3.13 Japan Economic Forecasts

The Tokugawa era (1603-1868) brought prosperity by centralizing power in an hereditary shogunate, imposing uniform systems of taxation, government spending and bureaucracy, and closing its doors to the outside world. Isolation ended on July 8, 1853, when Commodore Matthew Perry of the United States Navy steamed into Yokohama bay demanding trade with the west. He returned in 1854, and within five years trade treaties had been signed with other western nations. In the succeeding Meiji Restoration, the government built railroads, improved roads, and inaugurated a land reform program. A textile industry appeared, and a western-style education, the country hiring western teachers and sending thousands of students to America and Europe. {1-6}

Japan became an imperial power, colonizing Korea and Taiwan and then invading Manchuria and China. To counter the US oil embargo, Japan launched attacks on Hawaii and then British and Dutch territories in southeast Asia. Initial successes in 1941-2 period were bloodily undone in the Pacific War: occupied territories were recaptured by the US, the Japanese fleet sunk, and some 50 of Japan's largest cities destroyed by air raids, which included nuclear attacks on Hiroshima and Nagasaki. Japan surrendered in 1945, gave up its foreign conquests and was occupied and transformed into a demilitarized democratic nation by the United States. {1-6}

Thereafter, the noncommunist countries of east Asia adopted a state-guided capitalist export model, starting with cheap electronic goods designed for American and European markets. Japan led the way, followed by South Korea, Taiwan, Hong Kong and Singapore, and then the late developers: Malaysia, Indonesia, Thailand and the Philippines. Initially, protected from any communist threat by bases and the US fleet, these economies were remarkably successful, lifting millions from poverty, and creating products of increasing sophistication. {1-6}

By 1980, however, Japan's economy had swelled to twice the size of Germany's, and its products made inroads on the American market, which became saturated with Nike shoes, cars, TVs, semiconductors, petrochemicals, steel and ships. American producers retaliated by offshoring, moving factories to countries with lower labor costs and more flexible regulations. {1-6}

The system faltered when inhabitants of the poorer countries couldn't afford to buy their own products, and western countries couldn't absorb more in a saturated market where incomes were stagnant or falling. Paying workers more to create an internal market was prevented by the intense worldwide competition of globalization: companies simply shifted to lower labor cost countries. Only Taiwan, Malaysia, and China escaped the 'correction', all by different approaches. {3}

Post War Affluence

The industries of east Asia benefited from US aid and military protection, but were also protected from outside competition. Barriers in the form of stiff import taxes were imposed. Overseas companies found it next to impossible to sell their goods or set up factories. Financing by cheap governments loans was popular, creating swathes of companies that would not have existed otherwise, i.e. were not competitive by western standards, or were even loss-making. Such government-industry collaborative systems followed patterns created by Japan's late industrialization, and by the zaibatsu corporations that had fueled the war effort. Funding was by bank loan rather than shareholder equity: debt to equity ratios of 5 to 1 were common, against the 1 to 1 usual in US companies. Large bank loans were paid by income from foreign sales, which put those banks at risk should those sales falter. {3} {7}







The differences to western models need emphasizing. The electronics company LG, the third largest in Korea, only went into electronics when denied entry into textiles by the government. The Japanese Toyota company, the world's largest by production in 2010, took 17 years to develop its first international model, which was a flop when introduced into America. Decent overseas sales did not begin until the 1980s. For over thirty years these nascent industries have been protected from international competition, and without it, would not have survived. Indeed the industrialization Korea defies all logic: the country had no natural resources, no industrial experience and no entrepreneurial spirit when its government drew up its ambitious plans in 1948. {8} Today the country is a leading producer of steel, electronics and cars, striking evidence of how 'national characteristics' can be changed with state control and protectionism, both detested by 'free trade' advocates. {7} {28} {29}


Large domestic market
Well educated and disciplined workforce
Strong economy


Closed corporation model
Aging population
Sclerotic political system and corruption
Heavy reliance on exports


New markets
Reform of economic model


Competition from China
Dependence on USA

Threat: Dependence on Export Markets

The first blow to this successful model came in 1971, when President Nixon abolished the Bretton Woods accord on fixed exchange rates. The dollar, along with other currencies, was allowed to 'float', i.e. find exchange rates determined by the market. Faced with a growing trade deficit, the US negotiated the 'Plaza Accord' in 1985, which forced down the value of the dollar and forced up the value of the yen. American goods were cheaper on the international market and Japanese were dearer: an agreement that lasted a decade. {3}

To overcome this exchange rate disadvantage, Japanese companies geared up manufacturing efficiencies. The Japanese Ministry of Finance encouraged investment, and reduced domestic interest rates to practically zero. The result was massive overproduction, and $600 bn in 'unperforming' loans from banks, which teetered on bankruptcy. In 1995 the Japanese secured a lower value of the yen to the American dollar. Japanese banks had large holdings in US Treasury bonds, and President Clinton, facing re-election, did not want these funds called home to prop up ailing Japanese banks. From 1995 to 1997, the 'reverse Plaza Accord' devalued the yen by 60% against the dollar. {3} {9}

End of the Model

Meanwhile, other east Asian countries had pegged their currencies against the (low) dollar to discourage currency speculation. The 'reverse Plaza Accord' suddenly made those currencies overvalued against the yen. Exports evaporated. Export growth in South Korea, Thailand, Indonesia, Malaysia and the Philippines went from 30% per year in 1995 to zero by mid 1996. Compounding the problem was the growth in US mutual funds, from $1 tn in 1980 to $4.5 tn by the mid 1990s. In 1996 Asia was the destination of half of all foreign investment, Japanese, European and American. In 1997, Citibank held $22 bn in local currency loans and $48 bn in dollar loans. Other US banks were similarly exposed. {3} {9}

When east Asian exports tumbled, so did confidence in these loans, some $105 bn {10} of which were quickly withdrawn. In the scramble to buy dollars before the price went out of sight, local currencies were massively devalued. Foreign currency dried up, plunging the countries concerned into recession. Foreign banks declined new credit applications and refused to extend existing loans. The IMF came to the rescue in 1997, promising $40 bn to Indonesia, $17 bn to Thailand, and $57 bn to South Korea. The price was austerity budgets, the sale of commercial assets to foreign corporate investors at firesale prices, and high interest rates. In Indonesia the IMF ordered the closure of banks lacking deposit insurance, and precipitated a run on banks. The Chinese community moved its savings to Singapore, and Indonesian companies with dollar liabilities rushed to buy dollars. From 2,300 to the dollar, the Indonesian rupiah plummeted to 15,000 to the dollar. In the resulting troubles, President Suharto left office, many hundreds of Jakarta shopkeepers were killed in sectarian riots, 20 percent of the populace were left unemployed, and half reduced to living on less than one dollar a day. {3}

China, Malaysia and Taiwan emerged largely unscathed from IMF actions. China's currency cannot be freely traded and the country turned to inward investment. The Malaysia government placed restrictions on the ringgit. Taiwan had few dollar holdings because the country is not attractive to foreign investment, most production coming from state-controlled enterprises. {11} In all others the east Asian -USA export model was damaged, and the countries began looking for other trading partners. {3} {9}

Japan: Deflation

Part of the problem was also the so-called 'lost decade' when its inward-looking banking system met global competition. A 1986-91 boom in real estate and stock prices was replaced by the 'lost decade' of deflation {34} and unemployment. {12} Overproduction, financial deregulation, overconfidence about economic prospects, and monetary easing implemented by the Bank of Japan in the late 1980s caused massive speculation, making Tokyo the most expensive city on earth. The Nikkei stock index hit its all-time high on December 1989, and banks made increasingly risky loans.

The Bank of Japan first increased the discount rate (August 1990-June 1991) to curb inflation and then reversed its policy by reducing the rate, by steps to 1.75% in September 1993. Simultaneously, to counter recession, the country introduced three fiscal stimulus packages totaling 6 percent of GDP between August 1992 and September 1993. These measures were only partially effective, perhaps because the measures were not as large as claimed, and were directed to unproductive public works projects and credits to small businesses no longer economically viable. Growth picked up nonetheless, reaching nearly 4% in 1996 and early 1997. But deflation continued as Japanese firms and households chose to keep their money in the bank rather than buy and invest. The yen appreciated against the dollar as the demand for the yen increased, and the currency had to be depreciated by the 'reverse Plaza Accord'. In 1997 the government raised its consumption tax from 3 to 5%, and plunged the country back into deflation.

In 2001 the government resorted to the inflationary measure of quantitative easing (printing money), which stopped the urge to save, particularly as the banks themselves were at risk of defaulting from unwise loans to property development. Land prices stabilized by 2003, the economy enjoyed modest growth at some 2% per year, and deflation eased. The Bank of Japan held interest rates at zero until early 2007, and then increased it to 0.5%. Japan again entered recession in the fourth quarter of 2008, when GDP growth fell 12.9% from a year earlier, a downturn resulting from a slump in exports of consumer electronics and auto sales, which account for 16% of Japan's economy. {6} {13-16}


Though a downturn in demand for Japan's exports caused recession in late 2008, the government stimulus package spending helped the economy recover in late 2009 and 2010.

Japan recovered strongly in 2010, but was left with a high gross debt to GDP ratio (220%). Some economists {15} argue that this debt burden (with low growth, ingrained caution, corruption and an aging population) spells trouble, and urge the country to open further to competition. {19} Others point to increasing trade with China and the low tax take, {17} arguing it is the ability to pay that debt which is important, and here the numbers are far from threatening. Japan's Net Interest Service as a percentage of GDP is 4.29, lower than that of Germany (18.5) and the USA (8.30). {20} Then came the March 2011 earthquake, which disrupted manufacturing and cut electricity supplies. Costs of rebuilding are estimated at $235-310 bn, and the GDP declined almost 0.5% in 2011. {21}

Continuing proposals include opening more the agricultural and services sectors to foreign competition, boosting exports through membership of the Trans-Pacific Partnership trade talks, and free-trade agreements with the EU and other countries. Of current problems — high government debt, deflation, reliance on exports, and an aging population {21} — debt is often seen as the most serious. {22} Nonetheless, GDP growth was in June 2012 put at 2.2% /year, helped by the US$249 bn reconstruction budget. {23} {31-33} {35}

eBusiness Implications

Ecommerce came of age during Japan's lost decade of stagnation. Where retail sales generally have declined at 1% per annum, ecommerce has shown steady growth from 2005. Revenues have expanded year on year by 17%, and are expected to grow at nearly 10% a year for the 2012-7 period. One company in particular has made this possible, Rakuten, used by two-thirds of Japan's 90m Internet users. Rakuten's model is the shopping mall, which provides emerchants with a digital shopfront, advertising and payment processing services, similar to US merchant services. Perversely, it is recession that has favored the model, obliging shoppers to be more cost-conscious, and to stay at home with their computers. The country's delivery services are also cheap and efficient. Rakuten is also exporting its model to Indonesia, and like Amazon, allowing businesses to sell through its own store. {24} {30}

Rakuten has recently purchased Buy.com in the US for $250 million, Play.com in the UK for $38 million, and e-reader company, Kobo, for $315 million. {25} It has also acquired an interest in Pinterest and its affiliate LinkedIn, all moves away from the sluggish Japanese economy. {26}

Not all is gloom at home, however, and ecommerce market in Japan is valued at US$90 bn by end 2012, with annual growth projected at 16 percent through 2015. Indeed, ecommerce is the fourth (46%) most popular online activity among Japanese, behind search (92%), checking news (90%), and emailing (88%). Purchase is increasingly made with mobile phones, and some 57.5% of Japanese mobile users made such a purchase in 2011. {27}

Points to Note

1. Success of the closed market model.
2. Importance of the Japan-USA trade link, initially remarkably successful but leading to trade imbalances and currency problems.
3. Tentative moves to other models: investment overseas and more open trading conditions.

Sources and Further Reading

1. A Modern History of Japan: From Tokugawa Times to the Present by Andrew Gordon. O.U.P. 2003.
2. A History of Japan: From Stone Age to Superpower by Kenneth G. Henshall. Palgrave Macmillan 2004.
3. Blowback: The Costs and Consequences of American Empire by Chalmers Johnson. Holt Paperback, 2004.
4. Japan: Facts and History by Kallie Szczepanski. About.Com Guidas. 2012.
5. Timeline of East Asia Hstory: Japanese History. Ohio State University.
6. Economic History of Japan. Wikipedia. August 2012.
7. 23 Things They Don't Tell You about Capitalism by Ha-Joon Change. Penguin, 2010. 'Thing' 23.
8. The Economic History of Korea by Myung Soo Cha. EH Net. February 2010.
9. Currency Wars: The Making of the Next Global Crisis by James Rickards. Penguin 2011. Chapters 6 and 7.
10. Globalization: A Very Short Introduction by Manfred Steger.O.U.P. March 2009.
11. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization by Robert Wade. Princeton Univ. Press. 2003.
12. Web of Debt: The Shocking Truth About Our Money System And How We Can Break Free by Ellen Hodgson Brown. Third Millenium Press, 2007. pp 246-8.
13. Japan's Economy How the Fourth Largest Economy Affects the U.S. and the World by Kimberly Amadeo. About.com May 2012.
14. Avoiding an American ´'Lost Decade': Lessons from Japan's Bubble and Recession by Anthony Randazzo, Michael Flynn and Adam B. Summers. Reason.Org. February 2009.
15. Crisis in slow motion. Economist. April 2010.
16. Japan's Lost Decade Lessons for the United States in 2008 by John H. Makin. AEI Online. March 2008.
17. Japan's economy: Whose lost decade? Economist. November 2011.
18. The world in balance sheet recession: causes, cure, and politics by Richard C. Koo. Real-World Economics Review. 2011.
19. The Yakuza by Anthony Bruno. Crime Library. Undated.
20. Debt to GDP ratios are irrelevant (or : why Japan is not in such a difficult fiscal position) MacroAnalysis. May 2010.
21. Japan Economy Profile 2012. Index Mundi. Accessed August 2012.
22. Defying gravity. Economist. August 2012.
23. Japan's Economic Outlook Unchanged Even as Global Woes Deepen by Andy Sharp. Bloomberg. June 2012.
24. E-commerce takes off in Japan: Up and away Japanese online retailing is on the rise, and its champion is spreading its wings. Economist. June 2010.
25. How Japan's Biggest E-Commerce Company Plans to Take Over the World by Jay Yarow. Business Insider. March 2012.
26. Why A Japanese E-Commerce Giant s the Lead Investor in Pinterest by Jay Yarow. Business Insider. May 2012.
27. 6 Tips for Driving E-Commerce Success in Japan by Andy Radovic. ClickZ Asia. May 2012.
28. Asia's Next Giant: South Korea and Late Industrialization by Alice H. Amsden. O.U.P. 1992.
29. Sony vs Samsung: The Inside Story of the Electronics Giants' Battle For Global Supremacy by Sea-Jin Chang. Wiley, 2008.
30. Introduction to Navigating Japanese E-commerce by Yosuke Ito. Building Keystones. May 2012.
31. Japanese lessons After five years of crisis, the euro area risks Japanese-style economic stagnation. Economist. August 2012.
32. Japan Unemployment Rate Exceeds All Estimates by Aki Ito. Bloomberg. November 2011.
33. What the U.S. Can Learn from Japan's eCommerce Ecosystem. Pymnts. June 2012.
34. Deflation by Pierre L. Siklos. EH Net. February 2010.
35. The BoJ's Kuroda Wheels Out the Heavy Artillery by Mike Whitney. Counterpunch. April 2013. A left-wing view of Japan's reconstruction plan.