Causes of Japanese long-term recession
The rapid development of Japanese economy after the World War II that continued until 1990s is often regarded as the Japanese “economic miracle”. Indeed, this country managed to change its position from the weak developing countries to second most important industrial and exporting giant after the USA. A lot of scientists even argued that Japan will soon become the world’s most powerful industry; but the lasting recession of Japanese economy which started in 1990s, now denies these doubts. Japan has experienced four economical recessions since the start of the crisis, and its economy seems to be sinking deeper and deeper. Some economists even state that this state of Japanese economy should not be called a recession, but rather it is a depression.
This essay is meant to analyze the reasons of this economical phenomenon and possible remedies. I think that it is important to examine the reasons of Japanese “economical miracle”, and then trace the development of the country’s economy until nowadays to single out the purposes of current situation.
1. Brief overview of Japanese economy before World War II
Starting from 17th century and even earlier, Japan showed itself as a very neatly organized and structured empire with clearly divided economical power and ownership. The system of daimyo and shogun power division guaranteed the preservation of power between the warlords and the absence of armed opposition unions, so common for other proto-industrial; countries of that period. This is one of the main factors, together with economical achievements of Japan (fast urbanization, the development of agriculture and to some extent industry) and the readiness of the society to compete with western countries [1, p. 5], which have determined the pivot of Japanese political and economical structure; this structure, in its turn, let this country to achieve significant economical success in future.
2. The government policy and the “economical miracle”
So, what are the factors that determined the transformation of Japan into the second powerful industrial country? First of all, it is the government policy aimed to accumulation of new technologies and the creation of MITI (Ministry of International Trade and Industry). This institution in fact “took responsibility for overseeing industrial policy” [1, p. 10]. The state chose the policy of buying most of the available new technologies, and thus allowed Japanese enterprises to receive a great concurrent advantage over the competing firms in USA and other competing industrialized countries. Together with this, the policy of aggressive export and at the same time protectionist measures concerning domestic enterprises has been put into practice. The government has stimulated domestic production with different loans, subsidies and low tariffs compared to the foreign investment rates. The shift of the economy to the dual one (high salaries and a lot of benefits for employees working for large industrial enterprises versus lower tariffs and lower standard of life for the rural regions) has also conditioned the high social ability to accept new technologies. All these factors, together with the policy of government intervention into all spheres of the economy and stimulation of the growth of the desired branches of economy, were the leading forces of the Japanese economical miracle. As a result, Japan was overtaking the USA in GDP per-capita and PPP rate (purchasing power parity).
The best description of the Japanese economical miracle is the following sentence: Dubbed a miracle, it is best seen as the reaping of a bountiful harvest whose seeds were painstakingly planted in the six decades between 1880 and 1938 [1, p. 12].
3. The reasons of the long recession
I believe that most of the factors, which were the basis for Japanese economical success, determined the country’s economical recession nowadays. In my opinion, one of the most important reasons of repeating recessions in Japanese economy is the reluctance of the Japanese government to accept free market economy and concurrence inside the country. Taking into consideration the globalization processes going throughout in the world, Japanese enterprises (a lot of which are inefficient compared to foreign competitors) have to be reformed. The situation that is taking place in Japanese economy can be described by the next citation: “On one hand, Japan contains some of the most competitive firms and industries in the world… On the other hand, however, there are large portions of the Japanese economy that not only fail to measure up to the standards of the best worldwide competitors but fall far behind them”. [2, p. 384].
The following chart illustrates the GDP growth rate in 1990-2001 years; as we can see from this table, the dynamics of GDP during this time was very unstable and faltering; this table is illustrating the thesis that Japanese economy is experiencing a recession now.
Some economists state that Japan is in a depression. It is experiencing high deflation level as well as the significant reduction of consumption level. This is, in my opinion, a direct consequence of the increased interest rates and the excess of goods in Japan. Another flaw of Japanese policy is the intervention into foreign competition and high entry barriers for efficient foreign competitors. As a result of over-protectionist policy, most of domestic firms are inefficient, and only some giant corporations are really competitive.
The second chart illustrates the dynamics of unemployment rate and consumption expenditure during the regarded period; it also represents evidence about the depression.
Another interesting fact is that Japanese government was denying the crisis for the last decade, and the negative economical processes in fact did not affect the life of citizens until nowadays; despite the repeating economical recessions, the life standards in Japan remained the same. Only during the last two or three years the level of unemployment has risen and other negative phenomena started to show up. The explanation of such situation lies in the policy of Japanese government, which is relying on the dominance of investment level over the international loan rate, and therefore solves the appearing problems with further money injections into the economy using international loans. As a result borrowing has reached 130% of GDP, higher than any other industrialized country.[6, p.108] Between 1992 and 1995, Japan tried six spending programs total cost of 65.5 trillion yen and in 1994 government even cut income tax rates.[5,p.370] But currently the investment profit level is reducing compared to the previous years, and if it falls lower than international loan rate, the state debt will lead to complete crash of the Japanese economy.
The analysis of statistical evidence and economical data during the last 10-15 years has shown us that Japanese economy is in a state of recession now. The economical crisis is approaching, and a lot of scientists state that the state of Japanese economy should not be called a recession, but rather a depression. The stability of Japanese economy is very important not only for Japanese people, but for the whole community as well, because Japan is linked with many countries and regions by economical and industrial links, and the crisis of Japanese economy will possibly result in a global economical recession.
In my opinion, there are some essential measures that are necessary for Japanese government to avoid economical crash. The main of them are:
1. to stop using the Keynesian policy of injecting money into domestic industries as it has proved its ineffectiveness
2. to stop the increase on non-performing debt
3. (the most important factor, in my opinion) – to open the way for free market economy, i.e. to stop excessive protection concerning domestic production and cancel the practice of subsidies
4. to reduce taxes and eliminate the entry barriers in main industrial spheres