Download Growth Rate of Real GDP Unemployment Rate Ratio

PART I: INTRODUCTION (Written 1989; Revised 2002)
This monograph will consider the economy of Japan since 1955. We cannot devote
much space to the Japanese economy prior to 1955. However, there are a few points
about the economic history of Japan that are important in understanding the period since
1955. The first part of this introduction will describe these points. The second and third
parts will provide a basic survey of the economic performance of Japan since 1955.
(1) Some Points About the Economic History of Japan
First, it is important to understand that Japan was a feudal country until 1868. By
contrast, Europe ended feudalism nearly 500 years ago. This feudal society was basically
isolated from the rest of the world. It was based on a strong sense of personal
obligation, with strong personal loyalties and with the elevation of social duties above
personal rights. It was a very hierarchical society, with the mass of the population very
docile before authority. It was a very nationalistic society, reinforced by the racial and
linguistic homogeneity of the Japanese. And it was a society in which learning was
highly regarded; literacy rates were high. Many of these traits have continued to this day.
Second, between 1868 and 1945, the Japanese government was very involved in
the economy. (Originally, the government created companies in several industries
deemed important. Later, these were turned into private companies.) Initially, the
government was motivated by its desire to rid Japan of foreign domination. This later
turned into Japanese imperialism. The desire to be rid of foreign domination and the
absence of acceptance of a laissez faire philosophy have continued to this day. We
shall discuss the role of the Japanese government in the economy and the Japanese
economic relations with other countries in later sections.
Third, prior to the end of the war, the economy was dominated by four large groups
of companies (or conglomerates) called zaibatsu. The four zaibatsu groups were
Mitsui, Mitsubishi, Sumitomo, and Yasuda (later to become Fuji). These had large
holdings in industry, finance, international trade, etc. They were centered around a group
bank.
Fourth, as is obvious, by the 1930s, Japan was certainly NOT an underdeveloped
country. Between 1900 and 1940, Japan’s real national income had grown at an
annual rate of 4.5%, a rate unprecedented for the time. Japan’s investment rate was
high and it was a major exporter of manufactured goods. The Japanese economic miracle
certainly did not begin in 1955.
Fifth, while Japan had very large and modern manufacturing companies, it also had a
large number of small companies. These had little capital and thus produced by using
mainly labor. They were quite poor. Japan had what has been called a “dual economy”.
In addition, due to the large number of workers and the very strong companies, Japan had
a weak labor force and an absence of strong labor unions.
Sixth, from 1945 to 1953, Japan was under occupation, mainly by the United States
Army (under General MacArthur). Among the economic policies taken by the
occupation, several were especially important. One was the break-up of the zaibatsu.
The stock in their companies was sold to the public and the zaibatsu leaders were
prohibited from further business activity. (This is led to the rapid rise of a whole new
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generation of business leaders.) We shall see later how the groups of companies reestablished themselves (although the modern groupings are in no way similar to the old
zaibatsu). A second occupation policy was land reform. All the land of absentee
owners and all but about 2.5 acres of land owned by landlords resident in the rural areas
was bought by the government and resold to tenant farmers. This virtually destroyed the
landlord class. In 1946, 46% of the land was worked by tenant farmers; by 1950, only
1O% of the land was worked by tenant farmers. A third occupation policy was the
introduction of anti-monopoly laws similar to the Sherman Act in the United States. As
we shall see, these were not well enforced by Japan until the late 1970s. A fourth
occupation policy was to introduce labor laws similar to those in the United States.
The proportion of workers in unions grew from 0 to 60% between 1945 and 1949. This
led to a series of major strikes. The unions were defeated in these strikes. The employers
responded to their victory by instituting the modern system of Japanese industrial
relations. We shall discuss this in a later section. A final occupation policy was called
the Dodge Plan. It involved a number of austerity measures imposed on Japan in
1949. These austerity policies included a balanced budget, the abolition of subsidies,
and a devaluation of the yen to Y360 = $1. This led to deflation, and was the cause of
the workers’ strikes. Until at least the 1970s, the Japanese policy-makers were strongly
attached to the idea of balanced budgets and to the exchange rate of Y360 = $1.
Seventh, because of the experience of the war, Japan emerged with a deep
commitment to economic growth and industrialization. This commitment was widely
shared throughout the population until at least the early 1970s.
In 1953, Japan became an independent country. It was fortunate in that its economy
benefited economically from the Korean War. Japan sold materials to the American
military under special procurements. It also served as a base for American troops. The
Cold War also ended any attempt by the United States to punish Japan for World War II.
Japan was now to be aided so that it would enter into alliance with the Western countries.
This meant that the United States would provide most of Japan’s defense, as Japan
was prevented from having a significant military by its own constitution. With this
desirable beginning, postwar Japan went on to have one of the most outstanding records
of economic performance ever experienced. Let us take a brief look at that performance.
(2) Survey of Japan’s Economic Performance from 1955 to 1990.
To many, the success of Japanese economic performance has been a miracle. In many
ways, there is no other country to have achieved what Japan achieved. This economic
miracle is best seen in terms of economic growth rates. The table below shows the annual
growth rates in Real GDP for Japan and for the United States.
1961-65 1966-70 1971-75 1976-82 1983 1984 1985 1986 1987 1988
Japan 12.4% 11.0%
U.S.A. 4.6% 3.0%
4.3%
2.2%
4.5% 3.2% 5.1% 4.7% 2.5% 4.4% 5.4%
2.3% 3.6% 6.8% 3.4% 2.8% 3.4% 3.8%
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As you can see, in the 1960s (and also in the 1950s), Japanese growth rates were truly
astounding. While they have fallen in the 1970s and the 1980s, they have still been quite
good in most years. In 1955, Real GDP per capita in Japan was only 21% of that of
the United States. By 1988, it was approximately 80% that of the United States.
According to the World Bank, in 1986, Japan had a GDP per capita of $12,840, making it
the sixth richest country among the 129 countries surveyed (behind only Switzerland, the
United States, Norway, Canada, and Sweden).
As we shall see below, in the 1950s and 1960s, much of Japan’s economic growth can
be explained by Japan’s ability to borrow technology from abroad and adapt it. By the
1970s, this option was no longer as important. From 1955 on, much of Japan’s
economic growth has been intensive growth. For example, writing in the mid-1970s,
Edward Denison (perhaps America’s leading scholar on economic growth) found that for
the period 1953-71, only 45% of Japan’s economic growth could be explained by
increases in labor, capital, and land (extensive growth). The other 55% is explained
by increases in production per unit of the factors of production (intensive growth).
Japan has achieved large increases in productivity. These increases occurred over the
entire economy, not just in manufacturing. For example, from 1965 to 1972,
productivity in Japan grew at an annual average rate of about 9%, compared to a
little over 2% in the United States. From 1973 to 1983, Japan’s productivity grew at an
annual average rate of 3.5%, while American productivity was virtually stagnant. This
productivity growth has led to a large increase in real wages in Japan. Real wages
rose over 350% between 1956 and 1983. In subsequent sections, we shall need to
explain two facts. First, we shall need to understand the cause of the rapid rise in
productivity. Second, we shall need to explain why, in most years, real wages rose
more slowly than productivity.
Another aspect of Japan’s economic performance also requires explanation. This is
shown in the data below. Note that Japan’s official unemployment rate (on American
definitions of unemployment) has been very low and has not risen much during bad
economic times. Also, note that, while Japan has experienced some years of high rates of
inflation, generally inflation has been well under control.
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YEAR
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
UNEMPLOYMENT
JAPAN
U.S.A.
1.2%
4.5%
1.4
3.8
1.3
3.8
1.2
3.6
1.1
3.5
1.2
4.9
1.3
5.9
1.4
5.6
1.3
4.9
1.4
5.6
1.9
8.5
2.0
7.7
2.0
7.1
2.3
6.1
2.1
5.8
2.0
7.1
2.2
7.6
2.4
9.7
2.7
9.6
2.8
7.5
2.6
7.2
2.8
7.0
2.9
6.2
INFLATION (CPI)
JAPAN U.S.A.
6.4% 1.6%
5.4 2.9
3.5 3.1
5.6 4.2
5.3 5.5
7.5 5.7
6.2 4.4
4.9 3.2
11.7 6.2
23.2 11.0
11.9 9.1
9.2 5.8
8.2 6.5
4.2 7.6
3.7 11.3
7.8 13.5
5.0 10.3
2.7 6.2
1.8 3.2
2.3 4.3
2.1 3.6
.6 1.9
.~ 3.6
Behind the rapid economic growth and the rapid rise in productivity was a very high
rate of investment, financed by a high rate of savings. This is shown in the table below
(the numbers are “percent of GDP”):
1965-69
Gross Investment
33.8%
Net Investment
20.2%
Household Saving 10.6%
Corporate Saving
5.0%
Government Saving 5.4%
1970-74
37.5%
23.8%
13.5%
4.7%
6.5%
1975-79 1980-83
31.5%
30.5%
18.5%
16.5%
15.6%
13.6%
1.2%
0.9%
0.9%
2.7%
Several points about this table are noteworthy. First, both gross and net investment
rates were very high (net investment subtracts that investment which replaced
capital that had depreciated). To illustrate, from 1980-83, gross investment rates in the
United States averaged 15.7% and net investment rates averaged about 4% (these were
recession years in the United States, but the gaps are substantial in any other period as
well). Second, as in the United States, net investment rates declined significantly
from the mid-1970s. But unlike the United States, household saving rates did not
Page 5
decline (as will be seen below, much of this “excess saving” made its way to
investments in the United States). Third, household saving rates are very high. In
Japan, personal savings comprise almost one-half of all savings, compared to 15% to
30% in the United States. What is unique to Japan is the high savings rate among lowincome and working-class households. We shall have to explain these phenomena later.
Another interesting feature of Japanese economic performance has been that the high
rates of economic growth seem to have been accompanied by considerable equality in
the distribution of income. In the mid-1970s, the Gini Index for Japan was 0.335 before
taxes (0.316 after taxes) compared to 0.404 for the United States (0.381 after taxes). The
Gini Index is a number between zero and one; the lower the number, the more equal is
the distribution of income. Japan’s distribution of income is more equal than that of
the United States or any of the Western European countries. However, inequality in
Japan increased in the 1980s. (In later sections, we shall consider the inequality in
wages between those who work in large firms and those who work in smaller firms. And
we shall also consider the large wage differences between men and women.) Associated
with this rise in inequality has been a decline in the proportion of the Japanese
population who consider themselves “middle-class”.
One final aspect of Japan’s economic performance involves international trade. Japan
has run large current account surpluses, especially in the 1980s and particularly in
relation to the United States. In a later chapter, we shall discuss Japan’s trade policies and
how they have evolved since 1955. We shall also discuss the problems in trade between
the United States and Japan and some of the proposed solutions. (The current account
balance is the difference between exports and imports, counting both goods and services.)
JAPAN’S OVERALL CURRENT ACCOUNT BALANCE U.S. TRADE DEFICIT WITH JAPAN
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
5.797
6.624
-0.136
-4.693
-0.682
3.68
10.2
16.534
-8.693
-10.746
4.77
6.85
20.799
35
49.169
86.97
87.0
79.6
+ = surplus - = deficit
-
2.75
4.782
1.631
1.048
1.372
5.286
- 8.149
- 11.676
- 8.6
- 9.1
- 14.1
- 15.8
- 18.3
-37.7
- 45.2
- 55.9
- 5.9
- 49.2 est.
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(3) Survey of Japan’s Economic Performance Since 1990.
Until the end of the 1980s, Japanese economic performance was the envy of the
world. Many works were written in the United States arguing that the Japanese economy
had a competitive advantage over the American economy. Some even argued that the
Japanese economy would replace the American economy as the leading economy in the
world. But none of this has come to pass. The decade of the 1990s (and especially the
period from 1995 to 2000) was a period of economic boom in the United States. On the
other hand, the decade of the 1990s was one of economic gloom for the Japanese. No
one today (2002) believes that the Japanese economy is a threat to the American
economy. And many Japanese economists believe that the advantages once possessed by
the Japanese economy have come to an end and that the Japanese economy needs to
undergo serious reform.
The decade actually begins in 1986 and 1987. In those years, the United States
pressured the Japanese to do something about the American trade deficit with Japan. The
price of the yen was very high at that time and the United States wanted the Japanese to
help reduce the American trade deficit with Japan. To help reduce the American trade
deficit, the United States wanted the central bank of Japan (called the Bank of
Japan) to increase the Japanese money supply. It was hoped that increasing the
money supply in Japan would give the Japanese people more money that they would use
to buy American goods. Also, increasing the money supply in Japan would raise prices
in Japan, making it more expensive for Americans to buy Japanese goods.
The Bank of Japan did indeed increase the Japanese money supply. But the
additional money went mainly to buy stocks and real estate. This began what is
called a “bubble economy”. In a bubble economy, people buy stocks and real estate for
speculative purposes only. This means that one buys a stock or some real estate in the
hope that once can resell it very soon for an even higher price. The price of the stock or
the real estate greatly exceeds its true value. But the buyer does not care. The buyer only
hopes the price goes even higher so the buyer can resell the stock or the real estate and
make a profit. Eventually, the bubble bursts. In Japan, the bubble burst in December
of 1989 when the Bank of Japan decided to reverse its policies and tighten the
money supply. (The real estate bubble did not burst until late in 1990.) People who had
bought stocks or real estate and paid more than the intrinsic worth now panicked. They
sold as quickly as they could, trying to sell before the prices went down too much. The
result of a large amount of selling is that prices indeed do decline. The Nekkei Stock
Index (a broad average of Japanese stock prices similar to the S&P 500 Index in the
United States) fell from 38,130 in December of 1989 to 23,740 in December of 1990 and
then to 22,304 in December of 1991 and 17,390 in December of 1992. By September of
1998, the Index was below 14,000. The situation for real estate prices was similar.
The decline in stock and real estate prices caused a decline in wealth for many
Japanese. Feeling poorer, and also becoming pessimistic about the future, these people
reduced their spending on consumer goods. The decline in consumer spending sent Japan
into a recession. (This series of events was similar to the one that occurred in the United
States in 2001.) This was a “growth recession”. A “growth recession” means that
Page 7
production (Real GDP) did not fall; instead, it simply increased much less rapidly.
1990
1991
1992
1993
1994
1995
1996
1997
1998
Growth Rate of Real GDP Unemployment Rate
5.0%
2.1%
3.8%
2.1%
1.0%
2.2%
0.3%
2.5%
0.6%
2.9%
1.5%
3.2%
5.1%
3.4%
1.4%
3.4%
-2.8%
4.1%
Ratio
1.40
1.40
1.08
.76
.64
.63
.70
.72
.53
(Ratio is the ratio of job openings to job application)
This period is known in Japan as the Heisei Recession. Officially, it lasted until October
of 1993. But what is remarkable about this period is that, once the recession was
officially over, the economy recovered only very slowly. Economic growth over the
period 1992 to 1998 was the lowest of the 7 main industrial countries.
Beginning in March of 1997, the Japanese economy went into another recession.
In this case, Japan experienced a true recession. From April of 1997 to March of 1998,
Japanese production (Real GDP) actually fell 0.7%. And from April of 1998 to
December of 1998, Japanese production (Real GDP) fell at the very high rate of 2.4%. In
the first quarter of 1999, the unemployment rate in Japan was 4.8%, the highest rate in
Japan since the 1930s. (In Japan, as we will see, the main response to bad economic times
is to reduce work hours, rather than increase unemployment. In this period, work hours
fell from an average of 2,100 per year to 1,900.) The labor market in Japan was
chronically depressed through much of the 1990s.
To some extent, this recent recession was a continuation of the previous recession.
But this recession was also a result of the so-called Asian Crisis. The Asian Crisis began
in the summer of 1997 with speculative selling of the Thai Baht, the Indonesian Rupiah,
the Malaysian Ringgit, and the Korean Won. This selling led to large declines in the
exchange rates (depreciation) of these monies. The depreciation of these monies led
several of these countries to have to default on international debts they had incurred.
Indonesia and Malaysia in particular entered a severe recession. Korea and Thailand
have also suffered. These are major export markets for Japanese companies. The
reduction in exports to these countries and the inability to collect on loans made to
these countries contributed to the most recent and most severe Japanese recession.
There are two other major changes in the 1990s in Japan that are worthy of notice.
One is the aging of the Japanese population. Population growth in Japan is expected to
turn negative by 2007. The population of working ages (age 15 to 64) actually declined
between 1995 and 1998. By 1994, life expectancy in Japan became the highest in the
world --- 76.6 years for males and 83 years for females. People age 65 and over rose
from 5.7% of the population in 1960 to 14.1% in 1995. This increase is expected to
Page 8
continue. The rapid aging of the population will have major effects on Japanese
employment, on Japanese savings, on the Japanese retirement policies, and on other
important aspects of the Japanese economic system.
The other major change in the 1990s was the absolute decline of manufacturing.
From 1992 to 1998, employment in manufacturing declined 11%. The structure of
Japan’s economy is undergoing a significant structural change. In response to this
change, many of the Japanese groups (the descendents of the zaibatsu) are increasing
their presence in finance and decreasing it in manufacturing. This structural change will
surely affect the high rate of investment spending in Japan.
(4) Conclusion
In subsequent chapters, we will try to answer the following questions. First, what are
the aspects of the Japanese economy that are different from the United States? Why did
these arise? Are they a source of advantage or disadvantage for Japan? Second, what are
the explanations for the exceptional rate of economic growth in Japan until 1990? Third,
what are the explanations for the relatively poor performance of the Japanese economy
since 1990? And finally, what kinds of changes might be needed in the Japanese
economic system in the 21st century? Are these changes likely to actually take place?
Will the Japanese economy return to prosperity or will it continue to stagnate? Much of
the success of the Japanese economy up to 1990 has been attributed to the particular
business system that existed in Japan. Part II will consider this particular business system
in some detail.