July 2, 2020 in Research
Japanese Economy: Success and Failures

The economic history of Japan has faced periods of economic growth and recessions. In fact, some periods of slow economic growth such as the lost decade have hit the country’s economy so hard that monetary policy tools were becoming counterproductive. The paper has analysed Japan’s economic status from 1950s to present by substantiating on the precursors to high and slow economic growths. It also explains how other global tragedies influenced Japan’s economy. An example is the oil crisis and the recent Brexit vote. Moreover, the paper explains some of the strategies the government used to revive the economy and why some were successful. The research is enlightening because it’s an amalgam of history and economics as well as how various economic tools have been deployed to regulate Japanese economy. 

Japan’s economy is the third largest in the world based on the nominal GDP. It’s also among the world’s most developed economies. The success of Japan’s economy can be attributed to its innovation skills that give the country a competitive edge over global industry players. Moreover, the economy benefits from political and social stability as well as efficiently run institutions. The economic history of Japan is interesting because of its spectacular growth in different periods. The paper will lay emphasis on Japan’s economic growth from the 1950s. The analysis will encapsulate the economic trends and policies behind the economy’s fluctuations. 

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Japanese economy entered into a period of high growth after the recovery period of 1945-49 and Korean War in 1950-53. By then, Japan had regained political independence in 1951 and a unified exchange rate in 1951.The high growth period took place in the early 1950s after controls and subsidies restored market mechanism. Private international trade also began in this period. The new changes compelled industries to strive for efficiency and competitiveness by improving quality and reducing production costs. There was also population stabilization as efforts to control population had been successful. The government had legalized abortion in 1948 and instigated a national campaign to sensitize citizens on the importance of family planning. However, Japan was experiencing a balance of payments crisis and resorted to raising interest rates to lower inflation. Other policy tools such as foreign exchange budget, capital control and preferential tax treatment were also introduced. Japan had also reintegrated itself in the global economy by becoming a member of IMF and joining United Nations in 1952 and 1956 respectively. 

Apparently, it seems that the Japan was laying a foundation for its economic growth and development in 1950s through the implementation of aforementioned policies. The 1960s were a period of high economic growth as well. The economy started focusing on high-quality and high-technology products as it targeted international markets as per the new policies from Ministry of Trade and Industry. The high growth in this period can be attributed to Ikeda Hayato’s Income Doubling Plan. Ikeda, who was the prime minister of Japan, achieved this by expanding public sector spending, reducing taxes and expanded trade ties with the Soviet Union. His aim was to double Japan National income within ten years. The economic boom ranked Japan among the world’s largest economies. 

However, Japan was in a high growth era until 1970s when it was confronted with a severe economic challenge due to the world oil crisis. This took place in 1973 and 1979. The economy was dependent on foreign petroleum and an increase in oil prices led the economy into a recession. This lowered expectations of future growth and reduced private investments. However, Japan responded to the oil crisis by developing fuel-efficient products and manufacturing processes. Energy intensive industries also reduced their dependence on oil and enhanced productivity. As a result, most firms became famous for their innovations and creativity. In the mid-1980s, Japan was a key player in global financial markets even though the high oil prices affected inflation and exchange rates. In the late 1980s, the Japanese yen had become strong thus triggering an increase in global investment spending. The government had also implemented stringent tariffs to encourage people to save their income and this made it easier to obtain loans. Companies were also investing in capital resources and this became an era of economic bubble. 

In the early 1990s, land and stock prices were rising and this plunged Japan’s economy into a recession again. Growth slowed down while prices declined persistently. Consumers and producers also became pessimistic. The recession was caused by excessive loan growth quotas dictated on banks through the ‘window guidance policy’. Moreover, the monetary policies failed to achieve recovery. The yen was also appreciating against the dollar due to export surplus and the economy was stuck between anemic growth and economic recession. This was contrary to American expectations. The economy decline of the 1990s compelled the government to liberalize the economy by encouraging foreign investment. This is because the expansion of monetary base did not offset credit expansion due to bad debts in the banking system. No one expected that bursting of the bubble in the early 1990s will be a precursor to a prolonged period of economic growth. 

In the late 1990s, the fear of banks default had spread as other banks were becoming bankrupt and this led to the establishment of Financial Services Agency in 2000. The bank of Japan also adopted the zero interest rates policy. However, efforts to overcome the crisis were becoming a lengthy and costly process as the financial intermediary function was undermined. This explains why the1990s recession period was known as the lost decade. In early 2000, Japan strived to curb the appreciation of the Yen by intervening in foreign exchange market and purchasing dollar assets. This increased international reserves and there was hope and optimism for the twenty first century. However, the economy slid back into a recession in 2001 due to sluggish domestic demand and huge debts owed by Japanese banks. International factors also played a role in this recession because the U.S. economy was deteriorating and this meant a decline in Japanese exports. 

In early 2002, the economy was in a period of slow but steady recovery and banks were starting to dispose their bad loans. The success can be attributed to the efforts of Financial Services Agency. The agency was forcing companies to stop lending to zombie companies. Most financial problems were settled by 2005 and consumer confidence was rising. There was also an increase in wages and corporate profits and employment opportunities for graduates were starting to open up. By early 2007, Japan was showing signs of relapsing back into a recession due to high prices of fuel and commodities. In the third quarter of 2008, the economy fell back into a recession due to weak export growth and steep cuts in corporate spending. 

The GDP was dropping at an annual pace of 12.7% while economic indicators were deteriorating. In late 20009 and 2010, the economy was recovering as a result of government stimulus spending. In 2013, Japan was among the largest economies in the world. In 2015, the economy started shrinking again due to decreasing population which subsequently reduced the economic growth. The consumption was also becoming weak. However, the economy bounced back early this year avoiding a recession. Today, Japanese economy is not stable as Brexit has sparked market turmoil. In fact, the Brexit vote may affect Japan beyond its financial markets and the government might consider currency swaps as a way to stabilize the yen. 


Japan is among the largest economies in the world and is well known for its efficiency and innovation in sectors that are technology oriented. The history of Japan’s economy been confronted with periods of economic growth, downturns and recession. However, some periods of low economic growth affected the entire globe such as the oil crisis. Similarly, poor economic growth affects Japan’s economy through its exports and currency fluctuations. In times of poor economic conditions, the government struggles to restore and improve economic conditions even though sometimes it became difficult. The economic failures and successes should be lessons to other economies. 


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