Japanese Economy

An overview of Japanese economic, monetary, and fiscal policies over time.

Edo Era

During the Edo Era (江戸時代, edo jidai), social classes existed roughly as:

1. Lords
2. Farmers
3. Craftsmen
4. Merchants

Mercantilism was seen as an unproductive activity.

10%-30% of land was cultivated by tenants who paid 20-28% of their harvest to the landlords. Rice was the predominant crop.

While farmers had to prioritize subsistence, lords were able to sell their share in an open market. About 75% of the total market supply came from lords rather than the farmers responsible for producing the crop.

A futures market on rice was formed as early as 1730 in Osaka. The only known earlier futures market was for Dutch tulips.

Isolationism

Sakoku (鎖国) was the preeminent economic policy of the Tokugawa shogunate. From 1639 to 1868, trade was restricted tightly. Immigration was also entirely forbidden, with the primary intention therein being the expulsion and execution of foreign missionaries.

Some sources use kaikoku (海禁, lit. "maritime restrictions") to clarify that there were exceptions.

Meiji Restoration and Imperial Japan

The Meiji Restoration (明治維新) saw the economy reorganized for military power. This militarism remained and accelerated until the end of Imperial Japan.

War

Japan claimed territory through the Sino-Japanese War (1894-1895), the Russo-Japanese War (1904-1905), and World War I (1914-1918). Exploitative state-run companies were established in colonies to further feed the war economy.

World War II brought a forceful end to this era and this policy more generally.

Great Depression

Japan was largely unaffected by the Great Depression. This is largely accredited to Takahashi.

When Takahashi attempted to cut spending after the economy recovered, the military government ordered his assassination. Subsequent ministers were unwilling to cut spending.

Postwar Period

Japanese fiscal and monetary policy was dictated by GHQ until 1952.

Corporations

The zaibatsu (財閥) were dissolved and eventually supplanted by the keiretsu (系列).

Monetary Policy

Postwar Japan saw hyperinflation and a breakdown of currency-based trade. Multiple currencies were issued for disparate use; A円 for U.S. military trade, B円 for civilian trade. Per-island exchange rates were set.

The U.S. military phased out use of A円, establishing B円 as the sole Japanese currency. In 1949 GHQ set a fixed exchange rate of $1=360円. This monetary policy persisted until 1971.

War

The Korean War (1950-1953) saw increased investment into Japan by the U.S. military, as well as increased commercial activity by U.S. military personnel. Military bases became economics centers.

High Growth Rate Era

Until 1973, Japan benefited from rapid technological advancement and growth in commercial and manufacturing sectors.

Manufacturing

Factories and foundries quickly pivoted from war economy into consumer goods. The so-called 3 sacred items (refrigerators, washing machines, and televisions) were seen as key export products.

Japanese manufacturing continued to develop technologically, and by the 1960s the new 3 sacred items were cars, color televisions, and coolers (A/C).

Labor

The labor market of this period has been described as sanchan agriculture (三ちゃん農業) (sanchan referring to じいちゃん, ばあちゃん, and かあちゃん). Men worked for companies, while women and the elderly farmed.

Government Intervention

The ministries, especially MOF and MITI, were active economic interventionists. With the primary goal being full employment, rather than efficient labor, the ministries organized supply chains to have the maximum number of small-to-medium businesses as middlemen.

There was general unavailability of credit; the ministries were often the only way to get capital invested into a startup.

The bureaucratic and regulatory processes were dominated by an iron triangle between the LDP, the MOF, and keiretsu.

Causes of Stagflation

The end of the fixed exchange rate in 1971 led to a more competitive U.S. dollar. This continued and exacerbated under Volckner's tight monetary policy and Reagan's expansive financial policy. Not until a decade later did a pair of G7 joint agreements (Plaza Accord in 1985, Louvre Accord in 1987) bring this rapid depreciation under control.

The oil shocks, and more generally the unrest in the Middle East, led to disruptions of international supply chains.

Large Japanese businesses, such as car manufacturers, reincorporated as MNCs. They moved their headquarters to countries with more favorable tax rates, and moved production to countries with more reliable supply chains or cheaper labor forces.

Modern Japan

Stagflation

The government pursued expansionist monetary policy continuously, leading to a zero interest rate. In 2019, Abe experimented with a negative interest rate.

The collapse of a real estate and stock bubble led to widespread insolvency of major banks. Rather than letting them fail, the government propped them up as zombie banks.

Household Savings

The personal (household) savings rate rose in the 1970s and has not meaningfully declined. This can easily be attributed to the aforementioned monetary and fiscal policies (that is, households were induced to save by an appreciating yen and a growing public debt) but must be understood in the context of the welfare state. Families are expected to bear the fiscal burden of their elderly and children. Multi-generational households are commonplace.

Additionally, personal credit is not widely available (largely due to the extremely low interest rate). The housing market is highly exclusive. Most mortgages feature logner terms than are conventionally seen, up to and including the 100-year mortgages of the 1980s.

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