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Japan in 1990s Changes in political economy Changes in political economy • Challenges to stability of equilibrium – domestic socioeconomic or political problems – external economic or security problems • Changes of different magnitude – adjustments in public policy – changes in socioeconomic basis – changes in economic or political institutions – major shifts in two or three spheres Bubble burst (1990-01-01) Bubble burst (1990-01-01) • • • • • • Massive stock and land price collapse annual GDP growth rate around 1% manufacturing productivity decreased corporate bankruptcies unemployment rate economic performance at bottom of industrialized democracies – opposite from 1960s Japan slows down GDP (constant 1995 US$) 1E+13 9E+12 8E+12 7E+12 6E+12 5E+12 4E+12 3E+12 2E+12 1E+12 Germany France Japan UK 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 19 78 19 76 19 74 19 72 19 70 19 68 19 66 19 64 19 62 19 60 0 USA GDP per capita (constant 1995 US$) 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 Germany France Japan UK USA 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 19 78 19 76 19 74 19 72 19 70 19 68 19 66 19 64 19 62 19 60 0 International competitiveness • • • • • • World Economic Forum ranking Japan was No. 1 in 1990 14th in 1997 15th in 2001 10th in 2012 9th in 2013 Political earthquake of 1993-95 • Economic stagnation since late 1980s • Major corruption scandals of LDP leaders – 2.5 billion yen contribution from a company – 1 billion yen income tax evasion – media revelation of systematic corruption • Businesses’ demand for political reform – high cost of doing business – political bribes and contributions Industrial contributions Party Realignment (‘90s) Prime Ministers 1993-2001 • non-LDP Prime Ministers 1993 - 1996 • LDP coalition cabinets since 1996 New Electoral Rules (1996) • 480 members in House of Representatives – 300 elected from single-member districts – 180 elected from 11 proportional representation districts • 252 members in House of Councillors – 100 elected from proportional representation district – 152 elected from 47 prefecture constituencies More shocks in 1990s • Large and rising government deficit and debt (~150% of GDP) • Aging population • Banking crises and non-performing loans • Asian financial crisis (1997-8) • “Hollowing out” of industry • natural disasters and terrorist attacks Economic transformation • capital market and currency had become deeply integrated into world markets – investment abroad • formal trade barriers and limits on foreign direct investment largely eliminated • Japanese-owned firms became multinational – overseas production, financing, R&D, and technological alliance Appreciation of yen Changes in economic policies • New reliance on – consumption taxes – borrowing – debt service • public debt more than twice its GDP • move away from monetary restraint • zero interest rate Zero interest rate Changes in economic policies • • • • privatization of nationalized industries official effort to support declining industries protect the inefficient promote the competitive Inconsistent policies • Lack of cohesiveness and singularity in economic policy – internal contradictions • no longer a cohesive strategy directed at structural improvement of economy • eclectic mixture of ad hoc efforts to deal with economic problems Still an outlier • Comparison with other industrialized democracies • markets for imports remained skewed against high value-added manufacturing goods • imports from overseas subsidiaries of Japanese-owned multinational corporations Still an outlier • Comparison with other industrialized democracies • limited amount of foreign direct investment in Japan • FDI per capita in Japan is less than 10% of that in Germany, less than 5% of that in UK