Jamar Johnson, Economic Environment and Country Analysis, IE Business School

March 2013

How did Japan perform until 1991? How do you explain this performance?

The performance of the Japanese economy from the 1970s, up until the recession
of 1991, was nothing short of sensational (See Annex 1). From structural institutions
tailored to the needs of the business market, to a highly-skilled labor market, and
effective corporate governance in place, the Japanese economy was equipped to be major
player in global business on par with many Western markets. Japans resurgence,
economically, existed in its ability to work toward its unified national goal by looking
long-term and tapping into financial resources paired with its unique vision for the
futurei.
Before major economic change could be implemented, it was important for
Japanese bureaucrats to determine which industries would serve as an asset to transform
this former feudal society into a world-class player through export trading. This
responsibility was placed with the Ministry of International Trade (hereafter MINI)ii. This
government agency was characterized as, us[ing] its control over trade and investment
to pick and support a handful of industries for leading Japans export-oriented
growth.iii In addition, MINI and its subcommittee not only sought out additional
industries showing tremendous upside to Japan as telecommunications and service, but
this government-body worked to adopt then-considered sophisticated economic practices
found elsewhere in the world to foster innovation and free-market competition such as
deregulation, promotion of competition, and [the] acceleration of intellectual-capital
formation.iv
Japanese businesses also received substantial local support provided by keiretsus.
This local corporate structure allows for the interlocking of equity interest amongst
Japanese-based businessesv. Free from the external sentiment of stockholders, market
fluctuations, and investor pressures as commonly found in the West, Japanese business
owners effectively insulated themselves to achieve long-term corporate objectives during
the 20th Centuryvi. Another benefit to Japans unique finance borrowing was the tax
incentives the government provided corporations incorporating the practice of keiretsu.vii
Lastly, and albeit controversial, amakaduris worked to protect and enhance the business
interests of private sectors in its dealings with the Government of Japan. It is important to
mention that the above mechanisms allowed for Japan to reach its collective success.

Why has Japan stagnated since 1991? Why does neither fiscal nor monetary policy
seem to work?
Since 1991, Japan has applied much effort to surmount its economic deficits and
spells with periodic recession. There are many causes to the foregoing. Ironically, many
of the government institutionssuch as the Bank of Japan and MITI-- helped to facilitate
Japans meteoric rise, can it serve as one of the blames for its eventual stagnationviii. For
instance, agencies that once served to propel Japans competitiveness within the global
business community ultimately transitioned to hubs for bureaucratic infighting and policy
bottlenecks.ix
In the past, a general consensus required within many bureaucratic institutions of
Japan ensured that policy proposals were well-reasoned, examined to maximize
feasibility, and supported among leading figures within the business community to move
forward. Unfortunately, as the influence of bureaucrats and grew, so did institutional
inefficiency thereby curtailing the ratification of progressive economic policies.
In relation to international trade, a weak Yen, commonly known as en'yasu, had
served as a boon for remarkable GDP growth (See Annex 2). However, after 1991, the
opposite happened. Endaka is a state in which Japanese Yen increases in value in relation
to global currencies (See Annex 2). The hike of the Yen spelt less competitive exports for
the Japanese economy (See Annex 3). Together with the issues affecting the Japanese
Yen, there were also many social issues which have compounded their economic
challenge. From 1991 and onwards, the increased standard of living, pension costs, and
an ever-growing aging population has added additional pressures to Japan. In Annex, 6,
we that nearly 20% of government subsidies were allocated to care for Japans elderly
and will increase in the coming decades.
Quite expectedly, this trend will continue in the coming decades. More pointedly,
from 1975 up until 2005, Japan has experienced a population increase of close to 100%
(See Annex 4 and 5). x Adjacent to its surge in population, Japan also suffers from major
barrier to entry obstacles which stand in the way for free-market competition and
entrepreneurship compared to many other advanced market nations.xi In conclusion,
Japan must work to integrate its structural components and social institutions in line with
the current global economy; should it seek to achieve long-term growth.

How long can Japans current account remain in surplus? Is this a good time to buy
Yens (assume that we are at the time of the case)?
Judging from the economic performance of Japan in terms of GDP in comparison
to the global economy and its strengthening Yen against the U.S. Dollar (See Annex 7
and 9 ), I contend that buying Japanese Yens on the exchange markets are for individuals
with an enormous appetite for risk. A weakened Yen is a boon to Japanese traditional for
export-led growth (See Annex 8). From a geo-political perspective, the bilateral relations
between Japan and China have been lukewarm, at best. This is mainly due to what the
Peoples Republic of China considers Japans predilection to engage in revisionist history
in response to War World 2 adjacent to its support of Taiwanese Independencexii.
In addition, China views Japan as not only a competitor to its economy, but a
strategic ally with the United States for balance of power in the region. Not to mention,
China has joined the United States and Continental Europe in accusing Japan of
participating in a veiled currency war for export advantages.xiii. This can spell a disaster
for current Japanese export-led growth if economically-allied countries enact policies to
curtail, what can clearly be perceived as asymmetrical tradingxiv.
In conclusion, it is important to note that the current surplus in which Japan is
enjoying is actually the lowest since 1985xv. The country faces great pressure from its
geo-political skirmishes, internal pressure of a growing economy, illiquid companiesxvi
and bank assetsxvii, and experiencing one of the lowest entrepreneurship levels
globally.xviii Should the tensions increase within the international economic community
and/or the clashes and threats occur with China, I am confident that the value of the
Japanese Yen will plummet. In light of the aforementioned, I think the Japanese Yen
would be a strong short-sell.

Ohmae, k. (1982), the mind of strategist: The art of Japanese business.1stedn, McGrow-Hill, Inc., New
York. Accessed on March 7, 2013.
http://www.economist.com/media/globalexecutive/books/mind_of_the_strategist_e_03.pdf
ii

Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published
on June 2, 2005. Accessed on March 5, 2013, pg. 7
iii
ibid
iv
Ibid

The Economist, Keiretsu Idea, Tim Hindle. http://www.economist.com/node/14299720. Accessed on

March 6, 2013.
vi
Dr. Jerzy Grabowiecki, Institute of Developing Economies. Keiretsu Group: Their Role in the Japanese
Economy and a Reference Point (or a Paradigm) for Other Countries.
http://www.ide.go.jp/English/Publish/Download/Vrf/pdf/413.pdf. Accessed on March 7, 2013.
vii

ibid

viii

Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published
on June 2, 2005. Accessed on March 5, 2013, pg. 7
ix
Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published
on June 2, 2005. Accessed on March 5, 2013, pg. 7
x

Japan Ministry of Internal Affairs and Communications, Statistics Bureau.

http://www.stat.go.jp/data/nenkan/pdf/z02-1.pdf. Accessed on March 6, 2013.

xi

OECD, Product Market Regulation Database, May 2011. Accessed on March 7, 2013.
Ministry of Foreign Affairs of the Peoples Republic of China, Some Sensitive Issues,
http://www.fmprc.gov.cn/eng/wjb/zzjg/yzs/gjlb/2721/2722/t15974.htm
xii

xiv

Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published
on June 2, 2005. Accessed on March 5, 2013, pg. 2.
xv
AFP, Japan current account surplus lowest since 1985,
http://www.google.com/hostednews/afp/article/ALeqM5jcQFyXcX8z-h9qAANkGYfNUO2eQ?docId=CNG.5150739a24f7c5dd770577f39274d37f.71
xvi

Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published
on June 2, 2005. Accessed on March 5, 2013, pg. 5.
xviii

Doing Business, Ease of Doing Business Ranking, http://www.doingbusiness.org/rankings.

Annex 1

Source: United States Louis Johnston and Samuel h. Williamson compilation of previous
historical estimates and National Accounts.
Annex 2

Source: The Japanese Economic Institute of America.

http://www.jei.org/AJAclass/JEcon20thC.pdf
Annex 3

Source: The Japanese Economic Institute of America.

http://www.jei.org/AJAclass/JEcon20thC.pdf

Annex 4

Annex 5

Source: Japan Ministry of Internal Affairs and Communications, Statistics Bureau

Annex 6

Source: Textbook for the 7th Study Programme for Asian Social Insurance Administrators, Japan
International Corporation of Welfare Services; The World Bank, Averting the Old Age Crisis, New
York: Oxford University Press, 1994.
Annex 7

Source: Asia Times, Time Running Out for Japan. Found at:
http://www.atimes.com/atimes/Japan/LI14Dh01.html

Annex 8

Source: Ronon Lyons, A Brand New Scare Graph, Japans Collapsing Exports
Annex 9

Source: Jerry Furst, InvestorsEducationNetwork.com