generation’. During the time of Japan’s economic boom, the
country had an intensive hiring procedure. After graduation of students there was a hiring
season which came only once a year.
If you miss it then there is no second chance and if a company selects you gets your loyalty for
life. This helped to increase the employment level. When the bubble burst, companies cut down
employees. This meant that tons of people were unemployed, this segment of people couldn’t
get married. The population had stopped growing and the birth rate was very low. This segment
of the population is called ‘The Lost Generation’ or ‘The Lost decade’. When the country’s
population does not grow then there would be no huge expenses by the government such as
mortgage, childcare and healthcare. When people stop spending, the economy remains in coma.
In 2012, Shinzo Abe became the prime minister for the second time and he came up with some
set of economic policies. It was named ‘Abeconomics’. Many say it was a success but other
say it failed in the areas that matter. Japan's economy's future is unclear. There are indications
that the nation is beginning to heal, though. There are some indications that the measures put
in place by the Japanese government to promote economic development are beginning to have
an impact. Whether Japan will be able to regain its past economic glories is still up in the air.
There is, though, hope that the nation will one day overcome its challenges and reclaim its
economic power.
Japan was the fastest growing economies during the 60’s and 70’s. But after the economic
bubble burst the growth rate in Japan has been less than 2%. The country that leads in
technology and innovation till toady still hasn’t found a solution to restructure their economy
again. The rise and fall of Japan have become a lesson in national economics for many
countries. Many other advanced economies are beginning to stagnate, some economists say
that they might be on their way to their own lost decade. Currently now Japan is sitting in a
mess of its own making.