NAME: Sulagna Maitra

STUDENT ID: 06T1103

COURSE NAME: The Japanese Economy in the World Economy
PROFESSOR: Moghbel Zafar
DATE: 25. 1. 2007

KEY WORDS: Bubble, Economic Growth, Inflation, Globalization, Population.

1. BUBBLE: The word “Bubble” in the context of the Japanese economy refers to the
period following the Plaza Accord until the mid- 1990s when the value of stock and
assets grew at a rate that was inherently unsustainable. During this period the Japanese
economy was characterized by soaring land and stock prices, deregulation and low
interest rates. Actually the process began in the 1970s when the government began to
deregulate financial markets which in turn allowed banks to actively seek out new
customers. During the mid-1980s, Japan’s monetary policy caused the money supply to
increase and interest rates to fall. The combination of these two actions led to the creation
of a speculative bubble, both in the stock market (fuelled by “zeitech” or financial
engineering and in land. However by 1989, the government, uneasy with the soaring
stock prices, tightened its monetary policy to arrest the rise in prices of assets. Higher
interest rates, in turn, set the stock prices on a downward spiral and by end of 1990, the
prices in the Tokyo Stock Market had fallen by 38% while price of land assets also
plummeted. This plunge into recession is known as the “bursting of the bubble”.
2. ECONOMIC GROWTH: Economic growth may be defined as the increase in the value
of goods and services produced by an economy. Conventionally, it is measured as the
percentage rate of increase in real Gross Domestic Product or GDP. In the Post War
period, the Japanese economy grew very rapidly from the 1960s through the 1980s. In
1960s, the growth average was around 10%, 5% in the 1970s and at around 4% average
in the 1980s. This was followed by a period of virtual economic stagnation in the 1990s
due to the after-effects of the “bursting” of the Bubble. Economic recovery of Japan at
the dawn of the 21st century was adversely affected by a slump in the global economy.
However, since 2006, the economy of Japan is again showing signs of recovery. In fact,
Japan's economy grew faster than it previously thought in the first quarter of 2006 - rising
by an annualized rate of 3.1%.
3. INFLATION: The International Monetary Fund defines inflation as the annual percent
change in the prices of goods deemed necessary for life in that country. The specific
goods included in this "market basket" change only rarely, so this measure reflects
fluctuation in purchasing power of the national currency. Japan experienced extremely
high inflation after the first Oil crisis in October 1973. As a result Japan recorded
negative economic growth in 1974 for the first time in the post-war period. High inflation
rates were overcome by consciously shifting Japan from an energy dependent to an
energy saving economy. Conversely, inflation rates were close to zero even during the
bubble period in late 1980s and remained below zero since the later half of the 1990s. In
the past few years, however, inflation rates have shown an upward trend which has
prompted speculation that interest rates in the country may soon rise from record lows.
The relief is that the Japanese economy has recorded continuous growth for more than
five years despite flat consumer prices and low consumer spending.
4. GLOBALIZATION: Broadly, globalization refers to the deepening of economic ties
worldwide resulting from intensified cross-border movement of capital and labor force,
increased transactions of commodities and services through trade and expanded overseas
investment. The World Bank defines globalization as the "freedom and ability of
individuals and firms to initiate voluntary economic transactions with residents of other
countries." The globalization of the Japanese economy, in the post War period may be
traced back to the 1970s when Japan adopted the floating exchange rate system. Scholars
have identified four main characteristics of globalization in the Japanese economy. First,
the transition to the floating exchange rate system that led to a considerable appreciation
of the yen and greatly impacted the economy. Second, the advancement of Japan’s
industrial and trade sector and the corresponding diversification of trade from USA to
East Asia. Third increase in equity investments from abroad in Japan. However, Japan’s
international financial and capital investments have been stagnant for some time. And
finally, the level of globalization of the Japanese economy by no means equals that of
Europe or the USA.
5. POPULATION: Japan has traditionally been a country with a high density of population.
In the post War period, the population of Japan surpassed the 100 million mark (1967).
However, Japan's population growth has slowed down ever since with the annual pace of
population growth averaging about one percent from the 1960s through the 1970s. From
the 1980s, it has declined sharply. The population figure of 127.76 million released in the
2005 Population Census was below the 2004 population estimate (127.78 million). This
marked the first time since World War II that the population has fallen compared to the
previous year, and the beginning of a population decline in Japan. Another disturbing
trend is that the speed of aging of Japan's population is much faster than in advanced
Western European countries or the U.S.A. In 2005, the population of elderly citizens (65
years and over) was 26.82 million, constituting 21.0 percent of the total population and
marking record highs in both number and percentage terms. On the other hand, the
percentage of the younger age population in Japan (0-14 years) has been shrinking since
1982. In 2005, the younger age population amounted to 17.40 million, accounting for
13.6 percent of the total population, the lowest level on record since the Population
Census began. The working-age population (15-64 years) totaled 83.37 million,
continuing its decline from the year before. A fast aging population in Japan poses the
problem of a greater burden on the shrinking work force of the country and at the same
time increase the government expenditure on social security.