1945 is the year the Empire of Japan would finally surrender to the Allied forces, ending the Second World War. The war had devastated the empire’s economy, leaving it only a shadow of its previous industrial might. Merciless bombing campaigns had reduced her cities to mere rubble, and industrial output fell by 27.6% by 1946 compared to pre-war levels. Nevertheless, with the injection of funds from the United States, Japan’s economy was able to achieve rapid economic development between 1952 to around the 1990s. This event is called an ‘economic miracle,’ reflecting how fast Japan was able to develop from being a war-torn country to the world’s third largest economy today.
The end of World War 2 brought a period of occupation of Japan by the United States. During this period, the United States led Japan in three stages. From 1945 to 1947, the US significantly reformed Japan’s institutions, including the constitution, to prevent the country from ever becoming militarized again and to implement Western values such as democracy into Japan’s society. The US also conducted war trials, punishing those who were involved in making Japan’s decisions during the war. To prevent Japan’s remilitarization, the US barred war officials from ever holding public office, as well as prevented Japan from ever possessing an army, although it does have a self-defense force today. Other reforms include the downgrading of the emperor’s importance, implementing women’s rights, and strengthened the parliamentary system. Fearing Japan would succumb to communism, the United States turned from punishing Japan toward stabilizing and growing the economy to prevent communist uprisings by the workers. The Ministry of International Trade and Industry was established to oversee the production and usage of raw materials in Japan. When the Korean War broke out in 1950, the US used it to establish Japan as a base of operations from which to launch attacks on North Korea, as well as supplied with raw materials to Japan, allowing the country to invest further in industrial power. Once the occupation forces led by General MacArthur felt the reforms were well established within Japan, the United States moved to restore Japan’s sovereignty, with the country regaining it in 1952 with the Treaty of San Francisco. With this treaty, the Allied forces would establish Japan’s autonomy and Japan, in turn, promised to pay repatriations for the damage it caused. The United States and Japan also signed an agreement called the Bilateral Security Treaty whereby the United States would defend Japan from foreign attacks. Thus ends the first stage of Japan’s economic miracle, the recovery stage from 1945 to 1954.
After being rebuilt and reformed, the next stage of the miracle would take place from 1954 to 1972, called the ‘High Increasing Stage,’ reflecting how fast Japan’s GDP grew. During the High Increasing Stage, Japan’s economy would grow approximately ten percent per year. With the guidance of the Ministry of International Trade and Industry (MITI), Japan was able to accomplish this feat, as the ministry effectively controlled the economy by having a monopoly on the lending of loans and capital to businesses. A quality education system fostered workers who were highly educated, which eventually led to Japan being able to become a technologically advanced economy. Japan’s economy at this time was a model of state-guided capitalism, with the government choosing which companies and industries it would fund to grow the economy. The Japanese government also implemented protectionist policies and regulations. Japanese businesses and the government worked so closely together, Western media often deemed the business culture in Japan as ‘Japan Incorporated.’ During this time Japanese companies organized themselves in a system called the keiretsu, a conglomerate of companies ‘including a main bank, large financial institutions, the largest manufacturing firms, and a large general trading company’ working together to maximize efficient use of resources (‘Japanese economic takeoff after 1945’). Examples of keiretsu conglomerates include Sony, Toyota, Mitsubishi, and Kawasaki. Under Prime Minister Ikeda Hayato, the government undertook a plan called the Income Doubling Plan, calling for incomes and Gross National Product (GNP) to grow at a pace of 7.2% per year through the 1960s, thus doubling in 10 years. This would be accomplished through trade liberalization, investment in infrastructure, and promoting welfare spending. The plan actually overshot its goal, achieving an average of 11.6% GNP growth during the 10 year period. Exports grew at a rate of more than 15% annually during the 1960s, which allowed Japan to achieve a trade surplus for the first time in 1965. With the combined efforts of the government and Japanese companies, Japan’s GDP grew so fast it officially became the world’s second-largest economy in 1978.
The Oil Crises of 1973 and 1979 considerably slowed down the growth of Japan’s economy due to the dramatic increase in oil costs from the Organization of the Petroleum Exporting Countries (OPEC), thus ending the High Increase Stage and beginning the Steady Increase Stage Oil prices rose in response to sanctions from OPEC, which tripled in both 1973 and 1979, ultimately resulting in the cost of oil rising from $3 to $13 and $39 in 1979. Because of the dependency on fossil fuels for industrial production, the rising cost of oil severely affected several major economies, including Japan, which saw its first decline in industrial production since the miracle began, and high inflation ensued. From double-digits, GDP growth fell to around 4 to 6% annually. To continue growing, Japanese companies increased the efficiency of their factories to reduce dependency on oil. In addition, several promising industries sprang up, including electronics, semiconductors, and automobiles allowed Japan to continue growing. Throughout the entire economic miracle, Japan largely relied on exporting manufactured products, which was greatly enhanced by a cheap yen. In fact, Japan prioritized exports even further during the 1970s to offset the rising cost of imports from the high oil prices, which would cause Japan to fall into debt from trade deficits. At this time, the United States began to feel threatened by the increasing dominance of the Japanese economy, which was forecasted to surpass the US in the near future. Fears about Japanese dominance mirror those of the concerns related to China today, with the United States worrying about the countries eclipsing it economically. One major point of contention was the trade deficit the United States had with Japan, a major cause of which was the cheap yen. A cheap currency boosts exports by making them cheaper to an importing nation. To rectify this, the United States signed an agreement with Japan, Great Britain, France, and Germany to devalue the US dollar relative to the respective nations’ currencies. This was called the Plaza Accord, signed in 1985. The agreement caused the Japanese yen to rapidly strengthen against the US dollar, going from ¥242=$1 in 1985 to as low as ¥120=$1 in 1988. Because of the dramatic strengthening of the yen in such a short time, exports took a hit, and Japanese GDP growth slowed down massively due to the dependency of the Japanese economy on exports. In response, the Bank of Japan lowered interest rates in order to stimulate lending, lowering interest rates from 5% in 1985 to 2.5% in 1986. This allowed for money to be borrowed cheaply to increase consumption, with the increase in consumption came a dramatic increase in expenses across Japan, from housing to stock values. During this time, land prices would soar so high that at its peak, the land under which the Imperial Palace was built was said to be worth more than all the real estate in the entire state of California. The Nikkei 225 stock market index climbed to its all-time peak of 38,957 in December 1989. This time period, from 1986 to 1991, is known as the Japanese Asset Price Bubble, or the ‘bubble economy.’ Although GDP may not have expanded quite as fast as during the High Increasing Stage, the economy still grew briskly when compared to other major economies at the time.
As Geoffrey Chaucer once said, ‘All good things must come to an end,’ and this is precisely what happened to Japan during the 1990s. Finally perceiving the bubble economy to be a major problem, the Bank of Japan began to hike interest rates in May 1989, raising it from 2.5% to 3.25%, ultimately raising it to 6% by 1990. Because the sudden spike in interest rates made borrowing extremely expensive, a sudden selloff ensued, with land costs and the stock market collapsing. The Nikkei 225 fell from its high in 1989 at 38,957 to 14,000 in August 1992. Land values fell an average of 50% from its peak until 1992, with the cities hit much worse than other parts of the country. The bursting of the asset bubble caused GDP to fall to an average of 1% per year throughout 1992 and 2001. This period of time is known as the ‘Lost Decade,’ as economic advancement dramatically slowed down compared to the rest of the post-war economic miracle. To try to stimulate the economy, the Japanese repeatedly tried several fiscal stimulus packages, aiming to revive demand through increased government spending, which all mostly failed at successfully reviving GDP growth. In addition, the Bank of Japan implemented a zero interest rate policy to try to stimulate consumption by making it cheaper to borrow money. Although it is called a Lost ‘Decade,’ Japan still has yet to fully recover from the economic recession. Japan has continually (until 2013) suffered from deflation (a condition where prices fall) since 1998, which stalled consumption by encouraging consumers and businesses to save in anticipation of a cheaper price tomorrow rather than today. In addition, Japan’s working-age population stagnated sometime in the 1990s, and with fewer people who are contributing to the economy, this will eventually lead GDP growth to slow or even become negative, unless productivity growth surpasses population decline, which in Japan has barely happened. Beginning around 2008, Japan’s population began to shrink, falling from a peak of 128 million in 2008 to 126.8 million in 2017. However, from 2002 to 2007, Japan’s economy did improve considerably under Prime Minister Junichiro Koizumi, with average GDP growth rising to 1.8% during this time. Prime Minister Koizumi undertook substantial reforms in order to improve the economy, which the increase in growth indicates. The progress was reversed, however, by the 2008 Great Recession, which knocked Japan back down to the recession, with GDP falling by 5.2% in 2009. Due to the massive stimulus measures attempted by the government, the debt to GDP ration has risen to more than 200% of Japan’s nominal GDP. The only reason the Japanese government has not gone into bankruptcy from interest payments is due to the interest rates being cut to such a low level for such a long time. From 2009 to 2012, the yen appreciated in value sharply, rising to as much as ¥80=$1, significantly harming exports which constitute a large part of the country’s economic growth.
In late 2012, current Prime Minister Shinzo Abe was elected in as prime minister of Japan, with the Liberal Democratic Party regaining power after the Democratic Party of Japan gained power from 2009 to 2012 for the first time in Japan’s post-war history. Prime Minister Abe campaigned on a platform of reviving the Japanese economy using three ‘arrows’ of fiscal stimulus, monetary stimulus, and structural reform. These policies are collectively known as Abenomics and have thus far resulted in mixed results, with structural reforms being implemented at a rather slow pace. These structural reforms, which include cutting red tape, increasing immigration, empowering women, and encouraging innovation, are widely considered to be the most important aspect of Abenomics, yet these measures are not being implemented fully. Under Abenomics, the BOJ under governor Haruhiko Kuroda implemented a massive Quantitative Easing (QE) policy, which is where the central bank buys government bonds to increase the money supply. This was done in an attempt to reach the BOJ’s inflation target of 2%, which in theory would cause consumption to rise again as the expectation of falling costs would be wiped away by increasing inflation. QE was also implemented to decrease the value of the yen, which in theory would help exporters. The yen fell from its high during the administrations of the Democratic Party to around ¥120=$1 by 2013. In addition to monetary stimulus, fiscal stimulus was also done, with the government passing a stimulus package worth 20.3 trillion yen ($210 billion) to pay for infrastructure projects and other government spending to revive the economy. A package of structural reforms announced during 2014. Abenomics is inspired by a Japanese folktale, which said three arrows working together could not be broken, whereas a single arrow would break if bent. Fiscal and monetary stimulus measures were supposed to be to buy time for structural reforms which would cause short-term pain. But since the third arrow (structural reforms) was not fired, this has led to an initial boost in growth followed by continued difficulties economically. These include the ever-increasing debt to GDP ratio thanks to the stimulus, negative interest rates in 2016 potentially causing a speculative bubble to form, said interest rates causing damage to banks, and a consumption tax increase in 2014 causing the economy to fall into recession thanks to a stall in consumption. Abenomics has been successful, however, in signing trade deals which may force liberalization of certain sectors of the economy, as well as opening up some sectors including agriculture, energy, and healthcare. Unemployment has fallen to as low as 2.2%, the lowest in decades, the jobs to applicants ratio has risen to 1.64, and women have seen rising participation rates. Deflation is considered to be gone, although inflation is still low, being only halfway to the BOJ’s stated goal of 2%. In addition, the Nikkei 225 has risen from 8,500 in 2012 to as high as 24,000 in 2018. From 2016 to 2018, GDP grew for 8 consecutive quarters, a streak not marked in 3 decades. Yet without the third arrow of structural reform, most major economists agree the Japanese economy cannot fully recover from its Lost Decade(s).
The world has seen Japan rise from a war-torn nation to one of its most prosperous countries. The post-war economic miracle from 1945 to 1992 led Japan to become the third largest economy in the world from a militaristic, totalitarian regime in the 1930s and early 1940s. Yet with this progress and prosperity came an inevitable economic decline, with Japan having suffered from almost 3 decades of little growth. With Abenomics, perhaps Japan can eventually recover from its Lost Decades and once again become an economic juggernaut as it was in the 1980s.
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