Rebuilding After the Bubble

Japan Map

Japan/China Map

I.      Introduction

A.  Admirers of the Japanese system recommended its:

1.   "Share economy" (bonus income based on enterprise performance), supporting full employment (Martin Weitzman)

2.   Cooperative government-industry relations, known as "Japan, Inc." (Chalmers Johnson). The Japanese export orientation and government-industry cooperation established a model of economic growth that has been emulated, with adaptations, in other Asian countries. 

3.   "Humanistic enterprise system," of lifetime employment and egalitarianism (William Ouchi, Robert Ozaki, and others).

B.  Critics have emphasized:

1.   Discrimination, long working hours, low standards of living, high suicide rates.

2.   Financial instability and stagnation since collapse of  "bubble economy."

3.   Political instability--seven prime ministers served during 1990s, and seven served during 2000-2012. Some stability restored when Shinzō Abe served from 2012-2020, making him the longest-serving Prime Minister in Japanese history. The current Prime Minister is Yoshihide Suga who was Chief Cabinet Secretary under Abe, suggesting continued stability.

Between 1955 and 2009, 22 of the 25 PMs came from the center-right Liberal Democratic Party. During 2009-2011, three PMs came from the center-left Democratic Party, but LDP rule was restored in 2012 with the selection of Abe and continues with Suga.

4.   “Crony Capitalism”—government protection of industry and finance

5.   Poor leadership for Asian recovery or trade liberalization.

II.  The Environment

A.  Little land or resources—import dependency

B.  Taming the Work Ethic

1.   Past refrain: "We must work very hard because we are a poor island nation." A new Japanese term, karo shi, was coined to mean "death by overwork," and now families are compensated by both the government and the employer for these deaths.

2.   Recent efforts to moderate work ethic:

Reduced the length of the standard legal workweek from 48 to 44, and then to 40 hours. Employees who work more hours are supposed to be paid overtime, and there's a legal cap on how many hours can be worked overtime. On the positive side, some firms are shifting to a 4-day work week to encourage employees to go home, and some are turning off their lights at night. In June 2018, the government passed a new labor law that limits overtime to 100 hours per month (a lot!), but included a loophole that allows white-collar workers to exempt themselves from that limit.

However, at many firms, staying within legal limits is considered a form of "disloyalty," and workers find ways around those limits -- for example, by working without clocking in. According to BBC, "Nearly a quarter of Japanese companies have employees working more than 80 hours overtime a month, often unpaid, a recent survey found. And 12% have employees breaking the 100 hours a month mark."

C.  Culture of Conformity – homogeneity and groupism - a hierarchy of family structures from the nuclear family up to the old "Japan Inc." 

D.  Poor Status of Women– According to the 2020 World Economic Forum index, Japan currently ranks 121st in the world - behind China (106), India (112), and the United Arab Emirates (120) - in gender equality. Women hold only 5% of seats on company boards, compared to 22% in the U.S. and more than 40% in France, Iceland, and Norway. The current controversy is the #KuToo movement, protesting rules that require women to wear high heels at work - even in some assembly-line jobs.

III. A Brief History

A.  Tokugawa era (1603) - Military dictatorship brought peace, law, order, and isolation.  In 1853, Commodore Perry demanded opening  trade relations. 

B.  Meiji reforms (1868) - Opened the door to foreign trade, equality of classes, eliminated feudal guilds, divided agricultural estates among the peasants, instituted monetary taxes, and established businesses and supported private industry through loans and subsidies.  Growth continued until 1938 and World War II.

C.  World War II - Destroyed 1/4 of buildings and 1/3 of industrial machinery.  Japan was not surrounded by other countries with expanding markets; recovery initially slow. U.S. occupation forces initially had little interest or expectation in quick recovery.

D.  Korean and Vietnam Wars - Increased demand for Japanese exports and caused the U.S. to see Japan as an important ally.

IV. The Economic Growth Miracle

From 1956 until the oil shocks that began in 1973, the Japanese economy grew at a rate of about 10%/year. According to econometric estimates, these were the major contributors:

A.  Growth of capital stock - The largest contribution to growth, supported by saving rate.

B.  Technology - 2nd ranking cause of growth was the contribution of knowledge and technology to factor productivity. Facilitated by the adoption of foreign technology.

C.  Labor - Growth in the quantity, working hours, and educational quality of labor was the third primary source of growth.  Low unemployment was promoted by the permanent commitment system and flexible bonus income.

V.  The Bubble Economy

Early 1980s -- Japanese growth was discouraged by U.S. recession 

1983-84 –U.S. recovers, Japan soars, but with trade imbalance.

1985 -- Plaza Accord -- Japan accepts large appreciation of the yen, compensating for slow export growth with expansionary monetary policy. Easy money triggered speculative bubble economy, with rising real estate and stock prices.

May 1989 -- Bank of Japan shifts to more restrictive monetary stance, causing bubble to burst. During 1989-1996, real estate and stock prices both fell by about 50 percent.

Japan Nikkei

1993-2002 – Annual GDP growth of only 1.2%, compared to 2.9% average for industrial countries.  Deflation started around 1999 and has recurred during many years.

Japan Inflation
Source: OECD from FRED database (online)

December 2012 -- Shinzo Abe became Prime Minister and introduced "Abenomics," characterized by "three arrows:" 1. Pressuring the Bank of Japan to launch aggressive monetary easing and setting a target of 2% inflation to support a target of 2% real GDP growth (4% nominal growth); 2. deficit-financed supplemental government budget with new public works spending; and 3. a program of structural reforms to achieve growth through stimulating private investment. However, the Ministry of Finance failed to follow a vigorous  fiscal policy, and structural reforms moved slowly. So the main policy instrument was a late-in-the-game expansionary monetary policy, including  a negative interest rate policy that managed to push inflation above 2% in 2014, but then it fell below 1% again during 2015-2017. Many commentators have concluded that Abenomics was not sufficiently comprehensive and bold to meet the demands of the Japanese economy.

NOTE: The Japanese experience with deflation had a major impact on the U.S. response to the recent recession.  See Ben Bernanke's 2002 speech, "Deflation: Making Sure 'It' Doesn't Happen Here": high real interest rates, high cost of repayment in valuable money, delayed purchases, complication of monetary policy.

Along with deflation, the declining population in Japan (currently falling by 400,000 per year), caused by low fertility and marriage rates and unwillingness to accept foreign workers, have been considered major causes of declining economic growth. In December 2018, Abe pushed through the parliament a controversial bill to accept 345,000 foreign workers over the next five years and to simplify the procedures for them to renew visas. To address concerns that the immigrants would depress wages for Japanese workers, the new law stipulates they must be paid the same as their Japanese peers.
In 2020, the Ministry of Economy, Trade and Industry published an interesting Handbook for the Employment of International Students and Empowerment after Hiring .

Japan: Annual Growth of GDP
1951-2023 (%)
(actual and forecast)

Japan GDP Growth
Source: Penn World Tables and OECD Economic Outlook, December 2021


Japan and S. Korea: Working Age
(15-64) Share of Population

Japan Korea Working Population

Unmarried Women in Japan, 1965-2005

Japan Unmarried Women

Foreign-Born Population
in OECD Countries, 2013
(% of total population)

Foreign Born Population 2013

Source: OECD

Japan Population Forecasts
Japabn Population Forecasts

VI. Industrial Organization

A.  Big Business

1.   Zaibatsu - Family-owned holding company controlled shares in a diversified group of industrial corporations, trading companies, and banks.  After the war, American-written anti-trust legislation dissolved holding companies.

2.   Keiretsu - Created after WWII, these groups usually involve cross holdings of stock, interlocking directorates, presidents' clubs, and other cooperative arrangements.

a.   financial keiretsu -- Mitsui, Mitsubishi, and Sumitomo, which were formed by regrouping former zaibatsus, plus Fuyo (or Fuji), Sanwa, and Dai-Ichi Kangyo—include manufacturing firms and also banks, insurance companies, and trading companies.

b.   production keiretsu – a large industrial concern and its subsidiaries and subcontractors, with tight, stable relationships, such as Toyota. Able to use just-in-time (kanban) system, shifting the inventory cost to subcontractors.

c.   distribution keiretsu -- exclusive organization that moves products from manufacturers to consumers. Operating like networks of company-controlled auto dealerships in the United States, these are found in the automotive, cosmetic, electrical, and electronic sectors in Japan.

3.   Results -- Japanese companies apparently did not join keiretsu groups to earn monopoly profits, but to provide the security and stability of a family relationship. [UPDATE]With rising competition since the rise of China, that security system has broken down. According to Forbes:
"The keiretsu system reached its peak in 1988 when 55% of all floated TSE stock was held in keiretsu cross-shareholdings. However, as Japan’s economic fortunes declined in the 1990s, cracks began to appear and both the cross-shareholdings and the keiretsu system began to unwind. Over the next 20 years, the flagship firms began squeezing their mid-sized suppliers, forcing them to operate and innovate with smaller teams and tighter margins. The keiretsu also began to diversify their supply chains and source extensively from China and Southeast Asia. Today, those annual sales guarantees are quickly disappearing, and Japan’s mid-sized manufacturers are being forced to learn sales and marketing or to go out of business."

Some of them, for example, are now supplying Apple for the iPhone: "More than 700 companies are involved in the manufacture of an iPhone, and unsurprisingly about half (349) of these companies are in China. In second place, however, is Japan with 139 firms, followed by the U.S. with 90."

While the old keiretsu system has yielded to foreign competition, other recent research suggests that a new, more flexible and competitive keiretsu system has arisen. "Over the past two decades Toyota’s suppliers’ association (kyohokai) has remained quite stable: From 1991 to 2011 fewer than 20 of about 200 companies withdrew. From 1991 to 2010 the average sales-dependence ratio (the revenue from Toyota-related business as a share of total revenue) of 44 of the company’s suppliers has remained about 80%, even as Toyota has expanded its sourcing pool."


B.  Small Business - 99% of Japanese companies, employing 75% of work force, employ fewer than 100 workers.

1.   Subcontractors - 2/3 of small firms in manufacturing.  Large firms shift the cost of holding inventories to subcontractors, and maintain their "permanent commitment" employment by adjusting the use of subcontracting.

2.   Retail stores - Average store has only 4 employees. Remained small because of limited auto ownership and bureaucratic obstacles.

III.       Labor Market and Labor Relations

A.  Collective Bargaining

1.   Unions - Comprehensive enterprise-based unions, affiliated with industrial, regional, and national federations.  Labor-management disputes are generally kept within family companies. 

2.   Spring Labor Offensive - December/January, labor federations target basic wage increases. April, unions stage brief strikes and demonstrations.  Coordinated negotiations between national labor and employer confederations.

B.  Lifetime Employment

1.   Coverage - Male employees in larger corporations.  About 25-30 percent of labor force.  During the 1990s, the proportion of long-tenure (10-year plus) workers was 43% in Japan, compared to 26% in the U.S. Women historically excluded--until recently, participation rate during early marriage dipped below 50%.  It still dips, but not as deeply, and overall female participation has risen above U.S. levels:

Japan US Female Labor Partic 2010      Japan US Female Labot Partic 2019

Source: International Labor Organization ILOSTAT database

2.   Benefits 

a.   Security and loyalty of workers who are covered. 
b.   May contribute to adoption of technology because workers have little fear of technological unemployment and employers know their company will benefit from training.

3.   Problems -

a.   To employers--redundant, incompetent, unmotivated workers retained, sometimes in meaningless jobs.

b.   To young employees--difficult to leave for a more attractive job. 

c.   To older employees and workers not included in system-- greater job uncertainty.

d.   For these and other reasons, the conventional wisdom has suggested that the system was in decline, but recent (2015) research by Japanese authors suggests that it has changed very little while employment has grown more insecure in the U.S..

UPDATE: Wall Street Journal, 4/11/2018: More people are switching careers at for new opportunities, and more companies are willing to hire them because of scarce talent, however:
"many companies resist the idea of midcareer job-switching... The number of employees switching jobs annually is still less than 5% of the Japanese workforce. In 2016, the average worker in Japan had been at one company for about 12 years, compared with an average 8.6 years in the U.K., according to official data. The U.S. Bureau of Labor Statistics doesn't report average employee tenure, but the median U.S. figure was 4.2 years in 2016. "Employees will see their salary more than double if they continue working for 20 years, so they don't have the incentive to think about changing jobs," said Ryo Kambayashi of Hitotsubashi University. .

C.  Seniority Pay - Wages are determined largely by the length of service of the employee.  Reinforces employee interest in lifetime employment, but reduces employer interest.  System is in decline.

D.  Bonuses - Account for 20% of pay in manufacturing.  Significance:

1.   Employee motivation. 

2.   Saving - If the bonuses are regarded as transitory income, permanent income hypothesis suggests that a large portion of the bonus income will be saved.

3.   "Share Economy" - Weitzman claims that bonus system explains low Japanese unemployment.  In share economy, profit maximizing employers would expand employment and output until "every qualified person" has a job. Critics say that bonuses are negotiated in advance, so they aren’t true share contracts, and that Weitzman's theory cannot explain the Great Depression and takes little account of expectations or uncertainty.

IV. The Financial Sector

A.  Ministry of Finance (MOF) -- exceptionally broad authority, including influence over fiscal and monetary policy and informal administrative guidance of financial institutions.Reformers wish to reduce its power.

B.  Bank of Japan -- central bank, led by seven-member Policy Board, is formally independent, but informally subject to the MOF. Because securities markets developed slowly, the Bank uses discount lending, rather than open market operations, as its primary tool, and uses it to support industrial policy through moral suasion, or window guidance, of banks.

C.  Commercial banks – provide large share of company financing, again, because of  limited securities market.

1.   City banks -- among most powerful financial institutions in the nation, with nationwide branches. Serve large and upper-middle-sized corporations.

2.   Regional banks -- branches in single city or prefecture. Serve small and lower-middle-sized companies.

D.  Long-term credit banks -- underwrite securities and finance fixed capital investments

E.   Governmental financial institutions -- Japan Development Bank, the Export-Import Bank, Small Business Finance Corporation, and Housing Loan Corporation. These are financed through the Fiscal Investment and Loans Program (FILP), prepared by the Ministry of Finance. Thus, the government has been able to use lending as an important lever to implement its industrial policy. Operating in 24,000 post offices nation wide, the largest financial institution in the country is the Japanese postal savings system, which encourages saving with services and tax breaks. Because of scandals in recent years, it is being transferred to private ownership through a "murky" privatization.


V.  The Government

A.  Views of Governmental Role

1.   Conservatives - Point to conventional measures of government influence, such as taxation, and claim that the Japanese success was based on a limited government. 

2.   Japan, Inc. - Government is "corporate headquarters" where policy is planned and investment decisions are made.  Understates the influence of the business community on the government. 

B.  Economic Planning - The Economic Planning Agency solicits proposals from business, labor, government, and academia.  It provides information and improve communication between all segments of the economy.  Adherence is voluntary. Targets were exceeded in 1960s and during the Bubble era, but underfulfilled in 1970s and 1990s.
UPDATE:  In 2001, the Economic Planning Agency was merged into a new Cabinet Office, and particularly its Council on Economic and Fiscal Policy, that serves as a "brain trust" for  newly strengthened role of the Prime Minister (now able to direct the work of ministries and to make decisions on matters for which there is no consensus in the ministries).


C.  Industrial Policy - Administered (far less aggressively than in the past) by Ministry of Economy Trade and Industry (the former Ministry of International Trade and Industry. Designates industries for priority development based on growth potential and contribution to growth of other sectors.

1.   Proponents - Japanese success required governmental direction, support, and socialization of risk.

2.   Critics - Japan succeeded in spite of industrial policy.  MITI picked corporations like Sony and Honda as "losers".  MITI is not as powerful as it seems.  Tax concessions are not as important in a system of low tax burdens and only a small portion of industrial investment is financed by government money.  In recent years, pressure has mounted for deregulation and less cronyism.

D.  Fiscal, Monetary, and Trade Policy - Monetary and fiscal policy are normally directed by Ministry of Finance.  Budget approved by the cabinet and the Diet.  Monetary policy is executed by the Bank of Japan, and has generally been accommodative.  

E.   Redistribution of Income -- Rapid economic growth caused property income to rise rapidly, causing income some inequality. However, the World Bank estimate of the Gini coefficient for Japan is a relatively egalitarian 33%- similar to those for France and Germany. Perhaps explained in part by a cultural norm against high executive pay. Median compensation for U.S. CEOs is 9 times larger than for Japanese CEOs.

1.   Taxation - Has a relatively small role in income redistribution.  Personal tax rates are highly progressive, an unusually large proportion of tax receipts come from business profit taxes, and a small proportion comes from the regressive consumption tax.  Furthermore, the overall tax burden is relatively light.

2.   Transfers - Government has paid relatively little attention to income redistribution because families and businesses take care of their own.  Social security costs are increasing as a growing percentage of the population reach retirement age.