Japan is remarkable for its extraordinarily rapid rate of economic growth in the 20th century, especially in the first several decades after World War II. This growth was based on unprecedented expansion of industrial production and the development of an enormous domestic market, as well as on an aggressive export trade policy. In terms of gross national product (GNP; or gross national income), a common indicator of a country’s wealth, Japan is the world’s second largest economic power, ranking behind only the United States. It has developed a highly diversified manufacturing and service economy and is one of the world’s largest producers of motor vehicles, steel, and high-technology manufactured goods (notably consumer electronics). The service sector has come to dominate the economy in terms of its overall proportion of the gross domestic product (GDP) and of employment.
The emphasis on trade stems from Japan’s lack of the natural resources needed to support its industrial economy, notably fossil fuels and most minerals. In addition, the limited amount of arable land in the country forces Japan to import much of its food needs. Generally, however, Japan’s strong domestic market has reduced the country’s dependence on trade in terms of the proportion trade contributes to the GDP when compared with that of many other countries.
BACKGROUND The Japanese economy lay utterly devastated at the end of World War II (1945). The immediate postwar period was one of hard struggle to achieve reconstruction and stability. Under the Allied occupation forces, land and labour reforms were carried out, and the plan for creating a self-sustaining economy was mapped out by American banker Joseph Dodge. The outbreak of the Korean War in 1950 created a huge demand for Japanese goods and set off an investment drive that laid the foundations for a long period of extraordinary economic activity. While investment in plants and equipment was spurred by an expanding domestic market, Japan also began pursuing strong export policies. Growing demand overseas for Japanese goods led to annual trade surpluses, which (with a brief interlude in 1979–80) became perennial by the late 1960s.
By the early 1970s Japan’s rapid rate of economic growth had begun to slacken, as the price of imported petroleum soared, labour costs increased, the value of the national currency, the yen, rose against foreign currencies, and overall global demand for Japanese goods weakened. In addition, distortions resulting from the earlier quick pace of growth had begun to show: Japan’s standard of living had not increased as rapidly as had the overall economy up to that point—in large part because of the high percentage of capital reinvestment in those years—but also Japan was under increasing pressure from its trading partners (notably the United States) to allow the yen to appreciate even more in value and to liberalize strong import restrictions that had been enacted to protect Japan’s domestic market.
By the mid-1980s Japan’s standard of living had increased to the point that it was comparable to that found in other developed countries. In addition, in 1985 Japan agreed with its trading partners to let the yen appreciate against the U.S. dollar, which led to a doubling of the yen’s value within two years. This action and other efforts at restraining exports encouraged Japanese companies to begin moving production bases overseas. At the same time, a speculative “bubble” arose in the prices of stock shares and real estate, and its bursting at the beginning of the 1990s sparked a severe economic downturn. The Nikkei 225 average (the main stock-price index of the Tokyo Stock Exchange), which had reached an all-time high in 1989, dropped to only half that much within a year, and housing prices in urban areas also plunged.
Economic growth was essentially stagnant throughout the 1990s—in what came to be known in Japan as the “lost decade”—even though a variety of economic policies were adopted and tried. The country experienced a serious recession at the end of the decade. Conditions improved after the turn of the 21st century, though growth rates were modest and were punctuated with periodic slumps. However, by 2000 Japan was facing the fact that an increasing number of postwar “baby boom” workers would be retiring, while, with the country’s population growth also stagnant, fewer young people would be entering the workforce. In addition, Japan, like the rest of the world, was hard hit by the global economic recession that began at the end of 2007 and took hold in earnest in 2008. Nonetheless, Japan continued to have one of the world’s highest per capita gross national products, and it experienced continued annual trade surpluses until the recession of 2008.
THE ROLE OF GOVERNMENT Japan’s system of economic management is probably without parallel in the world. Though the extent of direct state participation in economic activities is limited, the government’s control and influence over business is stronger and more pervasive than in most other countries with market economies. This control is exercised primarily through the government’s constant consultation with business and through the authorities’ deep indirect involvement in banking. Consultation is mainly done by means of joint committees and groups that monitor the performance of, and set targets for, nearly every branch and sector of the economy. Japanese bureaucrats utilize broad discretionary power rather than written directives to offer “administrative guidance” in their interaction with the private sector in order to implement official policies. However, since the early 1990s, efforts have been made to limit the use of such unwritten orders, which have been castigated for creating an atmosphere of collusion between the authorities and big business.
There are several agencies and government departments that concern themselves with such aspects of the economy as exports, imports, investment, and prices, as well as with overall economic growth. The most important of these agencies is the Economic Planning Agency, which is under the Ministry of Economy, Trade, and Industry (until 2001 the Ministry of International Trade and Industry) and, apart from monitoring the daily running of the economy, also is responsible for long-term planning. The practice of long-term planning has been a major force in the functioning of the Japanese economy. According to the economic objectives of the government, various policy measures have been used to shift the allocation of resources among industrial sectors and to influence the organization of specific industries.
Control has been underpinned by the detailed regulation of business activities, particularly in the financial sector. However, by the early 1990s reducing government intervention in the economy had become a major objective of the authorities. This was viewed as a way to create new business opportunities and as a necessity for making Japanese domestic markets more accessible to foreign business, thus revitalizing what was then a moribund economy. A number of deregulation packages to remove and ease controls subsequently were introduced and implemented.
In the 1980s the government relinquished to the private sector its monopolies over the tobacco and salt industries and domestic telephone and telegraph services, and the publicly owned Japanese National Railways was privatized as the Japan Railways (JR) Group. Most of the remaining public corporations are special-purpose entities (e.g., for nuclear power generation) that would be unprofitable to operate privately or are government financial institutions. The government also retains an interest in radio and television broadcasting. It remains active in matters deemed to be of strategic interest, notably nuclear power generation, which is subsidized through a major program to increase generating capacity.