Economy of Japan

Japan: Introduction
(i) Population 127m (ii) scattered over 4 major islands, (iii) territory smaller than California (iv) mostly mountainous and (v) less than 20% arable, (vi) imports 60% of its food (vii) nearly all of its energy, iron ore, copper, tin, aluminum, nickel, uranium. (viii) Longest life expectancy, (ix) lowest infant mortality, (x) smallest per capita prison population, (xi) one of most equal income distribution among industrialized countries GDP : $5.869 trillion (2011 est.) GDP per capita: $35,200 (2011 est.) Growth rate: -0.7% (2011 est.) Labor Force: 65.93 million (2011 est.) Unemployment Rate: 4.6% (2011 est.) Population Below Poverty Line: 16% (2007) Distribution of family income- Gini Index : 37.6 (2008) Inflation Rate: -0.3% (2011 est.) Current Account Balance: $120.5 billion (2011 est.)

Japan Brief History

(i)700-1603 AD. Monarchy, Jap. Lived in a chronic state of civil war. (ii) 1603-1867 AD: The Tokugawa shogunate (a military-led, dynastic government), provided 250 years of political stability, peace and law and order but imposed a feudal economic order and policy of total isolation from the outside world. . (iii) The Japanese people developed culturally and achieved a relatively high rate of literacy but fell behind West in science and technology. (v) Japanese became aware of their backward state in in 1853 when Commodore Perry arrived with his fearsome fleet of steam powered ships, (vi) delivered a letter from US president Franklin Pierce demanding the opening of trade relations. (vii) Japan opened its ports after signing the Treaty of Kanagawa with the US in 1854 and began to intensively modernize and industrialize. During the late 19th and early 20th centuries, Japan became a regional power that was able to defeat the forces of both China (1892) and Russia (1902). It occupied Korea, Formosa (Taiwan), and southern Sakhalin Island. In 1931-32 Japan occupied Manchuria, and in 1937 it launched a full-scale invasion of China. Japan attacked US forces in 1941 triggering America's entry into World War II - and soon occupied much of East and Southeast Asia. After its defeat in World War II, Japan recovered to become an economic power and an ally of the US. While the emperor retains his throne as a symbol of national unity, elected politicians hold actual decision-making power.

Japan Economy: Introduction

In the years following World War II, government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (1% of GDP) helped Japan develop a technologically advanced economy. Two notable characteristics of the post-war economy were the close interlocking structures of manufacturers, suppliers, and distributors, known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force. Both features are now eroding under the dual pressures of global competition and domestic demographic change. Japan's industrial sector is heavily dependent on imported raw materials and fuels. A tiny agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. Usually self-sufficient in rice, Japan imports about 60% of its food on a caloric basis. Japan maintains one of the world's largest fishing fleets and accounts for nearly 15% of the global catch. For three decades, overall real economic growth had been spectacular - a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s.

Japan Economy: Introduction

Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of inefficient investment and an asset price bubble in the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor. In October 2007 Japan's longest post-war period of economic expansion ended after 69 months and Japan entered into recession in 2008, with 2009 marking a return to near 0% interest rates. The Japanese financial sector was not heavily exposed to subprime mortgages or their derivative instruments and weathered the initial effect of the global credit crunch, but a sharp downturn in business investment and global demand for Japan's exports in late 2008 pushed Japan further into a recession. The 10-year privatization of Japan Post, which has functioned not only as the national postal delivery system but also, through its banking and insurance facilities, as Japan's largest financial institution, began in October 2007, marking a major milestone in the process of structural reform; however, in December 2009, the Democratic Party of Japan-led government passed a law to freeze future sales of Japan Post shares, halting the privatization process begun by Liberal Democratic Party governments. Debate continues on the role of and effects of reform in restructuring the economy and funding to stimulate consumption in the face of a tight fiscal situation.

Japan Economy: Introduction

Measured on a purchasing power parity (PPP) basis that adjusts for price differences, Japan in 2011 stood as the fourth-largest economy in the world after second-place China, which surpassed Japan in 2001, and third-place India, which edged out Japan in 2011. A sharp downturn in business investment and global demand for Japan's exports in late 2008 pushed Japan further into recession. Government stimulus spending helped the economy recover in late 2009 and 2010, but the economy contracted again in 2011 as the massive 9.0 magnitude earthquake in March disrupted manufacturing. Electricity supplies remain tight because Japan has temporarily shut down almost all of its nuclear power plants after the Fukushima Daiichi nuclear reactors were crippled by the earthquake and resulting tsunami. Estimates of the direct costs of the damage - rebuilding homes, factories, and infrastructure - range from $235 billion to $310 billion, and GDP declined almost 0.5% in 2011. Prime Minister Yoshihiko NODA has proposed opening the agricultural and services sectors to greater foreign competition and boosting exports through membership in the USled Trans-Pacific Partnership trade talks and by pursuing free-trade agreements with the EU and others, but debate continues on restructuring the economy and reining in Japan's huge government debt, which exceeds 200% of GDP. Persistent deflation, reliance on exports to drive growth, and an aging and shrinking population are other major long-term challenges for the economy.

People, Work Ethics, and Groupism

1.The People: ( i) An island people, poor in natural resources, developed hard working habits to compensate (ii) WWII carnage, destruction, necessary to work hard (iii) developed a remarkable uniformity in race, language, and culture (iv) This, in turn, encouraged the development of a social philosophy known as groupism . 2. Groupism: a social philosophy that elevates the importance of group over the individual. 3. Benefits of Groupism: (i) Encourages a tight system of familial and social obligation ( divorce low and eldely live with families) (ii) familial relations extend into the business world (iii) The individual worker, company, Zaibatsu all derive security, stability (individual from family and company, company from a loyal employee and Zaibatsu, and Zaibatsu from member companies and government) (iv) The system of familial relations encourages resolution of conflicts through conciliation and compromise rather than conflict and litigation. (Japan has less lawyers than one US city Philadelphia, PA.

Groupism
4. Burdens/Costs of Groupism: (i) low level of occupational, social and managerial flexibility. ( elder son must take over after fathers death even if he does not like the occupation, a zaibatsu member company must buy/sell deal with companies within the Zaibatsu even if better deals possible with outside companies. (ii) Excessive conformity which may discourage individual initiative and creativity. Education system , respect for authority, less initiative and critical thinking. Yet, an unsurpassed nation of assimilators (iii) Japanese engineers have mastered technologies from other countries, incorporated them into marketable products and developed sequential improvements in quality standards and production processes. These incremental innovations are the essence of success in competitive process.

Meiji Reforms of 1867

Meiji Reforms of 1867: (i) 1867 Tokugawa military dictatorship overthrown, monarchy restored and young emperor Meiji came to power (ii) open door to foreign trade (iii) abolished feudalism.(iv) Serious attempts made to close gap between Japan and the West (v) legal equality and freedom to choose occupation (vi) agricultural land distributed among peasants (vii) monetary taxes replaced with taxes in kind (viii) all internal travel restrictions abolished (viii) Primary education with western curriculum made compulsory (ix) foreign teachers, consultants, corporate officials employed. (x) government established many large state owned businesses.

Japans Growth Since WWII: Contributors

(1) Outbreak of Korean war 1950s : Us recognizes the importance of Japan as an outpost against communism in the Far east, Japan now considered an ally not an adversary. (2) Growth of Capital Stock: High rate of K accumulation driven from high saving rates caused by (i) modesty of social security system (ii) bonus income (20% USA 1%) (iii) tax exempt saving accounts in post offices (iv) low overall tax burden (v) increase in consumer spending< increase in income. (3) Knowledge, technology, factor productivity: (i) intellectualism of Confucian heritage (ii) realization human resources are the only resource that Japan has (iii) LTE encourages employees to accept new technology (iv) LTE encourages employers to provide more training. (4) Growth in Quantity and Quality of Labor: (i) Low rate of unemployment contributed to quantitative growth of labor (ii) low UE due to LTE and flexibility of bonus and wages (iii) Confucian culture and fact that labor Japans only natural resource encouraged improvement of education, thus quality of labor. (5) Expansion of Markets: Domestic and foreign demand up after the war destruction, Korean war. (6) Systematic Movement of workers from low productivity agriculture to high productivity industry.

Bubble Economy (1985-89)

(i) 1980-1981s recession USA and Japan (ii) 1983-84 recovery (iii) Imbalance in US-Japan trade,
US imports from Japan>US exports to Japan (iv) 1985 Plaza accord, Yen appreciated, dollar depreciated (v) Expansionary monet. policy, MS increase, interest rates decline to stimulate domestic demand (vi) easy money policy triggered one of the most remarkable episodes of financial speculation in world history. (vii) Value of commercial property in central Tokyo increased ten fold 1985-89 (viii) The aggregate real estate value of Japan was 4 times larger than the value of US (ix) Govt. allowed Jap companies to take out bank loans backed by inflated real estate wealth to purchase securities. (x) Jap PER 54) US PER 15)(xi) with confidence in their economy and encouraged by the increased value of real estate and securities, Jap consumers and purchasers of K equipment went on a buying spree. (xii) During the first 5 years it was possible to argue that high asset prices were sustainable based on expectations of future earnings. (xiii)When prices continued to climb 88-89 the speculative nature of the boom grew increasingly evident (xiii) May, 1989 BOJ shifted to a more restrictive monetary policy and increase interest rates (xiv) The expansion paused and then the bubble burst (xv) Between 1989-96 real estate and stock price fell by 50%, bad debt, bankruptcies of borrowers and lending institutions (xvi) Reversal of consumer and investor expectations, full fledged recession and high rates of unemployment.

Japans Industrial Organization

Japans Industrial Organization: (i) In an average J industry, 27% output by 1, 54% by 3, 83% by 10 largest companies (ii) Level of concentration higher than USA (iii) Japan firms among the world 100 largest: 1965 (2), 1970 (8), 1990 (16), 1995 (37) (iv) Ind. concentration began in 1880s when Some nationalized Cos. bought by wealthy Jap. families from gov. Eventually conglomerates called Zaibatsu. (vi) Zaibatsu organized around a family owned holding company that controlled shares in smaller subsidiaries, suppliers. (v) Zaibatsu are close interlocking structures of manufacturers, suppliers, and distributors. (vi) Zaibatsu bank provide financing for the firms in the group, trading company handled intelligence and marketing functions for the entire group. (vi) During US administration, efforts to create a more competitive and decentralized economic structure, Zaibatsu broken up. (vii) 1952, Jap. Govt. relaxed anti trust laws. Zaibatsu name changed to Keiretsu. (viii) Today nearly all the large and midsize Jap enterprises connected to one or more keiretsu organizations. (ix) The Keiretsu include banking cos., manufacturing , general trading, and financial companies.

Industrial Organization
(x) Just in time (kanban) system allows dominant firm to shift costs of handling inventories to subcontractors. During recession large firms able to maintain employment by lowering amount of sub-contractors. (xi) Toyota as head of production Keiretsu owns stocks in many of the 230 regular suppliers that produce about 75% of tools and materials that Toyota needs to build a car. 140 of these factories located in Toyota city company complex near Nagoya. (xii) By working closely with its subcontractors Toyota able to exercise strict control over product quality, can adjust production more rapidly in response to consumer demand and maintain small inventories of parts and finished vehicles through Kanban system. (xiii) Japanese companies do not join Keiretsu to earn monopoly profits, instead members seek the security and stability that of a family relationship. (xiv) Zai Kai: Large corporations wield an unusual measure of influence over govt. through their participation in 4 big business federations whose leaders are known collectively as Zaikai. Prominent members of Zaikai hold regular meetings with govt. officials and serve as chairmen of advisory boards and panels of government agencies. Senior bureaucrats allowed to retire into well paid jobs in the private sector in exchange for favors.

Japan Labor Markets

The Labor Markets in Japan: (i) Before WWII no success in unionization (ii) US introduced reforms to weaken Zaibatsu and to guarantee basic rights to labor organization and unionization (iii)1948, 50% of LF unionized (iv) 1950s and 1960s unions weakened due to influence of LDP and association of labor with socialism/communism (v) 90 % unions comprehensive enterprise based, include all blue collar and white collar workers (vi) 1987 all private sector unions merged into a single federation RENGO (coalition), 1989 RENGO expanded to include public sector employees. (vii) The Spring offensive: Shunto(a) Each December/January RENGO announces targets for basic wage increases (b) These countered by recommendations from Nikkeiren (federation of employers association) (c) March-April the unions stage a 1-2 day strike demonstrations to assert their solidarity (iv) Next negotiations conducted at industry level and settlement reached at company level (v) Shunto process allows the Japanese labor market to work smoothly generating reasonable wage increases and limited strike activity.

Labor Markets
Life Time Employment: (i) Permanent commitment system of employment . (ii) Corporations and selected employees are honor bound to maintain their employment relationship until retirement. (iii) Company promises : it will not dismiss the employee except under extreme circumstances (embezzlement) (iv) the employee pledges: will not abandon the co. for a more attractive job. LTE Positives: (i) security to both (ii) worker loyalty, less labor unrest, labor willing to participate after working hours (iii) System explains Japans quick assimilation of production technologies (iv) Employees do not resist introduction of new technology and innovations that make their jobs easier (v) Employers willing to spend time and money to train their employees for new technology knowing that the company will benefit/employees stay (not look for another job) LTE Negatives: (i) From Employer perspective: incompetent, unmotivated, and redundant employees must be retained (ii) From employee perspective: difficult to leave a job for a better one (survey 59% Japan workers, 89% Americans happy with their jobs) Seniority Pay and Bonus wages: (i) Seniority system reinforces the loyalty of employee as costly to lose seniority with a change in job . But seniority pay decreases loyalty of employer, older higher paid workers forced to retire early. (iii) Bonuses to all regular employees from janitor to the president. Production workers in manufacturing sector paid 20% of income paid in compensation compared to only 1% in USA. A larger % of income from bonuses is saved compared to regular income.