The Economy - Overview

The Japanese economy is the second largest market economy in the world. In 2002 it recorded a gross domestic product (GDP) of 532.96 trillion yen. Per capita national income in 2001 was US $24,038, ranking Japan fifth among industrial nations. Since the collapse of the "bubble economy" in the early 1990s, however, GDP growth has stagnated, and, despite a couple of minor upturns, a sustained recovery has proved elusive. In an effort to revitalize the economy, the Japanese government is currently attempting to implement a wide range of structural and regulatory reforms. Major changes are also taking place in the corporate world as companies strive to increase competitiveness by moving away from traditional employment practices such as lifetime employment and seniority-based wages.

The Economy - Specifics

The Bubble Economy

Corporate investment rose sharply in 1988 and 1989. With higher stock prices, new equity issues swiftly rose in value, making them an important source of financing for corporations, while banks sought an outlet for funds in real estate development. Corporations, in turn, used their real estate holdings as collateral for stock market speculation, which during this period resulted in a doubling in the value of land prices and a 180% rise in the Tokyo Nikkei stock market index.

In May 1989, the government tightened its monetary policies to suppress the rise in value of assets such as land. However, higher interest rates sent stock prices into a downward spiral. By the end of 1990, the Tokyo stock market had fallen 38%, wiping out 300 trillion yen (US $2.07 trillion) in value, and land prices dropped steeply from their speculative peak. This plunge into recession is known as the "bursting" of the "bubble economy."

The Economy Since 1995

The post-bubble recession has continued through the second half of the 1990s and into the new millennium. Some temporary improvement in the economic outlook was seen in 1995 and 1996, but in 1997, a variety of factors, including a rise in the consumption tax rate, a reduction in government investment activity, and the bankruptcies of major financial institutions, quickly worsened the recession. Burdened with a huge volume of bad debt, financial institutions tightened their lending policies, thereby forcing companies to reduce plant and equipment investments. This, combined with falling exports caused by the Asian economic crisis, resulted in lower profits in almost all industries. Employment salaries and wages also fell, further dragging down consumer spending, and in 1998 the Japanese economy suffered negative growth.

The national budget for fiscal 1999 included a large increase in public project spending (100 billion Yen), and action, such as an increase in tax credits for new home purchases, was taken to reduce taxes. Beginning in February 1999, the Bank of Japan instituted a 0% short-term interest rate policy to ease the money supply, and in March the government poured 7.5 trillion yen in public funds into 15 major banks.

As a result of these measures and growing demand for Japanese products in Asia, in late 1999 and 2000 signs of recovery, such as increasing stock prices and revenue growth in some industries, began to be seen. In 2001, however, the economy slid back into recession because of domestic problems—sluggish domestic demand, deflation, and the continuing huge bad-debt burden carried by Japanese banks—as well as international factors that included a decline in Japanese exports due to deterioration of the U.S. economy. The unemployment rate, which had been only 2.1% in 1990, climbed to 5.4% in 2002.

Economic recovery in the United States and Asia beginning in 2002 has spurred export activity, and this has stimulated industrial production, but it remains to be seen whether a real recovery has begun. The vulnerability of Japanese business to fluctuations in the global economy is evidence of the continuing fragility of the Japanese economy, particularly the weakness of domestic demand. Past government measures, such as additional spending packages to stimulate the economy and prop up insolvent banks, have not fundamentally improved the situation. Therefore, the Japanese government has viewed these issues as structural problems in the Japanese economy, and is implementing policies covering regulatory reform, public company privatization, and administrative reform. Economic revitalization is being promoted with policies to improve efficiency in areas such as corporate management, labor allocation, fund allocation, and research and development.

Looking beyond the immediate-term measures for economic recovery, there is growing concern over the consequences that the aging of Japanese society will have for the economy. In 2001 approximately 18% of the population was 65 or older, but by 2050 this figure is projected to be about 36%. To minimize the effects of the contraction of the working population, it will be necessary both to increase labor productivity and to promote the employment of woman and people over 65. In addition, fundamental reforms will be necessary in pension and other social welfare systems in order to avoid large inequalities between generations with respect to the burdens born and benefits received.

Information Gathered From:

Japan Fact Sheet, http://web-japan.org/factsheet/economy/index.html