Japan’s economy was once one of the largest and most developed economies in the world. After World War II, Japan experienced a period of rapid economic growth known as the “Japanese economic miracle,” during which its economy grew at an average annual rate of over 10%. This rapid bloom was driven by several factors, including strong government support for the industry, a highly skilled workforce, and a focus on exports. As a result, Japan became a major economic power, with a highly developed industrial sector and a strong global presence.
However, the Japanese economy experienced a significant downturn in the 1990s, known as the “Lost Decade,” due to a number of factors. One of the main causes of the economic meltdown was the bursting of the “bubble economy”, which was a period of rapid economic growth and inflated asset prices in the 1980s. This was fueled by speculation rather than real demand, driven by easy credit and excessive borrowing, which led to a housing and stock market bubble. The bursting of the bubble caused a sharp decline in asset prices and a slowdown in economic growth, which led to significant deflation throughout the 1990s. Furthermore, Japan’s economy was heavily dependent on exports, and the appreciation of the Japanese yen made Japanese products less competitive on the global market. This, combined with a decline in demand for Japanese goods, contributed to the economic downturn.
Currently, Japan’s economy is stagnant, as the annual GDP growth rate averaged 0.51% from 1998 to 2021, a rate that falls short when compared to the US which has grown by 2.22% per annum. One of the main reasons for Japan’s stagnation is its demographic challenges, more specifically its aging population. This has led to a decline in the available workforce and a decrease in consumer spending, both of which contributed to said stagnation.
Another reason for this stagnation was the rise of the Chinese economy. China has a much larger population than Japan and has recently opened up its economy to foreign investment, encouraging more businesses to invest there. This, along with the appreciation of the yen since the 1980s, has made Japan less competitive in the global market, leading to a decline in industrial production.
Additionally, the Bank of Japan (BoJ) has implemented quantitative easing in an attempt to boost economic growth. Quantitative easing occurs when the central bank pumps money into the economy to buy stocks and bonds to pass on indirectly to corporations in order to boost economic activity. This program was so massive that BoJ’s total assets were worth approximately $5 trillion USD, which is about 125% of Japan’s GDP, compared to 66% for the ECB and 33% for the Fed in November 2022.
Additionally, the Bank of Japan (BoJ) has implemented quantitative easing in an attempt to boost economic growth. Quantitative easing occurs when the central bank pumps money into the economy to buy stocks and bonds to pass on indirectly to corporations in order to boost economic activity. This program was so massive that BoJ’s total assets were worth approximately $5 trillion USD, which is about 125% of Japan’s GDP, compared to 66% for the ECB and 33% for the Fed in November 2022. Although this program was carried out at a large scale, it has been ineffective due to Japan’s heavily regulated economy, which made it difficult for companies to enter its market or to innovate.
Although this program was carried out at a large scale, it has been ineffective due to Japan’s heavily regulated economy, which made it difficult for companies to enter its market or to innovate.
Faced with this situation of chaos and economic stagnation, the Japanese have bet on various ways to combat it. It is consensual that Japan needs to establish a financial system capable of allocating funds based on the mechanism of markets, rather than another attempt of administrative orientation.
Firstly, it is necessary to break the rigid budget system that leads several sectors to bankruptcy, while others, such as information infrastructure, receive inexplicable amounts for their development. Furthermore, it is urgent to reconstruct corporate governance based on market principles and transform it into a mobile market, where top executives can move between large companies, as opposed to a system of promotions based on career years.
Currently, Japan adopts an economic recovery policy, which is focused on six main areas – finance and banking, public finance, health, public administration, and education – and aims at a more general recovery, which is open to foreigners and based on responsible rules and market principles.
On the other hand, the emerging industries and higher risk companies reveal some difficulty in securing their funds, human resources and technology needed to get involved in the market. In this way, the government intends to facilitate corporate reconstruction by reducing restrictions that prevent mergers and acquisitions, international investments, alliances, and financial transactions within and outside Japanese borders. On this wise, the implementation of a policy of reducing bureaucracy would facilitate the dismissal of some and the hiring of others, which would result in greater flow in the labour market.
Moreover, if the Japanese government increased its stake in the public sector, such as in infrastructure construction, it would be able to positively influence the employment rate, in the short term, and economic efficiency would evolve, in the long term. Another measure highly recommended to the government is the creation of incentives so that companies can invest in training their employees, especially the elderly, so that, in this way, it is possible to reduce the impact of the aging of the Japanese population.
In conclusion, it is important to highlight the need for government intervention in the development of companies and public sectors. Furthermore, in past decades, Japan has demonstrated its high capacity for work and development, which is currently not being used in the best way and should be used up to its full potential.