After world war II, the economy of Japan recovered and achieved rapid growth and modernization. The proportion that Japanese gross national product accounted for the capitalist world is only 1.5% in 1950, but it soared to 10% in 1973. And the position in the capitalist world has jumped from seven to two, only second to the United States. Having experienced rapid economic growth in the 1980s, Japan has had two "lost decades" in the 1990s and 2000s. The ten-year average rate of economic growth is almost zero, the number of unemployment is increasing and the unemployment rate got to a record level of 5.4% (Andrade and Divino, 2000). The national debt, budget deficit and bank bad debts have reached an unprecedented scale. The discussion about the reasons for the Japanese rapid development in postwar and the subsequent Japanese economy long-term depression have a good reference and practical significance for the development of the economy. Therefore, this paper will discuss the reason for its economic success in the 1980s and stagnation and decline in economic power in the 1990s and 2000s.
Firstly, this paper will briefly examine the causes of Japan's economic success in the 1980s. Following that, it will analyze and evaluate the major reasons for its stagnation and decline in economic power in the 1990s and2000s. Based on my analysis, it will put forward the future policy responses for Japan.
Reasons for rapid development before 1990s
The main reasons for the rapid development of Japan economic can be expressed as the following points.
The favorable external environment
After the war, a democratic reform happened in Japan, which abolished many factors hindering the development of capitalism. In order to revive the Japanese economy, the United States has provided a lot of aid and loans, and offered assistance in technology. In the Korean War and the Vietnam War, Japan sold a lot of munitions to the United States, which greatly stimulated the development of the economy. At the same time, the United States returned the large number of loans to Japan. Japan is a country with fewer natural resources, while in the development of the national economy, the majority of developing countries takes the principle of exported resources and imported manufactured goods, which not only can give Japan an import market with vast resources, but also provide Japan a broad export market for manufactured goods (Hutchison, 1988).
Large-scale investment in equipment
In a long-term, Japan adhere to the implementation of high accumulation, high investment policy to achieve cost-effective operational mechanism, which is the main measures of long-term high-speed growth of Japan's post-war economy. After the war, the Japanese government and monopoly capital made effort to accumulate and expand the capital and effectively used it for the benefit of update equipment as well as the use of new technologies and expanded reproduction. During 1955 and 1970, fixed capital investment was increased by more than 15 times every year, accounting for about 1/3 of the gross national product (GDP), higher than all the capitalist countries (Hutchison, 1988).
The large-scale investment in equipment has promoted the increased productivity and industrial modernization, in particular, is of decisive significance for the economic development of the investment in machinery manufacturing, coal, electricity, iron and steel, chemical and other infrastructure sectors. Actually, it has provided advanced machinery and equipment to the technological transformation and modernization of the national economy.
The introduction of technology and innovation
The development of the country's technological progress can be regarded as a dynamic process for the combination and gradual increase of the introduction of technology and research. Japan specializes in the combination of technology and innovation from different countries (Okabe, 1995). Due to that advanced technology can reduce costs, improve product quality, they are the focus of corporate investment. Japan has set up emerging industrial sector to upgrade the industrial structure. The introduction of technology, as well as ancillary equipment investment, has led Japan's industrial structure transfer from labor-intensive one to the heavy chemical one, which changed Japan's consumption structure and the structure of export products. Besides, the introduction and use of new technology makes the export competitiveness greatly enhanced.
Emphasis on trade
Japan's strategy of trade can promote Japan's rapid economic growth between the mid-1950s and the early 1970s, to enhance Japan's comprehensive national strength. The trade strategy could clear the direction and goals of Japanese economic development, and make efforts to lead the Japanese industry into the international markets, which greatly enhanced the international competitiveness of Japanese goods. When Japan's export trade continues to expand, it has increased effective demand of the international market for Japanese goods, so that Japan's export industry achieved great development and stimulated the take-off of the entire national economy (Okabe, 1995).
Correct economic policy
Japan's economic take-off is inseparable from the industrial policy of the Japanese government. The industrial structure policy refers to the one as close to optimal industrial structure required. Japanese government uses tax leverage to expand the internal accumulation, and to encourage and promote private investment in equipment. It has adopted a policy of low interest, loans to the large number of enterprises, and strengthens the management of foreign trade and introduced foreign investment.
The educational development and qualified human resources
Under the influence of Confucianism, in Japan, it is of very great importance to education. After the war, an educational reform occurred to improve the educational status. Japan called the advanced science and technology and scientific management as the two wheels of the rapid economic growth, while viewed education as the power to make wheel forward (Perron, 1996). The result of attaching great importance to education is not only to train a large number of skilled workers for the industrial production, but also to establish a large science and technology team. The Japanese government also actively pursues industry-university cooperation system, namely the cooperation of businesses and schools. Schools do some research projects for enterprises, as well as training and the training of scientific and technological personnel and workers.
dynamic enterprises and enterprise system
Post-war the centralization of capital and domestic production in Japan was low. There was a fierce competition among enterprises. Therefore, in order to survive and develop vigorously, enterprise launched equipment investment and technological innovation, developing new products and reducing costs. Japanese enterprise system was also praiseworthy in the world. Japan actively introduced American production management, quality management, market research and modern scientific management methods in business forecasting. Combined with their traditional business management experience, the modernization of the operation and management is gradually achieved to form a Japanese-style corporate operation and management system. Among them, the lifetime employment system is the more prominent.
Further discussion on Depression
Figure 1: the real GDP and growth rate
The wrong fiscal policy is one of the main reasons that led to the long-term depression of Japanese economy after the collapse of the bubble economy. In a long period time, Japanese economic policy had been repeatedly wandering between Keynesian positive expansion fiscal and conservative austerity fiscal. But in the end, the latter one prevailed. Proactive fiscal policy was not enough, expansion and tightening fiscal policy were conflicting, and the implement of fiscal austerity policies did not take care of the actual economic consequences, which made Japan missed the opportunities to get out of the recession and continued growing. In the 1990s, the conservatism of Japanese political and economic ideology, political instability and the reduction of leading group's governing capacity are the political factors leading to the fiscal policy mistakes (Murata et al, 2008).
In the process of the formation and burst of the Japanese economic bubble, The major mistakes of the monetary policy had a big role. First, from 1986 to 1989, the continuing low interest rate policy fueled the bubble economy. Because after the "Plaza Accord". The Japanese appeared a short recession, that is "the appreciation of the yen Depression". Because of the fear of the appreciation of the yen, the Japanese government made wrong judgment, from January 1986 to February 1987, the Bank of Japan consecutively lower interest rates five times, the central bank discount rate declined from 5% to 2.5%, which not only was the lowest in Japanese the history, but also it was the lowest in the major countries of the world (Rowley, 2003). Excessive expansionary monetary policy resulted in a large number of surplus funds. Because market lacked investment opportunities, the excess funds through various channels got into the stock market and real estate market, which causing asset prices rise sharply. In the autumn of 1987, the world economy grown rapidly, the United States and other major Western countries had been raising interest rates in order to avoid overheating economy and generate inflation. On October 19, 1987, the United States happened "the New York stock market crash", which caused panic in the international market. The Japanese Government worried that high interest rates would make more international capital flows to Japan, promoted the appreciation of the yen and caused recession, it decided to continue the implementation of expansionary monetary policy and maintained the discount rate unchanged in a 2.5%, which was proved to be a "fatal mistake" (Bernanke and Ben, 2000). Extreme expansionary monetary policy caused the Japanese economy system was full of cheap money, and the bubble of the stock market and real estate market expanded rapidly. Besides, the sudden monetary tightening policies lead to long-term economic depression. The Bank of Japan decided to change the direction of monetary policy in order to prevent liquidity surplus led to rapid increases of asset prices and possible inflation. From May 1989 to August 1990, the Bank of Japan consecutively raised the central bank discount rate from 2.5% to 6% five times and required all commercial banks to slash the loan (Rowley, 2003). Meanwhile, Japanese monetary authorities required all financial institutions to control real estate loans, In 1991, Japanese commercial banks had actually stopped loans to the housing industry. Although this policy change solved the problems of asset prices rapid rise, but the bursting of the bubble economy had brought disastrous consequences to the Japanese economy. The sudden turn of monetary policy prick Japanese stock market bubble, almost at the same time, Japanese land prices also began to violently fell and it fell more than 46% in this year, then the real estate market bubble busted (Kuttner, Kenneth and Posen, 2001). After the bubble burst, the Japanese economy had experienced 13 years' depression, this period is usually referred as the "lost decade".
In addition to the monetary policy and the appreciation of the yen, the more important reason led to the long-term depression of Japanese economy is macroeconomic policy failures and the constraints of the economic system. The government's economic policy failures stifle the gradual economic recovery. Since the collapse of the bubble economy, the Japanese government can't make a right judgments for the economic situation exactly and develop appropriate countermeasures in a timely manner, which result in that the economy can't get out the recession (Okina and Kunio, 1999). First, from October 1992 to December 2000, the Government wants to stimulate domestic demand and add to supplementary budget 11 times, which amount to 130 trillion yen (Rowley, 2003). According to Keynesian doctrine, when economic contraction, the government can expand the public spending or take other proactive fiscal policy, which will help to stimulate the economy to rise rapidly. However, the Japanese government did not find the real "root cause" and apply the traditional methods of Western economic regulation, which does not play a role to stimulate the economy, on the contrary, the Japanese finance accumulated a huge deficit. Second, the Japanese government underestimated the negative impact the assets shrink on economic. In the early days of economic bubble burst, the government thought seriously diminished of asset prices was a normal phenomenon in the economic cycle and do not come up with a proper economic measures in time, which led to the negative impact the decline of asset prices on the real economy became more serious. In addition, in 1996, the Hanshin earthquake made the domestic demand expand and the economy situation significantly rebounded. But the government did not seize this opportunity in a timely manner to stimulate the economy continues to expand, on the contraryï¼Œit made a serious mistakes when handling the relationship between economic recovery and reform, it enhance the consumption tax from 3% to 5%, which greatly reduces private demand. Coupled with the negative impact of the Asian financial crisis, the Japanese economy once again got into recession (Fujiki et al, 2004).
Figure 2: the production growth, unemployment and CPI (%)
In the latter of the 1980s, Japan had completed the historic task, but it lost goals in the direction of economic development, especially in the industrial structure policy. At that time, the Japanese government did not realize that the world will get into the fourth industrial revolution era which is leading by IT Industry, and it did not introduce appropriate incentive policy for industry. At the same time, the U.S. started to adjust the new industrial structure and vigorously developed the high-tech industries and information internet, which help the United States to compete with the Japanese capital and get rid of the economical disadvantages. In less than a decade, the situation has undergone a fundamental reversal. Japan does not seize the golden opportunity to develop the information technology and became backward in the information technological revolution (Yuguchi, 2008). Because in this stage, the Japanese government did not identify the correct target and lost opportunities to implement the IT industry policy, which cause Japanese industry to generate a structural problem that traditional pillar industries could not develop and the new growth industry developed slowly. Therefore, in current, the adjustment of the industrial structure has become one of the key issues to help Japanese economic smoothly get rid of difficulties.
Besides, the Japanese enterprise system lack competition and innovation, so its reaction for new economic is relatively slow. Market competition is survival of the fittest, so the independent American businesses and the high diffluent labor and talent market show a high adaptability degree. Supported by venture capital, a large number of new high-tech SMEs have born and become the emerging industries which promote the development of the U.S. new economy. In contrast, under government protection, Japanese companies used enterprise serial system and the lifetime employment system which lack elimination mechanism and the flow of talent, which make the new enterprise difficult to get a rapid development in the traditional enterprise system (Bernanke and Ben, 2000).
In the financial sector, the financing is subject to the government, the government use a variety of means to guide funds get into the financial system and then support a particular industry according to the government will. The results is that "the economic operation blood", the financial institutions is complete in the hands of the government or interest groups, thus forming a specific protection system of the Japanese bank. The excessive bank loans and the excessive corporate borrowing eventually led to the bank's bad debt is increasingly serious.
Suggestion for future policy
To keep Japan's long-term productivity growth, the first thing should be to fully tap the productivity of existing industries. This needs to reduce government intervention in the economy, to relax a variety of regulatory, to encourage free competition. A variety of long-term government regulations not only limit free competition between enterprises, but also hinder the enterprises to start a new technological innovation based on the market need, and expand new areas of development. Reducing regulation and encouraging competition can release the growth potential of the existing enterprises. A persuasive example is that, the liberalization of electrical communication happening around 1995, allowing new firms to enter the power generation industry to reduce the price of electricity and other measures, has led the sharp increase in investment of equipment to expand output in these two industries (Okina and Kunio, 1999).
Secondly, we need to adjust the economic environment, to create the conditions for the generation and development of risk enterprises. This requires a two-pronged approach: First is to improve the existing bank's risk tolerance. Besides, in order to solve the problem of non-performing loans, restructuring of bank assets, banks need to improve the prior review and risk assessment management capabilities to reduce banks' reliance on land secured by real estate. The second is to broaden the financing channels for enterprises to improve the proportion of direct financing in the corporate finance. For example, through the relaxation, enterprises can do the financing through the stock market or the sale of corporate bonds. With the reform of referral financial system, a reform of the existing enterprise system needs to be carried out, to enable enterprises in a timely manner to adjust their investment decision-making and the employment relationship according to the needs of the market, which is conducive to existing enterprise, especially for small and medium-sized enterprises to be engaged in industrial activities with the high risk, according to the needs of the market.
In the long term, the Japanese economy needs a new pillar industry. Judging from the current situation, Japan's economic problems are concentrated in the financial issues, but its regeneration will depend on the development of the real economy. The existing Japanese corporate structure, the bank financing system as indirect financial center as well as a variety of government restrictions are not conducive to the survival and development of innovative enterprises. Therefore, the Japanese economy should be separated from the existing economic system, to create a new pillar industry.