Economic history of Japan
Encyclopedia
The economic history of Japan is one of the most studied for its spectacular growth after the Meiji Restoration when it became the first non-European Power and after the Second World War when the island nation rose to become the world's second largest economy
.
Europeans were quite admiring of Japan when they reached the country in the 16th century. Japan was considered as a country immensely rich in precious metals, mainly owing to Marco Polo
's accounts of gilded temples and palaces, but also due to the relative abundance of surface ores characteristic of a volcanic country, before large-scale deep-mining became possible in Industrial times. Japan was to become a major exporter of copper and silver during the period.
Japan was also perceived as a sophisticated feudal society with a high culture and advanced pre-industrial technology. It was densely populated and urbanized. Prominent European observers of the time seemed to agree that the Japanese "excel not only all the other Oriental peoples, they surpass the Europeans as well" (Alessandro Valignano
, 1584, "Historia del Principo y Progresso de la Compania de Jesus en las Indias Orientales).
Early European visitors were amazed by the quality of Japanese craftsmanship and metalsmithing. This stems from the fact that Japan itself is rather poor in natural resources found commonly in Europe, especially iron
. Thus, the Japanese were famously frugal with their consumable resources; what little they had they used with expert skill.
pirate raids. The Portuguese (who were called Nanban, lit. Southern Barbarians) therefore found the opportunity to act as intermediaries in Asian trade.
From the time of the acquisition of Macau
in 1557, and their formal recognition as trade partners by the Chinese, the Portuguese Crown started to regulate trade to Japan, by selling to the highest bidder the annual "Capitaincy" to Japan, in effect conferring exclusive trading rights for a single carrack
bound for Japan every year. The carracks were very large ships, usually between 1000 and 1500 tons, about double or triple the size of a large galleon
or junk.
That trade continued with few interruptions until 1638, when it was prohibited on the ground that the ships were smuggling priests into Japan.
Portuguese trade was progressively more and more challenged by Chinese smugglers on junks, Japanese Red Seal Ships
from around 1592 (about ten ships every year), Spanish ships from Manila
from around 1600 (about one ship a year), the Dutch from 1609, and the English from 1613 (about one ship per year).
The Dutch, who, rather than "Nanban" were called "Kōmō" (Jp:紅毛, lit. "Red Hair") by the Japanese, first arrived in Japan in 1600, onbard the Liefde. Their pilot was William Adams
, the first Englishman to reach Japan. In 1605, two of the Liefdes crew were sent to Pattani
by Tokugawa Ieyasu, to invite Dutch trade to Japan. The head of the Pattani Dutch trading post, Victor Sprinckel, refused on the ground that he was too busy dealing with Portuguese opposition in Southeast Asia. In 1609 however, the Dutch Jacques Specx
arrived with two ships in Hirado, and through Adams obtained trading privileges from Ieyasu.
The Dutch also engaged in piracy and naval combat to weaken Portuguese and Spanish shipping in the Pacific, and ultimately became the only westerners to be allowed access to Japan from the small enclave of Dejima
after 1638 and for the next two centuries.
The beginning of the Edo period
coincides with the last decades of the Nanban trade period, during which intense interaction with European powers, on the economic and religious plane, took place. It is at the beginning of the Edo period that Japan built her first ocean-going Western-style warships, such as the San Juan Bautista
, a 500-ton galleon
-type ship that transported a Japanese embassy headed by Hasekura Tsunenaga
to the Americas, which then continued to Europe. Also during that period, the bakufu commissioned around 350 Red Seal Ships
, three-masted and armed trade ships, for intra-Asian commerce. Japanese adventurers, such as Yamada Nagamasa
, were active throughout Asia.
In order to eradicate the influence of Christianization, Japan entered in a period of isolation called sakoku
, during which its economy enjoyed stability and mild progress.
Economic
development during the Edo period included urbanization
, increased shipping of commodities, a significant expansion of domestic and, initially, foreign commerce
, and a diffusion of trade and handicraft
industries. The construction
trades flourished, along with banking facilities and merchant associations. Increasingly, han authorities oversaw the rising agricultural
production and the spread of rural handicrafts.
By the mid-18th century, Edo had a population
of more than 1 million and Osaka
and Kyoto
each had more than 400,000 inhabitants. Many other castle town
s grew as well. Osaka and Kyoto became busy trading and handicraft production centers, while Edo was the center for the supply of food and essential urban consumer goods.
Rice
was the base of the economy, as the daimyo collected the taxes from the peasants in the form of rice. Taxes were high, about 40% of the harvest. The rice was sold at the fudasashi market in Edo
. To raise money, the daimyo used forward contract
s to sell rice that was not even harvested yet. These contracts were similar to modern futures trading.
During the period, Japan progressively studied Western sciences and techniques (called rangaku
, literally "Dutch studies") through the information and books received through the Dutch traders in Dejima
. The main areas that were studied included geography, medicine, natural sciences, astronomy, art, languages, physical sciences such as the study of electrical phenomena, and mechanical sciences as exemplified by the development of Japanese clockwatches, or wadokei, inspired from Western techniques.
first opened the country to Western commerce and influence (Bakumatsu), Japan has gone through two periods of economic development. When Tokugawa shogunate was overthrown and Meiji government was founded, Japanese Westernization
began completely. The first term is during Prewar Japan
, the second term is Postwar Japan
.
In the Meiji period
, leaders inaugurated a new Western-based education system for all young people, sent thousands of students to the United States and Europe, and hired more than 3,000 Westerners to teach modern science, mathematics, technology, and foreign languages in Japan (O-yatoi gaikokujin
). The government also built railroads, improved roads, and inaugurated a land reform program to prepare the country for further development.
To promote industrialization, the government decided that, while it should help private business to allocate resources and to plan, the private sector was best equipped to stimulate economic growth. The greatest role of government was to help provide the economic conditions in which business could flourish. In short, government was to be the guide and business the producer. In the early Meiji period, the government built factories and shipyards that were sold to entrepreneurs at a fraction of their value. Many of these businesses grew rapidly into the larger conglomerates
. Government emerged as chief promoter of private enterprise, enacting a series of probusiness policies.
The development of banking and reliance on bank funding have been at the centre of Japanese economic development at least since the Meiji era.
In the mid 1930s, the Japanese nominal wage rates were 10 times less than the one of the U.S (based on mid-1930s exchange rates), while the price level is estimated to have been about 44% the one of the U.S.
Comparison of GDP per capita between East-Asian Nations and the U.S. in 1935:
, Japan built an extensive empire that included Taiwan
, Korea, Manchuria
, and parts of northern China. The Japanese regarded this sphere of influence as a political and economic necessity, preventing foreign states from strangling Japan by blocking its access to raw materials and crucial sea-lanes, as Japan possessed very few natural and mining resources of it own, although it imported large amounts of coal from Chosen, Manchukuo, and some regions of occupied China. Japan's large military force was regarded as essential to the empire's defense.
Rapid growth and structural change characterized Japan's two periods of economic development since 1868. In the first period, the economy grew only moderately at first and relied heavily on traditional agriculture to finance modern industrial infrastructure. When the Russo-Japanese War
began in 1904, 65% of employment and 38% of the gross domestic product
(GDP) was still based on agriculture
but modern industry had begun to expand substantially. During World War I
, Japan used the absence of the war-torn European competitors on the world market to advance its economy, generating a trade surplus for the first time since the isolation in the Edo period
. By the late 1920s, manufacturing
and mining
contributed 23% of GDP, compared with 21% for all of agriculture. Transportation and communications
had developed to sustain heavy industrial development.
In the 1930s, the Japanese economy suffered less from the Great Depression
than most industrialized nations, expanding at the rapid rate of 5% of GDP per year. Manufacturing and mining came to account for more than 30% of GDP, more than twice the value for the agricultural sector. Most industrial growth, however, was geared toward expanding the nation's military power.
Beginning in 1937 with significant land seizures in China, and to a much greater extent after 1941, when annexations and invasions across Southeast Asia and the Pacific created the Greater East Asia Co-Prosperity Sphere
, the Japanese government sought to acquire and develop critical natural resources in order to secure economic independence. Among the natural resources Japan seized and developed were coal
in China, sugarcane
in the Philippines
, petroleum
from the Dutch East Indies
and Burma, and tin
and bauxite
from the Dutch East Indies and Malaya
. Japan also purchased the rice production of Thailand
, Burma, and Cochinchina
.
During the early stages of Japan's expansion, the Japanese economy expanded considerably. Steel production rose from 6,442,000 tonnes to 8,838,000 tonnes over the same time period. In 1941 Japanese aircraft industries had capacity to manufacture 10,000 aircraft per year. Much of this economic expansion benefited the "zaibatsu
", large industrial conglomerates.
Over the course of the Pacific War
, the economies of Japan and its occupied territories all suffered severely. Inflation was rampant; Japanese heavy industry, forced to devote nearly all its production to meeting military needs, was unable to meet the commercial requirements of Japan (which had previously relied on trade with Western countries for their manufactured goods). Local industries were unable to produce at high enough levels to avoid severe shortfalls. Furthermore, maritime trade, upon which the Empire depended greatly, was sharply curtailed by damage to the Japanese merchant fleet over the course of the war.
By the end of the war, what remained of the Japanese Empire was wracked by shortages, inflation, and currency devaluation. Transport was nearly impossible, and industrial production in Japan's shattered cities ground to a halt. The destruction wrought by the war eventually brought the Japanese economy to a virtual standstill.
wiped out many of the gains Japan had made since 1868. About 40% of the nation's industrial plants and infrastructure were destroyed, and production reverted to levels of about fifteen years earlier. The people were shocked by the devastation and swung into action. New factories were equipped with the best modern machines, giving Japan an initial competitive advantage over the victor states, who now had older factories
. As Japan's second period of economic development began, millions of former soldiers joined a well-disciplined and highly educated work force to rebuild Japan. Japan's colonies were lost as a result of World War II, but since then the Japanese had extended their economic influence throughout Asia and beyond.
(1945–52) resulted in the rebuilding of the nation and the creation of a democratic state
. United States assistance totaled about US$1.9 billion during the occupation, or about 15% of the nation's imports and 4% of GNP in that period. About 59% of this aid was in the form of food, 15% in industrial materials, and 12% in transportation equipment. United States grant assistance, however, tapered off quickly in the mid-1950s. United States military procurement from Japan peaked at a level equivalent to 7% of Japan's GNP in 1953 and fell below 1% after 1960. A variety of United States-sponsored measures during the occupation, such as land reform, contributed to the economy's later performance by increasing competition. In particular, the postwar purge of industrial leaders allowed new talent to rise in the management of the nation's rebuilt industries. Finally, the economy benefited from foreign trade because it was able to expand export
s rapidly enough to pay for import
s of equipment and technology without falling into debt, as had a number of developing nations in the 1980s.
, coal
, iron
, steel
, and chemical fertilizer
s. By the mid-1950s, production matched prewar levels. Released from the demands of military-dominated government, the economy not only recovered its lost momentum but also surpassed the growth rates of earlier periods. Between 1953 and 1965, GDP expanded by more than 9% per year, manufacturing and mining by 13%, construction by 11%, and infrastructure
by 12%. In 1965 these sectors employed more than 41% of the labor force, whereas only 26% remained in agriculture.
Japan's highly acclaimed postwar education system
contributed strongly to the modernizing process. The world's highest literacy
rate and high education standards were major reasons for Japan's success in achieving a technologically advanced economy. Japanese schools also encouraged discipline, another benefit in forming an effective work force.
The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufactures. Whereas textile
s and light manufactures maintained their profitability internationally, other products, such as automobile
s, ship
s, and machine tools assumed new importance. The value added to manufacturing and mining grew at the rate of 17% per year between 1965 and 1970. Growth rates moderated to about 8% and evened out between the industrial and service sectors between 1970 and 1973, as retail trade, finance
, real estate
, information
, and other service industries streamlined their operations.
in 1973 shocked an economy that had become virtually dependent on foreign petroleum
. Japan experienced its first postwar decline in industrial production, together with severe price inflation
. The recovery that followed the first oil crisis revived the optimism of most business leaders, but the maintenance of industrial growth in the face of high energy costs required shifts in the industrial structure.
Changing price conditions favored conservation
and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s and enhanced their productivity
. Advances in microcircuitry and semiconductor
s in the late 1970s and 1980s led to new growth industries in consumer electronics
and computers
, and to higher productivity in pre-established industries. The net result of these adjustments was to increase the energy efficiency of manufacturing and to expand so-called knowledge-intensive industries. The service industries expanded in an increasingly postindustrial economy.
Structural economic changes, however, were unable to check the slowing of economic growth
as the economy matured in the late 1970s and 1980s, attaining annual growth rates at only 4 to 6%. But these rates were remarkable in a world of expensive petroleum and in a nation of few domestic resources
. Japan's average growth rate of 5% in the late 1980s, for example, was far higher than the 3.8% growth rate of the United States. Despite more petroleum price increases in 1979, the strength of the Japanese economy was apparent. It expanded without the double-digit inflation that afflicted other industrial nations (and that had bothered Japan itself after the first oil crisis in 1973). Japan experienced slower growth in the mid-1980s, but its demand
-sustained economic boom of the late 1980s revived many troubled industries.
(1600–1867) bequeathed a vital commercial sector in burgeoning urban centers, a relatively well-educated elite (although one with limited knowledge of European science
), a sophisticated government bureaucracy
, productive agriculture
, a closely unified nation with highly developed financial and marketing systems, and a national infrastructure of roads. The buildup of industry during the Meiji period to the point where Japan could vie for world power was an important prelude to postwar growth from 1955 to 1973 and provided a pool of experienced labor following World War II.
Second, and more important, was the level and quality of investment
that persisted through the 1980s. Investment in capital
equipment, which averaged more than 11% of GNP during the prewar period, rose to about 20% of GNP during the 1950s and to more than 30% in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still hovered around 20%. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization
, Japan was able to avoid some of the trial and error earlier needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through technology licensing
, patent purchase
s, and imitation
and improvement of foreign inventions. In the 1980s, industry stepped up its research and development
, and many firms became famous for their innovations and creativity.
Japan's labor force
contributed significantly to economic growth, not only because of its availability and literacy
but also because of its reasonable wage
demands. Before and immediately after World War II, the transfer of numerous agricultural workers to modern industry resulted in rising productivity and only moderate wage increases. As population growth
slowed and the nation became increasingly industrialized in the mid-1960s, wages rose significantly. However, labor union cooperation generally kept salary increases within the range of gains in productivity.
High productivity growth played a key role in postwar economic growth. The highly skilled and educated labor force, extraordinary savings rates and accompanying levels of investment
, and the low growth of Japan's labor force were major factors in the high rate of productivity growth.
The nation has also benefited from economies of scale
. Although medium-sized and small enterprise
s generated much of the nation's employment, large facilities were the most productive. Many industrial enterprises consolidated to form larger, more efficient units. Before World War II, large holding companies formed wealth groups, or zaibatsu
, which dominated most industry. The zaibatsu were dissolved after the war, but keiretsu
—large, modern industrial enterprise groupings—emerged. The coordination of activities within these groupings and the integration of smaller subcontractor
s into the groups enhanced industrial efficiency.
Japanese corporations developed strategies that contributed to their immense growth. Growth-oriented corporations that took chances competed successfully. Product diversification became an essential ingredient of the growth patterns of many keiretsu. Japanese companies added plant and human capacity ahead of demand. Seeking market share rather than quick profit was another powerful strategy.
Finally, circumstances beyond Japan's direct control contributed to its success. International conflicts tended to stimulate the Japanese economy until the devastation at the end of World War II. The Russo-Japanese War
(1904-5), World War I
(1914–18), the Korean War
(1950–53), and the Second Indochina War
(1954–75) brought economic booms to Japan. In addition, benign treatment from the United States after World War II facilitated the nation's reconstruction and growth.
still worked in agriculture
, but this figure had declined to 17% by 1970 and to 7.2% by 1990. The government estimated in the late 1980s that this figure would decline to 4.9% by 2000, as Japan imported more and more of its food and small family farm
s disappeared.
Japan's economic growth in the 1960s and 1970s was based on the rapid expansion of heavy manufacturing in such areas as automobiles, steel, shipbuilding, chemicals, and electronics. The secondary sector (manufacturing, construction, and mining) expanded to 35.6% of the work force by 1970. By the late 1970s, however, the Japanese economy began to move away from heavy manufacturing toward a more service-oriented (tertiary sector) base. During the 1980s, jobs in wholesaling
, retail
ing, finance
, insurance
, real estate
, transportation, communications
, and government
grew rapidly, while secondary-sector employment remained stable. The tertiary sector grew from 47% of the work force in 1970 to 59.2% in 1990.
)—just behind the United States— and ranked first among major industrial nations in 1990 in per capita
GNP at US$23,801, up sharply from US$9,068 in 1980. After a mild economic slump in the mid-1980s, Japan's economy began a period of expansion in 1986 that continued until it again entered a recessionary period
in 1992. Economic growth averaging 5% between 1987 and 1989 revived industries, such as steel
and construction
, which had been relatively dormant in the mid-1980s, and brought record salaries and employment. In 1992, however, Japan's real GNP growth slowed to 1.7%. Even industries such as automobiles and electronics
that had experienced phenomenal growth in the 1980s entered a recessionary period in 1992. The domestic market for Japanese automobiles shrank at the same time that Japan's share of the United States' market declined. Foreign and domestic demand for Japanese electronics also declined, and Japan seemed on the way to losing its leadership in the world semiconductor
market to the United States, Korea and Taiwan.
Unlike the economic booms of the 1960s and 1970s, when increasing exports played the key role in economic expansion, domestic demand
propelled the Japanese economy in the late 1980s. This development involved fundamental economic restructuring, moving from dependence on exports to reliance on domestic demand. The boom that started in 1986 was generated by the decisions of companies to increase private plant and equipment spending and of consumers to go on a buying spree. Japan's imports grew at a faster rate than exports. Japanese postwar technological research
was carried out for the sake of economic growth rather than military development. The growth in high-technology industries in the 1980s resulted from heightened domestic demand for high-technology products and for higher living, housing, and environmental standards; better health, medical, and welfare opportunities; better leisure
-time facilities; and improved ways to accommodate a rapidly aging society. This reliance on domestic consumption also meant that consumption grew by only 2.2% in 1991 and at the same rate again in 1992.
During the 1980s, the Japanese economy shifted its emphasis away from primary and secondary activities (notably agriculture
, manufacturing
, and mining
) to processing, with telecommunications and computers becoming increasingly vital. Information became an important resource and product
, central to wealth and power. The rise of an information-based economy was led by major research in highly sophisticated technology
, such as advanced computers. The selling and use of information became very beneficial to the economy. Tokyo became a major financial center, home of some of the world's major bank
s, financial firms, insurance
companies, and the world's largest stock exchange
, the Tokyo Securities and Stock Exchange. Even here, however, the recession took its toll. In 1992, the Nikkei 225
stock average began the year at 23,000 points, but fell to 14,000 points in mid-August before leveling off at 17,000 by the end of the year.
, Japan implemented stringent tariff
s and policies to encourage the people to save
their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses
, the yen
appreciated against foreign currencies. This allowed local companies to invest
in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.
With so much money readily available for investment, speculation
was inevitable, particularly in the Tokyo Stock Exchange
and the real estate
market. The Nikkei stock index
hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loan
s.
At the height of the bubble, real estate values were extremely over-valued. Prices were highest in Tokyo's Ginza
district in 1989, with choice properties fetching over US$
1.5 million per square meter ($139,000 per square foot). Prices were only slightly less in other areas of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped and Tokyo's residential homes were a fraction of their peak, but still managed to be listed as the most expensive real estate in the world. Trillions were wiped out with the combined collapse of the Tokyo stock and real estate markets.
With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and Japanese manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, some people argue that the low consumption rate began to bear on the economy, causing a deflationary spiral.
The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. Meanwhile, the extremely low interest rate offered for deposits, such as 0.1%, meant that ordinary Japanese savers were just as inclined to put their money under their beds as they were to put it in savings accounts. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses". Eventually a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader.
The time after the , which occurred gradually rather than catastrophically, is known as the in Japan. The Nikkei 225
stock index eventually bottomed out at 7603.76 in April 2003, moved upward to a new peak of 18,138 in June 2007, before resuming a downward trend. The downward movement in the Nikkei is likely due to global as well as national economic problems.
and the Japanese government tried to eliminate deflation in the economy by reducing interest rates (part of their 'quantitative easing
' policy). Despite having interest rates down near zero for a long period of time, this strategy did not succeed. Once the near-zero interest rates failed to stop deflation, some economists, such as Paul Krugman
, and some Japanese politicians spoke of deliberately causing (or at least creating the fear of) inflation
. In July 2006, the zero-rate policy was ended. In 2008, the Japanese Central Bank still has the lowest interest rates in the developed world, deflation has still not been eliminated and the Nikkei 225 fell approximately 50% (between June 2007 and December 2008).
Systemic reasons for deflation in Japan can be said to include:
The Economist
has suggested that improvements to bankruptcy law, land transfer law, and tax laws will aid Japan's economy. In October 2009 the Japanese government announced plans to increase tobacco and green taxes while reducing rates for small and medium sized companies, according to NHK
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
.
First contacts with Europe (16th century)
RenaissanceRenaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...
Europeans were quite admiring of Japan when they reached the country in the 16th century. Japan was considered as a country immensely rich in precious metals, mainly owing to Marco Polo
Marco Polo
Marco Polo was a Venetian merchant traveler from the Venetian Republic whose travels are recorded in Il Milione, a book which did much to introduce Europeans to Central Asia and China. He learned about trading whilst his father and uncle, Niccolò and Maffeo, travelled through Asia and apparently...
's accounts of gilded temples and palaces, but also due to the relative abundance of surface ores characteristic of a volcanic country, before large-scale deep-mining became possible in Industrial times. Japan was to become a major exporter of copper and silver during the period.
Alessandro Valignano
Alessandro Valignano, , was a Jesuit missionary born in Chieti, back then part of the Kingdom of Naples, who helped supervise the introduction of Catholicism to the Far East, and especially to Japan....
, 1584, "Historia del Principo y Progresso de la Compania de Jesus en las Indias Orientales).
Early European visitors were amazed by the quality of Japanese craftsmanship and metalsmithing. This stems from the fact that Japan itself is rather poor in natural resources found commonly in Europe, especially iron
Iron
Iron is a chemical element with the symbol Fe and atomic number 26. It is a metal in the first transition series. It is the most common element forming the planet Earth as a whole, forming much of Earth's outer and inner core. It is the fourth most common element in the Earth's crust...
. Thus, the Japanese were famously frugal with their consumable resources; what little they had they used with expert skill.
Trade with Europe
The cargo of the first Portuguese ships (usually about 4 smaller-sized ships every year) arriving in Japan almost entirely consisted of Chinese goods (silk, porcelain). The Japanese were very much looking forward to acquiring such goods, but had been prohibited from any contacts with the Emperor of China, as a punishment for WakōWokou
Wokou , which literally translates as "Japanese pirates" in English, were pirates of varying origins who raided the coastlines of China and Korea from the 13th century onwards...
pirate raids. The Portuguese (who were called Nanban, lit. Southern Barbarians) therefore found the opportunity to act as intermediaries in Asian trade.
Macau
Macau , also spelled Macao , is, along with Hong Kong, one of the two special administrative regions of the People's Republic of China...
in 1557, and their formal recognition as trade partners by the Chinese, the Portuguese Crown started to regulate trade to Japan, by selling to the highest bidder the annual "Capitaincy" to Japan, in effect conferring exclusive trading rights for a single carrack
Carrack
A carrack or nau was a three- or four-masted sailing ship developed in 15th century Western Europe for use in the Atlantic Ocean. It had a high rounded stern with large aftcastle, forecastle and bowsprit at the stem. It was first used by the Portuguese , and later by the Spanish, to explore and...
bound for Japan every year. The carracks were very large ships, usually between 1000 and 1500 tons, about double or triple the size of a large galleon
Galleon
A galleon was a large, multi-decked sailing ship used primarily by European states from the 16th to 18th centuries. Whether used for war or commerce, they were generally armed with the demi-culverin type of cannon.-Etymology:...
or junk.
That trade continued with few interruptions until 1638, when it was prohibited on the ground that the ships were smuggling priests into Japan.
Portuguese trade was progressively more and more challenged by Chinese smugglers on junks, Japanese Red Seal Ships
Red seal ships
were Japanese armed merchant sailing ships bound for Southeast Asian ports with a red-sealed patent issued by the early Tokugawa shogunate in the first half of the 17th century...
from around 1592 (about ten ships every year), Spanish ships from Manila
Manila
Manila is the capital of the Philippines. It is one of the sixteen cities forming Metro Manila.Manila is located on the eastern shores of Manila Bay and is bordered by Navotas and Caloocan to the north, Quezon City to the northeast, San Juan and Mandaluyong to the east, Makati on the southeast,...
from around 1600 (about one ship a year), the Dutch from 1609, and the English from 1613 (about one ship per year).
The Dutch, who, rather than "Nanban" were called "Kōmō" (Jp:紅毛, lit. "Red Hair") by the Japanese, first arrived in Japan in 1600, onbard the Liefde. Their pilot was William Adams
William Adams (sailor)
William Adams , also known in Japanese as Anjin-sama and Miura Anjin , was an English navigator who travelled to Japan and is believed to be the first Englishman ever to reach that country...
, the first Englishman to reach Japan. In 1605, two of the Liefdes crew were sent to Pattani
Pattani kingdom
Pattani or Sultanate of Pattani was a Malay sultanate that covered approximately the area of the modern Thai provinces of Pattani, Yala, Narathiwat and much of the northern part of modern Malaysia. The King of Patani is believed to have converted to Islam some time during the 11th century...
by Tokugawa Ieyasu, to invite Dutch trade to Japan. The head of the Pattani Dutch trading post, Victor Sprinckel, refused on the ground that he was too busy dealing with Portuguese opposition in Southeast Asia. In 1609 however, the Dutch Jacques Specx
Jacques Specx
Jacques Specx was a Dutch merchant, who founded the trade on Japan and Korea in 1609. Jacques Specx received the support of William Adams to obtain extensive trading rights from the Shogun Tokugawa Ieyasu on August 24, 1609, which allowed him to establish a trading factory in Hirado on September...
arrived with two ships in Hirado, and through Adams obtained trading privileges from Ieyasu.
The Dutch also engaged in piracy and naval combat to weaken Portuguese and Spanish shipping in the Pacific, and ultimately became the only westerners to be allowed access to Japan from the small enclave of Dejima
Dejima
was a small fan-shaped artificial island built in the bay of Nagasaki in 1634. This island, which was formed by digging a canal through a small peninsula, remained as the single place of direct trade and exchange between Japan and the outside world during the Edo period. Dejima was built to...
after 1638 and for the next two centuries.
Edo period
Edo period
The , or , is a division of Japanese history which was ruled by the shoguns of the Tokugawa family, running from 1603 to 1868. The political entity of this period was the Tokugawa shogunate....
coincides with the last decades of the Nanban trade period, during which intense interaction with European powers, on the economic and religious plane, took place. It is at the beginning of the Edo period that Japan built her first ocean-going Western-style warships, such as the San Juan Bautista
Japanese warship San Juan Bautista
San Juan Bautista was one of Japan's first Japanese-built Western-style sail warships. She crossed the Pacific in 1614. She was of the Spanish galleon type, known in Japan as Nanban-Sen San Juan Bautista (“St. John the Baptist”) (originally called Date Maru, 伊達丸 in Japanese) was one of Japan's...
, a 500-ton galleon
Galleon
A galleon was a large, multi-decked sailing ship used primarily by European states from the 16th to 18th centuries. Whether used for war or commerce, they were generally armed with the demi-culverin type of cannon.-Etymology:...
-type ship that transported a Japanese embassy headed by Hasekura Tsunenaga
Hasekura Tsunenaga
Hasekura Rokuemon Tsunenaga or was a Japanese samurai and retainer of Date Masamune, the daimyo of Sendai....
to the Americas, which then continued to Europe. Also during that period, the bakufu commissioned around 350 Red Seal Ships
Red seal ships
were Japanese armed merchant sailing ships bound for Southeast Asian ports with a red-sealed patent issued by the early Tokugawa shogunate in the first half of the 17th century...
, three-masted and armed trade ships, for intra-Asian commerce. Japanese adventurers, such as Yamada Nagamasa
Yamada Nagamasa
was a Japanese adventurer who gained considerable influence in Ayutthaya kingdom at the beginning of the 17th century and became the governor of the Nakhon Si Thammarat in southern Thailand....
, were active throughout Asia.
In order to eradicate the influence of Christianization, Japan entered in a period of isolation called sakoku
Sakoku
was the foreign relations policy of Japan under which no foreigner could enter nor could any Japanese leave the country on penalty of death. The policy was enacted by the Tokugawa shogunate under Tokugawa Iemitsu through a number of edicts and policies from 1633–39 and remained in effect until...
, during which its economy enjoyed stability and mild progress.
Economic
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
development during the Edo period included urbanization
Urbanization
Urbanization, urbanisation or urban drift is the physical growth of urban areas as a result of global change. The United Nations projected that half of the world's population would live in urban areas at the end of 2008....
, increased shipping of commodities, a significant expansion of domestic and, initially, foreign commerce
Commerce
While business refers to the value-creating activities of an organization for profit, commerce means the whole system of an economy that constitutes an environment for business. The system includes legal, economic, political, social, cultural, and technological systems that are in operation in any...
, and a diffusion of trade and handicraft
Handicraft
Handicraft, more precisely expressed as artisanic handicraft, sometimes also called artisanry, is a type of work where useful and decorative devices are made completely by hand or by using only simple tools. It is a traditional main sector of craft. Usually the term is applied to traditional means...
industries. The construction
Construction
In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking...
trades flourished, along with banking facilities and merchant associations. Increasingly, han authorities oversaw the rising agricultural
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
production and the spread of rural handicrafts.
By the mid-18th century, Edo had a population
Population
A population is all the organisms that both belong to the same group or species and live in the same geographical area. The area that is used to define a sexual population is such that inter-breeding is possible between any pair within the area and more probable than cross-breeding with individuals...
of more than 1 million and Osaka
Osaka
is a city in the Kansai region of Japan's main island of Honshu, a designated city under the Local Autonomy Law, the capital city of Osaka Prefecture and also the biggest part of Keihanshin area, which is represented by three major cities of Japan, Kyoto, Osaka and Kobe...
and Kyoto
Kyoto
is a city in the central part of the island of Honshū, Japan. It has a population close to 1.5 million. Formerly the imperial capital of Japan, it is now the capital of Kyoto Prefecture, as well as a major part of the Osaka-Kobe-Kyoto metropolitan area.-History:...
each had more than 400,000 inhabitants. Many other castle town
Castle town
A castle town is a settlement built adjacent to or surrounding a castle. Castle towns are common in Medieval Europe. Good example include small towns like Alnwick and Arundel, which are still dominated by their castles...
s grew as well. Osaka and Kyoto became busy trading and handicraft production centers, while Edo was the center for the supply of food and essential urban consumer goods.
Rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...
was the base of the economy, as the daimyo collected the taxes from the peasants in the form of rice. Taxes were high, about 40% of the harvest. The rice was sold at the fudasashi market in Edo
Edo
, also romanized as Yedo or Yeddo, is the former name of the Japanese capital Tokyo, and was the seat of power for the Tokugawa shogunate which ruled Japan from 1603 to 1868...
. To raise money, the daimyo used forward contract
Forward contract
In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a...
s to sell rice that was not even harvested yet. These contracts were similar to modern futures trading.
During the period, Japan progressively studied Western sciences and techniques (called rangaku
Rangaku
Rangaku is a body of knowledge developed by Japan through its contacts with the Dutch enclave of Dejima, which allowed Japan to keep abreast of Western technology and medicine in the period when the country was closed to foreigners, 1641–1853, because of the Tokugawa shogunate’s policy of national...
, literally "Dutch studies") through the information and books received through the Dutch traders in Dejima
Dejima
was a small fan-shaped artificial island built in the bay of Nagasaki in 1634. This island, which was formed by digging a canal through a small peninsula, remained as the single place of direct trade and exchange between Japan and the outside world during the Edo period. Dejima was built to...
. The main areas that were studied included geography, medicine, natural sciences, astronomy, art, languages, physical sciences such as the study of electrical phenomena, and mechanical sciences as exemplified by the development of Japanese clockwatches, or wadokei, inspired from Western techniques.
Prewar period
Since 1854, when the Tokugawa shogunateTokugawa shogunate
The Tokugawa shogunate, also known as the and the , was a feudal regime of Japan established by Tokugawa Ieyasu and ruled by the shoguns of the Tokugawa family. This period is known as the Edo period and gets its name from the capital city, Edo, which is now called Tokyo, after the name was...
first opened the country to Western commerce and influence (Bakumatsu), Japan has gone through two periods of economic development. When Tokugawa shogunate was overthrown and Meiji government was founded, Japanese Westernization
Westernization
Westernization or Westernisation , also occidentalization or occidentalisation , is a process whereby societies come under or adopt Western culture in such matters as industry, technology, law, politics, economics, lifestyle, diet, language, alphabet,...
began completely. The first term is during Prewar Japan
Empire of Japan
The Empire of Japan is the name of the state of Japan that existed from the Meiji Restoration on 3 January 1868 to the enactment of the post-World War II Constitution of...
, the second term is Postwar Japan
Postwar Japan
Postwar Japan refers to the period in Japanese history immediately following the end of World War II in 1945 to the present day. Before and during the war Japan was known as an empire but is now officially the .-Occupation and democratization:...
.
In the Meiji period
Meiji period
The , also known as the Meiji era, is a Japanese era which extended from September 1868 through July 1912. This period represents the first half of the Empire of Japan.- Meiji Restoration and the emperor :...
, leaders inaugurated a new Western-based education system for all young people, sent thousands of students to the United States and Europe, and hired more than 3,000 Westerners to teach modern science, mathematics, technology, and foreign languages in Japan (O-yatoi gaikokujin
O-yatoi gaikokujin
The Foreign government advisors in Meiji Japan, known in Japanese as oyatoi gaikokujin , were those foreign advisors hired by the Japanese government for their specialized knowledge to assist in the modernization of Japan at the end of the Bakufu and during the Meiji era. The term is sometimes...
). The government also built railroads, improved roads, and inaugurated a land reform program to prepare the country for further development.
To promote industrialization, the government decided that, while it should help private business to allocate resources and to plan, the private sector was best equipped to stimulate economic growth. The greatest role of government was to help provide the economic conditions in which business could flourish. In short, government was to be the guide and business the producer. In the early Meiji period, the government built factories and shipyards that were sold to entrepreneurs at a fraction of their value. Many of these businesses grew rapidly into the larger conglomerates
Conglomerate (company)
A conglomerate is a combination of two or more corporations engaged in entirely different businesses that fall under one corporate structure , usually involving a parent company and several subsidiaries. Often, a conglomerate is a multi-industry company...
. Government emerged as chief promoter of private enterprise, enacting a series of probusiness policies.
The development of banking and reliance on bank funding have been at the centre of Japanese economic development at least since the Meiji era.
In the mid 1930s, the Japanese nominal wage rates were 10 times less than the one of the U.S (based on mid-1930s exchange rates), while the price level is estimated to have been about 44% the one of the U.S.
Comparison of GDP per capita between East-Asian Nations and the U.S. in 1935:
| Country | GDP/capita, 1935$ (Liu-Ta-Chung ) | GDP-PPP/capita, 1990$ (Fukao ) | GDP-PPP/capita, 1990$ (Maddison ) |
|---|---|---|---|
| U.S. | 540 | 5,590 | 5,590 |
| Japan (excl. Taiwan and Korea) | 64 | 1,745 | 2,154 |
| Taiwan | 42 | 1,266 | 1,212 |
| Korea | 24 | 662 | 1,224 |
| China | 18 | 543 | 562 |
Militarism
Before World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, Japan built an extensive empire that included Taiwan
Taiwan
Taiwan , also known, especially in the past, as Formosa , is the largest island of the same-named island group of East Asia in the western Pacific Ocean and located off the southeastern coast of mainland China. The island forms over 99% of the current territory of the Republic of China following...
, Korea, Manchuria
Manchuria
Manchuria is a historical name given to a large geographic region in northeast Asia. Depending on the definition of its extent, Manchuria usually falls entirely within the People's Republic of China, or is sometimes divided between China and Russia. The region is commonly referred to as Northeast...
, and parts of northern China. The Japanese regarded this sphere of influence as a political and economic necessity, preventing foreign states from strangling Japan by blocking its access to raw materials and crucial sea-lanes, as Japan possessed very few natural and mining resources of it own, although it imported large amounts of coal from Chosen, Manchukuo, and some regions of occupied China. Japan's large military force was regarded as essential to the empire's defense.
Rapid growth and structural change characterized Japan's two periods of economic development since 1868. In the first period, the economy grew only moderately at first and relied heavily on traditional agriculture to finance modern industrial infrastructure. When the Russo-Japanese War
Russo-Japanese War
The Russo-Japanese War was "the first great war of the 20th century." It grew out of rival imperial ambitions of the Russian Empire and Japanese Empire over Manchuria and Korea...
began in 1904, 65% of employment and 38% of the gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) was still based on agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
but modern industry had begun to expand substantially. During World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
, Japan used the absence of the war-torn European competitors on the world market to advance its economy, generating a trade surplus for the first time since the isolation in the Edo period
Edo period
The , or , is a division of Japanese history which was ruled by the shoguns of the Tokugawa family, running from 1603 to 1868. The political entity of this period was the Tokugawa shogunate....
. By the late 1920s, manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
and mining
Mining
Mining is the extraction of valuable minerals or other geological materials from the earth, from an ore body, vein or seam. The term also includes the removal of soil. Materials recovered by mining include base metals, precious metals, iron, uranium, coal, diamonds, limestone, oil shale, rock...
contributed 23% of GDP, compared with 21% for all of agriculture. Transportation and communications
Transport
Transport or transportation is the movement of people, cattle, animals and goods from one location to another. Modes of transport include air, rail, road, water, cable, pipeline, and space. The field can be divided into infrastructure, vehicles, and operations...
had developed to sustain heavy industrial development.
In the 1930s, the Japanese economy suffered less from the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
than most industrialized nations, expanding at the rapid rate of 5% of GDP per year. Manufacturing and mining came to account for more than 30% of GDP, more than twice the value for the agricultural sector. Most industrial growth, however, was geared toward expanding the nation's military power.
Beginning in 1937 with significant land seizures in China, and to a much greater extent after 1941, when annexations and invasions across Southeast Asia and the Pacific created the Greater East Asia Co-Prosperity Sphere
Greater East Asia Co-Prosperity Sphere
The Greater East Asia Co-Prosperity Sphere was a concept created and promulgated during the Shōwa era by the government and military of the Empire of Japan. It represented the desire to create a self-sufficient "bloc of Asian nations led by the Japanese and free of Western powers"...
, the Japanese government sought to acquire and develop critical natural resources in order to secure economic independence. Among the natural resources Japan seized and developed were coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...
in China, sugarcane
Sugarcane
Sugarcane refers to any of six to 37 species of tall perennial grasses of the genus Saccharum . Native to the warm temperate to tropical regions of South Asia, they have stout, jointed, fibrous stalks that are rich in sugar, and measure two to six metres tall...
in the Philippines
Philippines
The Philippines , officially known as the Republic of the Philippines , is a country in Southeast Asia in the western Pacific Ocean. To its north across the Luzon Strait lies Taiwan. West across the South China Sea sits Vietnam...
, petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
from the Dutch East Indies
Dutch East Indies
The Dutch East Indies was a Dutch colony that became modern Indonesia following World War II. It was formed from the nationalised colonies of the Dutch East India Company, which came under the administration of the Netherlands government in 1800....
and Burma, and tin
Tin
Tin is a chemical element with the symbol Sn and atomic number 50. It is a main group metal in group 14 of the periodic table. Tin shows chemical similarity to both neighboring group 14 elements, germanium and lead and has two possible oxidation states, +2 and the slightly more stable +4...
and bauxite
Bauxite
Bauxite is an aluminium ore and is the main source of aluminium. This form of rock consists mostly of the minerals gibbsite Al3, boehmite γ-AlO, and diaspore α-AlO, in a mixture with the two iron oxides goethite and hematite, the clay mineral kaolinite, and small amounts of anatase TiO2...
from the Dutch East Indies and Malaya
British Malaya
British Malaya loosely described a set of states on the Malay Peninsula and the Island of Singapore that were brought under British control between the 18th and the 20th centuries...
. Japan also purchased the rice production of Thailand
Thailand
Thailand , officially the Kingdom of Thailand , formerly known as Siam , is a country located at the centre of the Indochina peninsula and Southeast Asia. It is bordered to the north by Burma and Laos, to the east by Laos and Cambodia, to the south by the Gulf of Thailand and Malaysia, and to the...
, Burma, and Cochinchina
Cochinchina
Cochinchina is a region encompassing the southern third of Vietnam whose principal city is Saigon. It was a French colony from 1862 to 1954. The later state of South Vietnam was created in 1954 by combining Cochinchina with southern Annam. In Vietnamese, the region is called Nam Bộ...
.
During the early stages of Japan's expansion, the Japanese economy expanded considerably. Steel production rose from 6,442,000 tonnes to 8,838,000 tonnes over the same time period. In 1941 Japanese aircraft industries had capacity to manufacture 10,000 aircraft per year. Much of this economic expansion benefited the "zaibatsu
Zaibatsu
is a Japanese term referring to industrial and financial business conglomerates in the Empire of Japan, whose influence and size allowed for control over significant parts of the Japanese economy from the Meiji period until the end of World War II.-Terminology:...
", large industrial conglomerates.
Over the course of the Pacific War
Pacific War
The Pacific War, also sometimes called the Asia-Pacific War refers broadly to the parts of World War II that took place in the Pacific Ocean, its islands, and in East Asia, then called the Far East...
, the economies of Japan and its occupied territories all suffered severely. Inflation was rampant; Japanese heavy industry, forced to devote nearly all its production to meeting military needs, was unable to meet the commercial requirements of Japan (which had previously relied on trade with Western countries for their manufactured goods). Local industries were unable to produce at high enough levels to avoid severe shortfalls. Furthermore, maritime trade, upon which the Empire depended greatly, was sharply curtailed by damage to the Japanese merchant fleet over the course of the war.
By the end of the war, what remained of the Japanese Empire was wracked by shortages, inflation, and currency devaluation. Transport was nearly impossible, and industrial production in Japan's shattered cities ground to a halt. The destruction wrought by the war eventually brought the Japanese economy to a virtual standstill.
Postwar period
World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
wiped out many of the gains Japan had made since 1868. About 40% of the nation's industrial plants and infrastructure were destroyed, and production reverted to levels of about fifteen years earlier. The people were shocked by the devastation and swung into action. New factories were equipped with the best modern machines, giving Japan an initial competitive advantage over the victor states, who now had older factories
Factory
A factory or manufacturing plant is an industrial building where laborers manufacture goods or supervise machines processing one product into another. Most modern factories have large warehouses or warehouse-like facilities that contain heavy equipment used for assembly line production...
. As Japan's second period of economic development began, millions of former soldiers joined a well-disciplined and highly educated work force to rebuild Japan. Japan's colonies were lost as a result of World War II, but since then the Japanese had extended their economic influence throughout Asia and beyond.
Occupation
The United States occupation of JapanOccupied Japan
At the end of World War II, Japan was occupied by the Allied Powers, led by the United States with contributions also from Australia, India, New Zealand and the United Kingdom. This foreign presence marked the first time in its history that the island nation had been occupied by a foreign power...
(1945–52) resulted in the rebuilding of the nation and the creation of a democratic state
Democracy
Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...
. United States assistance totaled about US$1.9 billion during the occupation, or about 15% of the nation's imports and 4% of GNP in that period. About 59% of this aid was in the form of food, 15% in industrial materials, and 12% in transportation equipment. United States grant assistance, however, tapered off quickly in the mid-1950s. United States military procurement from Japan peaked at a level equivalent to 7% of Japan's GNP in 1953 and fell below 1% after 1960. A variety of United States-sponsored measures during the occupation, such as land reform, contributed to the economy's later performance by increasing competition. In particular, the postwar purge of industrial leaders allowed new talent to rise in the management of the nation's rebuilt industries. Finally, the economy benefited from foreign trade because it was able to expand export
Export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
s rapidly enough to pay for import
Import
The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...
s of equipment and technology without falling into debt, as had a number of developing nations in the 1980s.
Rebuilding
The hi early postwar years were devoted to rebuilding lost industrial capacity: major investments were made in electric powerElectric power
Electric power is the rate at which electric energy is transferred by an electric circuit. The SI unit of power is the watt.-Circuits:Electric power, like mechanical power, is represented by the letter P in electrical equations...
, coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...
, iron
Iron
Iron is a chemical element with the symbol Fe and atomic number 26. It is a metal in the first transition series. It is the most common element forming the planet Earth as a whole, forming much of Earth's outer and inner core. It is the fourth most common element in the Earth's crust...
, steel
Steel
Steel is an alloy that consists mostly of iron and has a carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most common alloying material for iron, but various other alloying elements are used, such as manganese, chromium, vanadium, and tungsten...
, and chemical fertilizer
Fertilizer
Fertilizer is any organic or inorganic material of natural or synthetic origin that is added to a soil to supply one or more plant nutrients essential to the growth of plants. A recent assessment found that about 40 to 60% of crop yields are attributable to commercial fertilizer use...
s. By the mid-1950s, production matched prewar levels. Released from the demands of military-dominated government, the economy not only recovered its lost momentum but also surpassed the growth rates of earlier periods. Between 1953 and 1965, GDP expanded by more than 9% per year, manufacturing and mining by 13%, construction by 11%, and infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
by 12%. In 1965 these sectors employed more than 41% of the labor force, whereas only 26% remained in agriculture.
Japan's highly acclaimed postwar education system
Education in Japan
In Japan, education is compulsory at the elementary and lower secondary levels. Approximately 98% of all students progress to the upper secondary level, which is voluntary . Most students attend public schools through the lower secondary level, but private education is popular at the upper...
contributed strongly to the modernizing process. The world's highest literacy
Literacy
Literacy has traditionally been described as the ability to read for knowledge, write coherently and think critically about printed material.Literacy represents the lifelong, intellectual process of gaining meaning from print...
rate and high education standards were major reasons for Japan's success in achieving a technologically advanced economy. Japanese schools also encouraged discipline, another benefit in forming an effective work force.
The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufactures. Whereas textile
Textile
A textile or cloth is a flexible woven material consisting of a network of natural or artificial fibres often referred to as thread or yarn. Yarn is produced by spinning raw fibres of wool, flax, cotton, or other material to produce long strands...
s and light manufactures maintained their profitability internationally, other products, such as automobile
Automobile
An automobile, autocar, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor...
s, ship
Ship
Since the end of the age of sail a ship has been any large buoyant marine vessel. Ships are generally distinguished from boats based on size and cargo or passenger capacity. Ships are used on lakes, seas, and rivers for a variety of activities, such as the transport of people or goods, fishing,...
s, and machine tools assumed new importance. The value added to manufacturing and mining grew at the rate of 17% per year between 1965 and 1970. Growth rates moderated to about 8% and evened out between the industrial and service sectors between 1970 and 1973, as retail trade, finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
, information
Information technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
, and other service industries streamlined their operations.
Oil crisis
Japan faced a severe economic challenge in the mid-1970s. The world oil crisis1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
in 1973 shocked an economy that had become virtually dependent on foreign petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
. Japan experienced its first postwar decline in industrial production, together with severe price inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. The recovery that followed the first oil crisis revived the optimism of most business leaders, but the maintenance of industrial growth in the face of high energy costs required shifts in the industrial structure.
Changing price conditions favored conservation
Energy conservation
Energy conservation refers to efforts made to reduce energy consumption. Energy conservation can be achieved through increased efficient energy use, in conjunction with decreased energy consumption and/or reduced consumption from conventional energy sources...
and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s and enhanced their productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
. Advances in microcircuitry and semiconductor
Semiconductor
A semiconductor is a material with electrical conductivity due to electron flow intermediate in magnitude between that of a conductor and an insulator. This means a conductivity roughly in the range of 103 to 10−8 siemens per centimeter...
s in the late 1970s and 1980s led to new growth industries in consumer electronics
Consumer electronics
Consumer electronics are electronic equipment intended for everyday use, most often in entertainment, communications and office productivity. Radio broadcasting in the early 20th century brought the first major consumer product, the broadcast receiver...
and computers
Computer industry
Computer industry is a collective term used to describe the whole range of businesses involved in developing computer software, designing computer hardware and computer networking infrastructures, the manufacture of computer components and the provision of information technology services.-See...
, and to higher productivity in pre-established industries. The net result of these adjustments was to increase the energy efficiency of manufacturing and to expand so-called knowledge-intensive industries. The service industries expanded in an increasingly postindustrial economy.
Structural economic changes, however, were unable to check the slowing of economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
as the economy matured in the late 1970s and 1980s, attaining annual growth rates at only 4 to 6%. But these rates were remarkable in a world of expensive petroleum and in a nation of few domestic resources
Natural resource
Natural resources occur naturally within environments that exist relatively undisturbed by mankind, in a natural form. A natural resource is often characterized by amounts of biodiversity and geodiversity existent in various ecosystems....
. Japan's average growth rate of 5% in the late 1980s, for example, was far higher than the 3.8% growth rate of the United States. Despite more petroleum price increases in 1979, the strength of the Japanese economy was apparent. It expanded without the double-digit inflation that afflicted other industrial nations (and that had bothered Japan itself after the first oil crisis in 1973). Japan experienced slower growth in the mid-1980s, but its demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
-sustained economic boom of the late 1980s revived many troubled industries.
Factors of growth
Complex economic and institutional factors affected Japan's postwar growth. First, the nation's prewar experience provided several important legacies. The Tokugawa periodEdo period
The , or , is a division of Japanese history which was ruled by the shoguns of the Tokugawa family, running from 1603 to 1868. The political entity of this period was the Tokugawa shogunate....
(1600–1867) bequeathed a vital commercial sector in burgeoning urban centers, a relatively well-educated elite (although one with limited knowledge of European science
Science
Science is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe...
), a sophisticated government bureaucracy
Bureaucracy
A bureaucracy is an organization of non-elected officials of a governmental or organization who implement the rules, laws, and functions of their institution, and are occasionally characterized by officialism and red tape.-Weberian bureaucracy:...
, productive agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
, a closely unified nation with highly developed financial and marketing systems, and a national infrastructure of roads. The buildup of industry during the Meiji period to the point where Japan could vie for world power was an important prelude to postwar growth from 1955 to 1973 and provided a pool of experienced labor following World War II.
Second, and more important, was the level and quality of investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
that persisted through the 1980s. Investment in capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
equipment, which averaged more than 11% of GNP during the prewar period, rose to about 20% of GNP during the 1950s and to more than 30% in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still hovered around 20%. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
, Japan was able to avoid some of the trial and error earlier needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through technology licensing
License
The verb license or grant licence means to give permission. The noun license or licence refers to that permission as well as to the document recording that permission.A license may be granted by a party to another party as an element of an agreement...
, patent purchase
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
s, and imitation
Imitation
Imitation is an advanced behavior whereby an individual observes and replicates another's. The word can be applied in many contexts, ranging from animal training to international politics.-Anthropology and social sciences:...
and improvement of foreign inventions. In the 1980s, industry stepped up its research and development
Research and development
The phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...
, and many firms became famous for their innovations and creativity.
Japan's labor force
Labor force
In economics, a labor force or labour force is a region's combined civilian workforce, including both the employed and unemployed.Normally, the labor force of a country consists of everyone of working age In economics, a labor force or labour force is a region's combined civilian workforce,...
contributed significantly to economic growth, not only because of its availability and literacy
Literacy
Literacy has traditionally been described as the ability to read for knowledge, write coherently and think critically about printed material.Literacy represents the lifelong, intellectual process of gaining meaning from print...
but also because of its reasonable wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
demands. Before and immediately after World War II, the transfer of numerous agricultural workers to modern industry resulted in rising productivity and only moderate wage increases. As population growth
Population growth
Population growth is the change in a population over time, and can be quantified as the change in the number of individuals of any species in a population using "per unit time" for measurement....
slowed and the nation became increasingly industrialized in the mid-1960s, wages rose significantly. However, labor union cooperation generally kept salary increases within the range of gains in productivity.
High productivity growth played a key role in postwar economic growth. The highly skilled and educated labor force, extraordinary savings rates and accompanying levels of investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, and the low growth of Japan's labor force were major factors in the high rate of productivity growth.
The nation has also benefited from economies of scale
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
. Although medium-sized and small enterprise
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
s generated much of the nation's employment, large facilities were the most productive. Many industrial enterprises consolidated to form larger, more efficient units. Before World War II, large holding companies formed wealth groups, or zaibatsu
Zaibatsu
is a Japanese term referring to industrial and financial business conglomerates in the Empire of Japan, whose influence and size allowed for control over significant parts of the Japanese economy from the Meiji period until the end of World War II.-Terminology:...
, which dominated most industry. The zaibatsu were dissolved after the war, but keiretsu
Keiretsu
A is a set of companies with interlocking business relationships and shareholdings. It is a type of business group. The keiretsu has maintained dominance over the Japanese economy for the greater half of the twentieth century....
—large, modern industrial enterprise groupings—emerged. The coordination of activities within these groupings and the integration of smaller subcontractor
Subcontractor
A subcontractor is an individual or in many cases a business that signs a contract to perform part or all of the obligations of another's contract....
s into the groups enhanced industrial efficiency.
Japanese corporations developed strategies that contributed to their immense growth. Growth-oriented corporations that took chances competed successfully. Product diversification became an essential ingredient of the growth patterns of many keiretsu. Japanese companies added plant and human capacity ahead of demand. Seeking market share rather than quick profit was another powerful strategy.
Finally, circumstances beyond Japan's direct control contributed to its success. International conflicts tended to stimulate the Japanese economy until the devastation at the end of World War II. The Russo-Japanese War
Russo-Japanese War
The Russo-Japanese War was "the first great war of the 20th century." It grew out of rival imperial ambitions of the Russian Empire and Japanese Empire over Manchuria and Korea...
(1904-5), World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
(1914–18), the Korean War
Korean War
The Korean War was a conventional war between South Korea, supported by the United Nations, and North Korea, supported by the People's Republic of China , with military material aid from the Soviet Union...
(1950–53), and the Second Indochina War
Vietnam War
The Vietnam War was a Cold War-era military conflict that occurred in Vietnam, Laos, and Cambodia from 1 November 1955 to the fall of Saigon on 30 April 1975. This war followed the First Indochina War and was fought between North Vietnam, supported by its communist allies, and the government of...
(1954–75) brought economic booms to Japan. In addition, benign treatment from the United States after World War II facilitated the nation's reconstruction and growth.
The Evolving Occupational Structure
As late as 1955, some 40% of the labor forceLabor force
In economics, a labor force or labour force is a region's combined civilian workforce, including both the employed and unemployed.Normally, the labor force of a country consists of everyone of working age In economics, a labor force or labour force is a region's combined civilian workforce,...
still worked in agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
, but this figure had declined to 17% by 1970 and to 7.2% by 1990. The government estimated in the late 1980s that this figure would decline to 4.9% by 2000, as Japan imported more and more of its food and small family farm
Farm
A farm is an area of land, or, for aquaculture, lake, river or sea, including various structures, devoted primarily to the practice of producing and managing food , fibres and, increasingly, fuel. It is the basic production facility in food production. Farms may be owned and operated by a single...
s disappeared.
Japan's economic growth in the 1960s and 1970s was based on the rapid expansion of heavy manufacturing in such areas as automobiles, steel, shipbuilding, chemicals, and electronics. The secondary sector (manufacturing, construction, and mining) expanded to 35.6% of the work force by 1970. By the late 1970s, however, the Japanese economy began to move away from heavy manufacturing toward a more service-oriented (tertiary sector) base. During the 1980s, jobs in wholesaling
Wholesale
Wholesaling, jobbing, or distributing is defined as the sale of goods or merchandise to retailers, to industrial, commercial, institutional, or other professional business users, or to other wholesalers and related subordinated services...
, retail
Retail
Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
ing, finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
, transportation, communications
Transport
Transport or transportation is the movement of people, cattle, animals and goods from one location to another. Modes of transport include air, rail, road, water, cable, pipeline, and space. The field can be divided into infrastructure, vehicles, and operations...
, and government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
grew rapidly, while secondary-sector employment remained stable. The tertiary sector grew from 47% of the work force in 1970 to 59.2% in 1990.
1980s
Throughout the 1970s, Japan had the world's second largest gross national product (GNPMeasures of national income and output
A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product , gross national product , and net national income . All are specially concerned with counting the total amount of goods and...
)—just behind the United States— and ranked first among major industrial nations in 1990 in per capita
Per capita
Per capita is a Latin prepositional phrase: per and capita . The phrase thus means "by heads" or "for each head", i.e. per individual or per person...
GNP at US$23,801, up sharply from US$9,068 in 1980. After a mild economic slump in the mid-1980s, Japan's economy began a period of expansion in 1986 that continued until it again entered a recessionary period
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
in 1992. Economic growth averaging 5% between 1987 and 1989 revived industries, such as steel
Steel
Steel is an alloy that consists mostly of iron and has a carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most common alloying material for iron, but various other alloying elements are used, such as manganese, chromium, vanadium, and tungsten...
and construction
Construction
In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking...
, which had been relatively dormant in the mid-1980s, and brought record salaries and employment. In 1992, however, Japan's real GNP growth slowed to 1.7%. Even industries such as automobiles and electronics
Electronics
Electronics is the branch of science, engineering and technology that deals with electrical circuits involving active electrical components such as vacuum tubes, transistors, diodes and integrated circuits, and associated passive interconnection technologies...
that had experienced phenomenal growth in the 1980s entered a recessionary period in 1992. The domestic market for Japanese automobiles shrank at the same time that Japan's share of the United States' market declined. Foreign and domestic demand for Japanese electronics also declined, and Japan seemed on the way to losing its leadership in the world semiconductor
Semiconductor
A semiconductor is a material with electrical conductivity due to electron flow intermediate in magnitude between that of a conductor and an insulator. This means a conductivity roughly in the range of 103 to 10−8 siemens per centimeter...
market to the United States, Korea and Taiwan.
Unlike the economic booms of the 1960s and 1970s, when increasing exports played the key role in economic expansion, domestic demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
propelled the Japanese economy in the late 1980s. This development involved fundamental economic restructuring, moving from dependence on exports to reliance on domestic demand. The boom that started in 1986 was generated by the decisions of companies to increase private plant and equipment spending and of consumers to go on a buying spree. Japan's imports grew at a faster rate than exports. Japanese postwar technological research
Research
Research can be defined as the scientific search for knowledge, or as any systematic investigation, to establish novel facts, solve new or existing problems, prove new ideas, or develop new theories, usually using a scientific method...
was carried out for the sake of economic growth rather than military development. The growth in high-technology industries in the 1980s resulted from heightened domestic demand for high-technology products and for higher living, housing, and environmental standards; better health, medical, and welfare opportunities; better leisure
Recreation
Recreation is an activity of leisure, leisure being discretionary time. The "need to do something for recreation" is an essential element of human biology and psychology. Recreational activities are often done for enjoyment, amusement, or pleasure and are considered to be "fun"...
-time facilities; and improved ways to accommodate a rapidly aging society. This reliance on domestic consumption also meant that consumption grew by only 2.2% in 1991 and at the same rate again in 1992.
During the 1980s, the Japanese economy shifted its emphasis away from primary and secondary activities (notably agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
, manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
, and mining
Mining
Mining is the extraction of valuable minerals or other geological materials from the earth, from an ore body, vein or seam. The term also includes the removal of soil. Materials recovered by mining include base metals, precious metals, iron, uranium, coal, diamonds, limestone, oil shale, rock...
) to processing, with telecommunications and computers becoming increasingly vital. Information became an important resource and product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
, central to wealth and power. The rise of an information-based economy was led by major research in highly sophisticated technology
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
, such as advanced computers. The selling and use of information became very beneficial to the economy. Tokyo became a major financial center, home of some of the world's major bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s, financial firms, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
companies, and the world's largest stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
, the Tokyo Securities and Stock Exchange. Even here, however, the recession took its toll. In 1992, the Nikkei 225
Nikkei 225
The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...
stock average began the year at 23,000 points, but fell to 14,000 points in mid-August before leveling off at 17,000 by the end of the year.
1989 Economic Bubble
In the decades following World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, Japan implemented stringent tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s and policies to encourage the people to save
Saving (money)
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs...
their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses
Balance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
, the yen
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
appreciated against foreign currencies. This allowed local companies to invest
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.
With so much money readily available for investment, speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
was inevitable, particularly in the Tokyo Stock Exchange
Tokyo Stock Exchange
The , called or TSE for short, is located in Tokyo, Japan and is the third largest stock exchange in the world by aggregate market capitalization of its listed companies...
and the real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
market. The Nikkei stock index
Nikkei 225
The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...
hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s.
At the height of the bubble, real estate values were extremely over-valued. Prices were highest in Tokyo's Ginza
Ginza
is a district of Chūō, Tokyo, located south of Yaesu and Kyōbashi, west of Tsukiji, east of Yūrakuchō and Uchisaiwaichō, and north of Shinbashi.It is known as an upscale area of Tokyo with numerous department stores, boutiques, restaurants and coffeehouses. Ginza is recognized as one of the most...
district in 1989, with choice properties fetching over US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
1.5 million per square meter ($139,000 per square foot). Prices were only slightly less in other areas of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped and Tokyo's residential homes were a fraction of their peak, but still managed to be listed as the most expensive real estate in the world. Trillions were wiped out with the combined collapse of the Tokyo stock and real estate markets.
With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and Japanese manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, some people argue that the low consumption rate began to bear on the economy, causing a deflationary spiral.
The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. Meanwhile, the extremely low interest rate offered for deposits, such as 0.1%, meant that ordinary Japanese savers were just as inclined to put their money under their beds as they were to put it in savings accounts. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses". Eventually a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader.
The time after the , which occurred gradually rather than catastrophically, is known as the in Japan. The Nikkei 225
Nikkei 225
The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...
stock index eventually bottomed out at 7603.76 in April 2003, moved upward to a new peak of 18,138 in June 2007, before resuming a downward trend. The downward movement in the Nikkei is likely due to global as well as national economic problems.
Deflation from the 1990s to present
Deflation in Japan started in the early 1990s. On March 19, 2001, the Bank of JapanBank of Japan
is the central bank of Japan. The Bank is often called for short. It has its headquarters in Chuo, Tokyo.-History:Like most modern Japanese institutions, the Bank of Japan was founded after the Meiji Restoration...
and the Japanese government tried to eliminate deflation in the economy by reducing interest rates (part of their 'quantitative easing
Quantitative easing
Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
' policy). Despite having interest rates down near zero for a long period of time, this strategy did not succeed. Once the near-zero interest rates failed to stop deflation, some economists, such as Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
, and some Japanese politicians spoke of deliberately causing (or at least creating the fear of) inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. In July 2006, the zero-rate policy was ended. In 2008, the Japanese Central Bank still has the lowest interest rates in the developed world, deflation has still not been eliminated and the Nikkei 225 fell approximately 50% (between June 2007 and December 2008).
Systemic reasons for deflation in Japan can be said to include:
- Fallen assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
prices. There was a large price bubble in both equities and real estateReal estateIn general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
in Japan in the 1980s (peaking in late 1989).
- Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, many loans went unpaid. The banks could try to collect on the collateral (land), but due to reduced real estate values, this would not pay off the loan. Banks have delayed the decision to collect on the collateral, hoping asset prices would improve. These delays were allowed by national banking regulators. Some banks make even more loans to these companies that are used to service the debt they already have. This continuing process is known as maintaining an "unrealized loss", and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy.
- Insolvent banks: Banks with a large percentage of their loans which are "non-performing" (loans for which payments are not being made), but have not yet written them off. These banks cannot lend more money until they increase their cash reserves to cover the bad loans. Thus the quantity of loans are reduced and less funds are available for economic growth.
- Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. People also save by owning real estate.
The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
has suggested that improvements to bankruptcy law, land transfer law, and tax laws will aid Japan's economy. In October 2009 the Japanese government announced plans to increase tobacco and green taxes while reducing rates for small and medium sized companies, according to NHK
NHK
NHK is Japan's national public broadcasting organization. NHK, which has always identified itself to its audiences by the English pronunciation of its initials, is a publicly owned corporation funded by viewers' payments of a television license fee....
Timeline
- Fondation of Tokugawa ShogunateTokugawa shogunateThe Tokugawa shogunate, also known as the and the , was a feudal regime of Japan established by Tokugawa Ieyasu and ruled by the shoguns of the Tokugawa family. This period is known as the Edo period and gets its name from the capital city, Edo, which is now called Tokyo, after the name was...
: beginning of early modern industrialization - Meiji RestorationMeiji RestorationThe , also known as the Meiji Ishin, Revolution, Reform or Renewal, was a chain of events that restored imperial rule to Japan in 1868...
: beginning of industrialization - The World War IIWorld War IIWorld War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
: controlled economy during the war - End of the World War IISurrender of JapanThe surrender of Japan in 1945 brought hostilities of World War II to a close. By the end of July 1945, the Imperial Japanese Navy was incapable of conducting operations and an Allied invasion of Japan was imminent...
: beginning of the way to a economic power state - April 25, 1971 : End of the Gold StandardGold standardThe gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
. - September 22, 1985 : Plaza AccordPlaza AccordThe Plaza Accord or Plaza Agreement was an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets...
. - December 26, 1989 : Nikkei 225Nikkei 225The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...
average peaks at 37,189 - 1990s : "The Lost DecadeLost Decade (Japan)The is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically...
", as it is known in Japan, is the time after Japan's economic bubbleJapanese asset price bubbleThe was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...
collapsed. The Nikkei 225Nikkei 225The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...
stock index eventually bottomed out at 7603.76 in April 2003, moved upward to a new peak of 18,138 in June 2007, before resuming a downward trend. - July 1997: Start of the Asian financial crisis which caused several companies including Nissan Mutual Life InsuranceNissan Mutual Life InsuranceNissan Mutual Life Insurance Company was a Japanese company that went bankrupt on April 25, 1997. It was the first time since the postwar period that a life insurer went bankrupt....
and YaohanYaohanYaohan was a Japanese retail group. The company was founded in 1930 by Kazuo Wada . Initially a single shop, it later expanded into a major supermarket chain after the Second World War with most retail outlets located in Shizuoka prefecture, south of Tokyo. It was listed on Tokyo Stock Exchange...
to go bankruptBankruptcyBankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
. - Post 2000, Bank of JapanBank of Japanis the central bank of Japan. The Bank is often called for short. It has its headquarters in Chuo, Tokyo.-History:Like most modern Japanese institutions, the Bank of Japan was founded after the Meiji Restoration...
begins quantitative easingQuantitative easingQuantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
strategy. - The Aftermath of the 2011 Tōhoku earthquake and tsunamiAftermath of the 2011 Tōhoku earthquake and tsunamiThe aftermath of the 2011 Tōhoku earthquake and tsunami included both a humanitarian crisis and massive economic impacts. The tsunami created over 300,000 refugees in the Tōhoku region, and resulted in shortages of food, water, shelter, medicine and fuel for survivors...
had far reaching economic consequences.
See also
- Bank of JapanBank of Japanis the central bank of Japan. The Bank is often called for short. It has its headquarters in Chuo, Tokyo.-History:Like most modern Japanese institutions, the Bank of Japan was founded after the Meiji Restoration...
- Economy of JapanEconomy of JapanThe economy of Japan, a free market economy, is the third largest in the world after the United States and the People's Republic of China, and ahead of Germany at 4th...
- History of JapanHistory of JapanThe history of Japan encompasses the history of the islands of Japan and the Japanese people, spanning the ancient history of the region to the modern history of Japan as a nation state. Following the last ice age, around 12,000 BC, the rich ecosystem of the Japanese Archipelago fostered human...
- Tokugawa coinageTokugawa coinageTokugawa coinage was a unitary and independent metallic monetary system established by Shogun Tokugawa Ieyasu in 1601 in Japan, and which lasted throughout the Tokugawa period until its end in 1867.-History:...
- JapanJapanJapan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
- KeiretsuKeiretsuA is a set of companies with interlocking business relationships and shareholdings. It is a type of business group. The keiretsu has maintained dominance over the Japanese economy for the greater half of the twentieth century....
- a distinctive Japanese way in which firms are related - Japanese post-war economic miracleJapanese post-war economic miracleThe Japanese post-war economic miracle is the name given to the historical phenomenon of Japan's record period of economic growth following World War II, spurred mainly by Japanese economic policy, in particular through the Ministry of International Trade and Industry...
- Japanese asset price bubbleJapanese asset price bubbleThe was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...
- Lost Decade (Japan)Lost Decade (Japan)The is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically...