Japan economic scale

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Japan is a nation that has experienced both the high and the low of the economic scale. In the years following World War II Japan began to establish a system of business all its own. During the rebuilding phase they developed a heavy reliance on trade with the United States and enjoyed very low exchange rates.

The low exchange rates and economic policies established in the decades after World War II led to the development of a heavily export-driven economy. The heavy reliance on exports allowed the economy to be largely controlled by allied firms and keiretsu was born. The keiretsu system replaced the zaibatsu system that was existent in pre-World War II Japan. In the zaibatsu system single families owned many different firms.

Keiretsu is a system where larger firms dominate commercial activity and access to resources. Major shareholders of corporations consist of banks, industrialists and other major firms (McGuire and Dow, 2003). Keiretsu is an alliance between major firms, but the thing that sets this system apart is that a bank holds a key position within the organizational structure. There are two types of keiretsu, horizontal and vertical. In a horizontal keiretsu firms are in different businesses. A vertical keiretsu involves firms that share a similar supply chain. Firms are able to share common resources and increase their advantage in international trade and the readily accessible debt from partnered banks allows for a consistent cash flow.

The bubble bursts

The Keiretsu system provided many years of growth and prosperity for Japan, but it ultimately led to a disaster. The system produced a large trade surplus that established significant domestic economic growth. The yen saw a rise in demand in the global market and its comparative value rose against other currencies. From 1986 to 1991 Japan saw its stock prices skyrocket and real estate prices significantly increase. All of these factors led to an artificially inflated economy known as the Asset Price Bubble. (Christopher Wood, 2005) The asset price bubble burst in the late 1980's and into the early 1990's leading to a rapid decline in the Japanese stock market like it had never seen before. The Japanese Economy slowed in the 1990's due to lower exports by the large firms in Keiretsu alliances.

In 1992 the Japanese economy collapsed and went into what is now recognized as the Heisei Recession. (Koichi Hamada, 2003) There are many proposed reasons why the Heisei recession came about. Blame for the recession is placed on everything from individual and corporate greed to the Bank of Japan, and even the Japanese financial policymakers. The Bank of Japan is mainly accused because they are believed to have reacted too slowly and failing to devalue the yen and as a result the economy fell into what is known as the Keynesian liquidity trap.

The liquidity trap refers to a situation where the demand for money becomes infinitely elastic. Once an economy has reached this point an injection of money will not help to lower the value of a currency. The Japanese government could do nothing at this point to help slow or ease the decline of its economy. In a liquidity trap, monetary policy has no ability to stop a free falling economy. (Keynes, 1936)

The rollercoaster

All of these events led to the Japanese economy going on a two decade long rollercoaster ride. The chart below shows the Japanese average annual GDP growth rate from 1980 to 2010.


The Japanese have seen significant changes in the economic climate throughout the past two decades. The Miyazawa administration, present during the Heisei recession, began implementing significant changes to the nation's regulatory policies in order to generate a greater amount of foreign direct investment in order to provide additional funds into the GDP in an effort to stimulate growth (Wada, 2005). The table below shows the amount of FDI into Japan from 1997-2004. It should be noticed that the total amount of FDI rose slightly each year until 2004 when it nearly doubled.

Governmental policy has shifted to aid in the widespread foreign direct investment from outside companies. As a result, many Japanese firms have opened up to the previously unheard of possibility of having non-Japanese individuals running their corporations. Some of the most recognized Japanese corporations, including Nissan, now have outsiders in the drivers seat.

Because of these things and due to the rise of FDI by international firms, the Japanese firms have begun implementing some of the management practices generally found in firms from the United States and Europe. These practices have become a significant trend that is growing yearly. Previous corporate environments allowed employees to have a major share in the company's decision making process. When a decision was made, the employees were heavily considered. In the western world, however, the main interest of corporate decision making is that of the company owner and shareholders. The Japanese have experienced a declining focus on employees and shifted the majority importance to business owners and shareholders.

Western management approaches, however, do not disregard the interests of Employees but instead views them as organizational assets to be used in the most effective manner possible for the benefit of the owners. Japanese businesses traditionally practiced lifetime employment and guaranteed promotion based on seniority. The shift in management styles has brought about a system of advancement based on an employee's merit and value to the organization rather than the time they have spent at a company. This has led to a decrease in organizational loyalty from employees and brought about a new breed of young professionals.

As Japan continues their economic restructuring they are slowly but surely losing some of their individuality in the process. The things that made Japanese corporate culture different, such as employee focused decision making and advancement based on seniority, are beginning to disappear in the face of business environment overhaul. The Japanese business culture is becoming more like its western trading partners by relying on increasing amounts of Foreign Direct Investment. The world is shrinking and there is nothing that can be done about it.

  • Wada, Maiko. 2005. "The promotion of foreign direct investment into Japan-the measure's impact on FDI series." Bank of Japan, Working Paper 05-E-02.
  • http://www.boj.or.jp/en/type/ronbun/ron/wps/data/wp05e02.pdf. (accessed 5 July 2008).
  • McGuire, J. and S. Dow. 2003. "The persistence and implications of Japanese keiretsu organizations." Journal of International Business Studies, 34(4): 374- 388.
  • Koichi Hamada, Yale University
  • The ESRI International Forum 2003
  • http://www. worldbank.org, 2010
  • John Maynard Keynes, 1936. The General Theory of Employment, Interest and Money. Macmillan
  • The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s Christopher Wood, 2005