Response to Globalization: 1973 to the Present

The Japanese economic miracle ended in 1973 when some Arab nations embargoed oil due to their opposition to American and allied Middle Eastern policies and energy prices subsequently rose throughout the developed world. Still, Japan enjoyed the highest average annual growth rates for a developed country all through the 1970s and 1980s. By the 1980s, Japan then occupied second place only to the United Kingdom as a foreign investor in the United States and trailed only Canada as a U.S. trading partner. The United States was (and still is) the leading foreign investor in Japan, making the U.S.-Japan economic relationship one of the most important bilateral business and financial relationships in the world. Americans were buying enormous amounts of such high-profile Japanese-produced goods as automobiles and stereos.

Because the major developed economies were incurring merchandise trade deficits with Japan in the 1980s, they pressured the Japanese not only to open their markets but also to raise the value of the yen, which had been artificially low for some time. The Americans and Europeans hoped that a higher yen would help their trade deficits by making exports to Japan cheaper and Japanese imports more expensive. In the 1985 Plaza Accord, five major industrialized nations—the United Kingdom, the United States, West Germany, France, and Japan—increased the value of the yen, thereby threatening Japan’s export-sector growth.

The Japanese government responded a short time later by lowering interest rates and substantially increasing the money supply in order to prevent the value of the yen from rising so high as to inhibit exports and reduce domestic economic activity. This action led to an increase in bank loans and an economic bubble that caused rapid and astronomical rises in the prices of stocks and especially real estate. After the Ministry of Finance, fearing inflation, raised interest rates in 1990, the bubble burst and Japan’s real estate prices, which had risen in value to four times the value of U.S. real estate, collapsed and the stock market quickly lost about half its former value. Japanese real estate also plummeted in value. Japan’s banks were left with an unspecified but staggering amount of bad loans.

Although what occurred in 1990 was immediately triggered by mistaken government monetary policies, the bursting of the assets bubble was prolonged because of more deep-rooted structural defects in Japan’s economy. Japan, although far from economically collapsing, experienced more than a decade of relatively hard times compared to the rest of the postwar period. The 1990s and the first few years of the 21st century were marked by several recessions despite very low interest rates, record postoccupation unemployment rates, low and, at times, negative annual economic growth rates, and a major crisis of confidence on the part of both businesses and consumers. The 1990s economic malaise affected all sectors of the economy, but perhaps what was most striking was the blow suffered by Japan’s manufacturers. At the end of 1997, industrial production barely exceeded 1990 levels. The Japanese economy lost 1 million manufacturing jobs between 1992 and 1996 and continued to lose manufacturing jobs for the rest of the decade. Such Japanese blue-chip industries as Toshiba, Hitachi, and Nippon Electronic Corporation (NEC) as well as many other manufacturing firms suffered (Katz 1998, 10).

The economy began to recover from this long-term downturn only in 2003. By that time, the Japanese government was making significant progress in stabilizing the financial system and banks. Also, businesses throughout Japan were cutting costs in an effort to avoid bankruptcy or to become profitable again. Since then, for the most part, annual growth rates have returned to what would be considered normal for a developed country, Japanese enterprises reporting favorable business conditions have outnumbered those reporting unfavorable situations for several recent years, unemployment has declined to acceptable levels, and exports have increased. However, the Japanese economy is in the process of a broad structural transformation from what existed during the miracle years. This transformation is probably most vital for Japan’s continued prosperity but also promises to change the larger culture in substantial ways.

Most economists believe that Japan’s previously highly successful economy faltered in the 1990s because global and domestic economic circumstances had drastically changed. Increased globalization meant more intense competition between multinational corporations. Firms that could quickly lower a wide range of costs to meet the competition had advantages in the new economy. A wide range of economists and policy makers agreed that because of too much government direction, subsidies, and overregulation, Japan’s economy was not well-positioned to meet these challenges.

During the miracle years and beyond, Japan faced relatively little economic competition from Europe and most of Asia. The U.S. government considered Japan so valuable an ally in the Cold War that it gave, with some exceptions such as the ‘‘voluntary’’ automobile export limitations of the early 1980s, relatively low priority to Japan’s significant inroads into a few American markets. When the Japanese economy was experiencing its most dramatic growth, the global information technology revolution had not yet occurred. Business decision-making time horizons were slower, which meant that government and business could be deliberate in strategy consultations without overly worrying about foreign competition. Then globalization brought dramatic change. By the end of the 1980s, Japan was contending with new European competition as well as competition from such Asian countries as South Korea, Taiwan, and Singapore. The Cold War’s end meant that the United States, apparently freed from that profound national security concern, began to pay even more attention to economic competitiveness and to issues such as trade deficits with Japan.

In the 1990s, American businesses and companies began to exhibit dramatic growths in productivity and flexibility because the private sector was free to initiate an information technology revolution. In the early part of the 1990s, such newly industrialized Asian countries as South Korea were now also competing with the Japanese in manufacturing computer chips, stereos, and automobiles. Often hindered by government regulation, Japanese companies lost ground to the United States and other countries. Japanese top-down capitalism, with its myriad regulations and cartels for specific sectors of the economy, made flexible responses to foreign competition and entrepreneurship difficult.

In order to regain economic momentum, Japan needed widespread structural economic reform in a number of areas including banking, financial and capital markets, public works, employment practices, technology, regulation, state-run enterprises, higher education, productivity, and international trade and investment. Many of these reforms would have the effect of moving parts of the economic system away from the old government-directed capitalism and more in the direction of a system similar in many ways to what was formerly known as the Anglo-American model but now, in an era of globalization, has come to be known as neoliberalism. Neoliberal economies are characterized by more private-sector freedom and less government regulation. Reform efforts gathered steam during Japan’s economic stagnation years, and enough substantial progress has been made that Japan’s economy has recovered from the doldrums of the 1990s and the ensuing few years.

The problem of bad, nonperforming bank loans to questionable commercial borrowers that became evident after the real estate collapse was in large part caused by government monetary policies and by bankers who were encouraged by the Ministry of Finance to make loans. Bank officials also often based loans to private borrowers on such noneconomic reasons as common friendship ties or previous university or other long-term relationships. The solution to the bank loan problem was slow going until 1998, took until 2004 to largely solve, and included a variety of measures such as bank mergers, some bank closings, regulatory changes and tougher investigation, accounting practices, and monitoring. Prime Minister Koizumi, who provided much-needed stability and national leadership from 2001 until 2006, took on one of the biggest drags on the Japanese economy, the government-run Postal Savings Bank.

The government-run Postal Savings Bank—which possessed approximately $3 trillion worth of U.S. assets, about 30 percent of all Japan’s household assets, 35,000 offices, and 260,000 employees—performed the dual role of Japan’s largest savings bank and largest life insurer (Lincoln 2007, 34). This financial institution is one of the most affluent in the world. The Postal Savings Bank deposits, excluding insurance assets, are three times as valuable as deposits in the largest U.S. bank (Progressive Policy Institute 2006). The money that Japanese savers and life insurance customers put into the bank was funneled through the Ministry of Finance to a variety of government programs, which often resulted in unnecessary public works projects that benefited the construction industry but generally hurt the economy by diverting capital from more productive uses and subsidizing an already noncompetitive and inefficient industry. As discussed in a previous chapter, Koizumi successfully challenged a wide array of public and private special interest groups and began the process to transform this massive government agency into a public corporation that would make loan and investment decisions based on market forces and not politics.

As Japan continues the process of economic liberalization, some of the most profound transformations that have already begun and will continue involve the reconfigurations and more efficient use of a variety of resources, and it is to this topic that we now turn.