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Historical Development, The Era of Slower Growth

dual economy, fixed exchange rate system, Japanese industries, hidden ways, efficient economy

In the fall of 1973 the first oil shock set off a global recession. Japan’s GDP declined for the first time since postwar recovery. Then, from 1975 to 1990, Japan’s economy grew at 4 percent, just half of its pre-1973 rate.

While the oil shock triggered the end of high growth, fundamental trends were slowing Japan’s growth anyway. Most importantly, once a country’s industrial takeoff is completed, growth always slows dramatically. In addition, the fixed exchange rate system, which had held the value of the yen (Japan’s basic unit of currency) steady since the end of the 1940s, ended in 1971. The value of the yen rose, raising the price of Japanese exports, which caused sales of Japanese goods overseas to slow. From 1972 to 1990, exports grew at half the rate they had during the high-growth era.

In response to the oil shocks of 1973 and 1979, Japan conserved on energy. It also shifted much of its manufacturing from resource-intensive products such as steel to more capital-intensive and knowledge-intensive products such as cars, consumer electronics, and computer chips.

Despite the economic setbacks of the 1970s and 1980s, Japan seemed to be doing very well. Its growth rate was the highest of the major industrialized countries. It consistently ran huge trade surpluses despite a rising yen. Some analysts predicted that Japan would overtake the United States as the world’s largest economy.

However, Japan suffered from a dual economy that made the growth of the 1980s unsustainable. Its export sectors, spurred by competition with other countries, were superbly efficient. But the sectors that produced goods for domestic consumption—farming, retailing, construction, and materials industries such as glass and cement making—were shielded from both domestic and foreign competition and thus were much less efficient. Moreover, far more Japanese people worked in domestic than in export sectors.

By the 1980s Japan no longer openly protected its domestic industries from competition with foreign imports. The government had begun to reduce overt trade restrictions such as quotas (limits on the quantity of imports) and tariffs (taxes on imports) in the 1960s, and most restrictions were eliminated by the end of the 1970s. Nevertheless, Japan imported few industrial products that would compete with ones manufactured in Japan. This was due in part to government-organized recession cartels. Japanese industries that had excess capacity (that is, they could make more goods than they could sell) formed associations to control production, allocate market share, raise prices, and, some observers believed, block imports in hidden ways. After 1987 official recession cartels were stopped, but some industry associations continued these practices on their own.

Some foreign exporters who had difficulty selling their products in Japan believed that Japan also maintained invisible barriers to trade, such as collusion among members of keiretsu groups, and government regulations that slowed the import process and made it more expensive. Japan argued that its market was fully open and that foreign exporters were not trying hard enough. Tensions over trade in the 1980s gave rise to a series of negotiations between Japan and its trading partners, particularly the United States. By the end of the 1980s Japan began to import more manufactured goods, and by the late 1990s frictions over trade became less prominent.

Government influence over private business decisions also continued in an indirect manner. In the high-growth era, the government guided the economy through clear laws and powers, such as the open import restrictions of the Ministry of International Trade and Industry (MITI) or the official list of favored industries for bank loans of the Ministry of Finance (MOF). In recent decades, ministries have tended to use informal “administrative guidance” (gyosei shido) instead. This guidance takes the form of suggestions or directives that do not have the force of law. Businesses generally comply voluntarily with administrative guidance; if they do not, ministries may punish them indirectly by enforcing unrelated regulations. MITI used administrative guidance in the 1980s to encourage Japanese auto manufacturers to cooperate with voluntary export restrictions requested by the United States. The effectiveness of administrative guidance varies widely from industry to industry. In general, its power has diminished over time.

In the 1980s Japan compensated for its domestic inefficiencies—and thereby temporarily hid them—by greatly increasing investment. But its investment was also inefficient. Japan needed to invest 35 percent of GDP (private plus government investment) just to get the same growth that a more efficient economy could have gotten from 25 percent. This was like running on a treadmill that keeps going faster. Unless Japan devoted ever-larger portions of national income to investment, growth would inevitably slow.

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