Japan’s Economic Miracle
Not That Long Ago Japan Was The
Economic Model For The World
• I finished my Undergrad in in 90s and we were
still exploring the Japanese management style
• Which by the way was started by an American
consultant in Japan
80s & 90s
• Widespread thought among thoughts leaders,
politicians, business leaders, & the media that
Japan had discovered a new business model
• This model was going to allow Japan to
overtake the US economy in just a few short
Chalmers Johnson
• A political scientist named Chalmers Johnson
wrote MITI and the Japanese Miracle
– Required reading in my business program at TOSU
• MITI was reorganized into the Ministry of
Economy, Trade, and Industry (METI) in 2001
• This is a cabinet branch of Japan’s gov
• Clyde Prestowitz, former US trade negotiator
– Trading Places: How We Are Giving Our Future to
Japan and How to Reclaim It
Quote From Prestowitz
• The power behind the Japanese juggernaut is
much greater than most Americans suspect,
and the juggernaut cannot stop of its own
volition, for Japan has created a kind of
automatic wealth machine, perhaps the first
since King Midas
Michael Crichton
• From the 1992 novel Rising Sun
– Sooner or later, the United States must come to
grips with the fact that Japan has become the
leading industrial nation in the world. The
Japanese have the longest lifespan. The have the
highest employment, the highest literacy, the
smallest gap between rich and poor. Their
manufacturing products have the highest
As late as 1995
• A book by a journalist—Blindside: Why Japan
Is Still on Track to Overtake the US by the Year
2000 by Eamonn Fingleton
Starting in the 70s – 90s
• Japanese companies loomed large
• Japanese firms were earning really high profits
• Japanese investors that making big
investments in the US
Business Schools
• They suggested that other countries were sure
to follow the Japanese path, including Europe,
and the US was past its zenith
• The business schools offered doom if we did
not follow that path
What Was Japan’s Unique and Special
• Greater government direction of the economy
worked better than unfettered free market
– Government-directed business firms
– Managed trade
– Patient capital
Directing Businesses
• Japan, Incorporated
The Visible Hand of Government Can
Outperform the Invisible Hand of
• MITI became a symbol of how government
can direct an economy
Managed Trade
• A mix of blocking imports from other
countries and offering subsidies to exporting
firms, with the result being large trade
Patient Capital
Ownership of Firms
• Ownership of firms was not stock market
based like in the US
• Keiretsu—combinations of firms acting
Econ Rocketed From 60s – Early 90s
Japan's Growth Rate by Decade
Japan's Growth Rate by
• The growth rate in the 1960 was 10 to 11%
1970s & 1980s
• The 70s was a slow period of growth for the
whole world, but Japan still averaged 4.5 to 5
percent growth
• 1980s saw growth slow a bit to 4 percent per
year, but even that was better than the US
Japan’s Growth
• On a per capita GDP basis, Japan was growing
about 5% a year on average from 1960 to
• The US economy was growing less than 2
percent a year during the same period
Japan’s Growth
• In 1960, Japan’s economy was about 10% the
size of the US economy
• By the early 1970s, Japan had surpassed
Germany to become the second-largest
• By the early 1990s, Japan’s economy was
about two-thirds the size of the US economy
• On a per capita basis, it was about 85% of the
US economy
Some Measures
• In 1950, half of the students leaving high
school and middle school wen into agriculture
• By 1965, only 5% of those leaving high school
and middle school went into agriculture
All Went Wrong in the Early 1990s
• Collapse of asset prices
• Real estate prices fell about 80 percent
• Massive numbers of corporate and personal
• Unemployment surged
• Economic growth in the 1990s and into the
21st century averaged 1 percent a year or less
How to Fix the Economy
• Tried huge budget deficits to increase AD
• Central Bank cut interest rates to near zero
• Japan’s economy is aging
– The workers are getting older and older
– They have a demographic nightmare that is even
worse than the US
Remember the Automatic Wealth
• Leading industrial nation in the world
• Overtake the US in just a few years
• All that hype from every B-school in America
and then nothing
• Is it possible that the fundamental analysis of
why Japan grew so fast was misguided
• The statements about Japan’s special
economic model, about managed trade, and
government intervention are true
• The statements that Japan grew very rapidly
are true
• There must be a basic logical problem
All in the Interpretation
• Imagine that I said in the US, the Defense
Advanced Research Projects Agency (DARPA)
helped to start the Internet.
• Therefore the entire high tech economy was
created by the government
• And based on government oversight of the US
Boring, But Economic Story
• This Japanese profit making machine story
was exciting, but it ignored the fundamentals
• Growth is all about
– Human capital
– Investment
– Free markets
How Japan Got the Economic
Fundamentals Right
• Human Capital
– Japan was an early strong investor in education
More Human Capital
• National savings in the US typically has been
15% - 18% of GDP
• In Japan, national savings has been 30% - 35%
of GDP
• Why does Japan save so much?
– The big difference is that households save much
more than the US
Why Japan Has Such High Savings
• Lower proportion of elderly
• Wages paid with a big chunk in end-of-year
• Rapid growth makes it easier to save
Why Japan Has Such High Savings
• Coming out of WWII
• Special tax breaks for savings accounts
• Underdeveloped Social Security requires
individuals to save more
Japan’s Technology
• Since back in the 19th century Japan has
worked hard to get new techno in businesses
• Current R&D spending is similar to US levels
Participated in World Free Markets
• We know that companies like Toyota, Sony,
Honda, Panasonic to be strong competitors in
international market
• These and others were responsible for
innovations and new international business
– Just-in-time inventory
– Philosophy of continuous product improvement
– Quality circles—groups that focus on quality in the
They Are All Together or Are They
• In the high growth period between the 50s
and the 80s, Japan had more strikes than
Germany or Sweden
– Not managed by consensus as some think
Why Growth
• Not what I learned in college
• Just boring fundamentals
– Education
– Investment
– Technological
– Free international markets
– Innovation
Did Japan Take Unfair Advantage?
• Back to industrial policy and managed trade
• After the war Japan’s government offered subsidies—
often in the form of cheaper loans—to favored
Electric power
Synthetic fibers
Chemical fertilizers
Machine tools
How Did This Policy Work Overall?
• Steel and electronics flourished others did not
do as well
• Economic studies show that high growth
sectors: electrical machinery, general
machinery, transportation equipment received
lower subsidies than
• Low-growth sectors: textiles, mining,
processed food
There Are Always Two Questions You
Can Ask About Government Industrial
• Is it possible to pick the future winners
• If yes, can you pick the winners and not be
politically favored to give money to the losers
In Japan?
• In Japan it seems very unlikely that the
government bureaucrats picked the winners
• An example of a misstep. HDTV they were
sure that HD was the future. But their focus
was analog not digital and gov helped this
doomed idea
Another example
• Fifth generation computer project
– No idea what one through four were
– But we were scared about that 5th one
– What happened?
I do not know
Everyone talk about how it would take over
And how Japanese investment would take it to the top
It just faded away
Just Remember That There Is Strength
In Market
• No markets are not perfect but
• Competition has a basic advantage
– Many firms are trying different things from
different angles—trying to get profit without the
help of the government
– This process improves the overall chance of
– If there is a bad idea, drop it
Japan’s Barriers to Trade
• Japan had 5% of world exports in 1965 and 9%
of world exports in 1990
• Japan’s imports have been about 7% of GDP
and its exports about 9% in recent years
• In the US imports and exports are 12-13% of
• Many industrialized counties are closer to 25%
Not Sure What This Proves
• Clearly it states that small European nations
trade more than larger and more isolated
• Still it is interesting that it is such a small part
of their Economy
• Over time US imports and exports have been
about 2% of our economy
Why Do We Think Japan Is Dependent
On Trade?
• The fact that we believe this may be an
indication of our own short-sightedness
• We see Japanese products in high profile
products like cars and electronics
– Then we assume that because we see these
products, they must be a big part of their
– After all, I see it in America so it must be
important in Japan
– That logic does not work
Trade Surpluses
• Trade surplus does not indicate anything
about the fairness of trade
– There is no question that Japan has very large
trade surpluses
– A common misperception is that surplus always
mean a country is unfair
– Remember that trade deficits can because by
many reasons
• One reason is high saving—like Japan
• The same apply to the US in reverse
Beyond the Stories
• Japan does not have a great amount of explicit
– It does not have high tariffs
– Does not have many quotas
– If they are not explicit they must come through
some bureaucratic path
• It is true that Japan is full of gov regulations
• Has powerful trade associations
• They do try to shut out import occasionally
70-80 & 90-00
• We heard these stories in the 70s and 80s
when all was well
• But we still hear them and all is bad
• It is possible that they had plain strong growth
and all of these policies that we thought
caused the growth were not needed and may
have even been wasteful
High Rates of Saving
• While the Japanese wanted to save more—I
should note that the government actively
restricted how they could save
• Japanese government controlled the banking and
financial sector for decades after WWII
• Consumers were encouraged to put their money
in banks and that was basically the only place to
• Consumer loans were discouraged through tax
High Rate of Saving
• This high saving rate translated into banks
flush with money
• Most of that financial capitalwas directed to
Japanese corporations
• Would this work in US—I doubt it. They
restricted consumer loans. Even after the
housing market crash, we still love loans
Is This High Saving Unfair
• It has had an effect
– But it is probably not a clever plan by MIDI and
Japanese bureaucrats to advance the country—
ultimately they select whether to save or not
• Back to the boring. Not a new model of
money creation. Just good fundamentals:
good education, r&d, investment, competing
in world markets