Unveiling Japan's Economic Miracle through History

Japans Economic Miracle

Not That Long Ago Japan Was The Economic Model For The World I finished my Undergrad in in 90s and we were still exploring the Japanese management style Which by the way was started by an American consultant in Japan

80s & 90s Widespread thought among thoughts leaders, politicians, business leaders, & the media that Japan had discovered a new business model This model was going to allow Japan to overtake the US economy in just a few short years

Chalmers Johnson A political scientist named Chalmers Johnson wrote MITI and the Japanese Miracle Required reading in my business program at TOSU MITI was reorganized into the Ministry of Economy, Trade, and Industry (METI) in 2001 This is a cabinet branch of Japan s gov Clyde Prestowitz, former US trade negotiator Trading Places: How We Are Giving Our Future to Japan and How to Reclaim It

Quote From Prestowitz The power behind the Japanese juggernaut is much greater than most Americans suspect, and the juggernaut cannot stop of its own volition, for Japan has created a kind of automatic wealth machine, perhaps the first since King Midas

Michael Crichton From the 1992 novel Rising Sun Sooner or later, the United States must come to grips with the fact that Japan has become the leading industrial nation in the world. The Japanese have the longest lifespan. The have the highest employment, the highest literacy, the smallest gap between rich and poor. Their manufacturing products have the highest quality .

As late as 1995 A book by a journalist Blindside: Why Japan Is Still on Track to Overtake the US by the Year 2000 by Eamonn Fingleton

Starting in the 70s 90s Japanese companies loomed large Japanese firms were earning really high profits Japanese investors that making big investments in the US

Business Schools They suggested that other countries were sure to follow the Japanese path, including Europe, and the US was past its zenith The business schools offered doom if we did not follow that path

What Was Japans Unique and Special Path Greater government direction of the economy worked better than unfettered free market forces Government-directed business firms Managed trade Patient capital

Directing Businesses Japan, Incorporated

The Visible Hand of Government Can Outperform the Invisible Hand of Markets MITI became a symbol of how government can direct an economy

Managed Trade A mix of blocking imports from other countries and offering subsidies to exporting firms, with the result being large trade surpluses

Patient Capital

Ownership of Firms Ownership of firms was not stock market based like in the US Keiretsu combinations of firms acting together

Econ Rocketed From 60s Early 90s Japan's Growth Rate by Decade 12 10 8 6 Japan's Growth Rate by Decade 4 2 0

1960s The growth rate in the 1960 was 10 to 11%

1970s & 1980s The 70s was a slow period of growth for the whole world, but Japan still averaged 4.5 to 5 percent growth 1980s saw growth slow a bit to 4 percent per year, but even that was better than the US

Japans Growth On a per capita GDP basis, Japan was growing about 5% a year on average from 1960 to 1985 The US economy was growing less than 2 percent a year during the same period

Japans Growth In 1960, Japan s economy was about 10% the size of the US economy By the early 1970s, Japan had surpassed Germany to become the second-largest economy By the early 1990s, Japan s economy was about two-thirds the size of the US economy On a per capita basis, it was about 85% of the US economy

Some Measures In 1950, half of the students leaving high school and middle school wen into agriculture By 1965, only 5% of those leaving high school and middle school went into agriculture

All Went Wrong in the Early 1990s Collapse of asset prices Real estate prices fell about 80 percent Massive numbers of corporate and personal bankruptcy Unemployment surged Economic growth in the 1990s and into the 21stcentury averaged 1 percent a year or less

How to Fix the Economy Tried huge budget deficits to increase AD Central Bank cut interest rates to near zero Japan s economy is aging The workers are getting older and older They have a demographic nightmare that is even worse than the US

Remember the Automatic Wealth Machine Leading industrial nation in the world Overtake the US in just a few years All that hype from every B-school in America and then nothing Is it possible that the fundamental analysis of why Japan grew so fast was misguided

??? The statements about Japan s special economic model, about managed trade, and government intervention are true The statements that Japan grew very rapidly are true There must be a basic logical problem

All in the Interpretation Imagine that I said in the US, the Defense Advanced Research Projects Agency (DARPA) helped to start the Internet. Therefore the entire high tech economy was created by the government And based on government oversight of the US economy

Boring, But Economic Story This Japanese profit making machine story was exciting, but it ignored the fundamentals Growth is all about Human capital Investment Free markets

How Japan Got the Economic Fundamentals Right Human Capital Japan was an early strong investor in education

More Human Capital

Savings National savings in the US typically has been 15% - 18% of GDP In Japan, national savings has been 30% - 35% of GDP Why does Japan save so much? The big difference is that households save much more than the US

Why Japan Has Such High Savings Lower proportion of elderly Wages paid with a big chunk in end-of-year bonuses Rapid growth makes it easier to save

Why Japan Has Such High Savings Coming out of WWII Special tax breaks for savings accounts Underdeveloped Social Security requires individuals to save more

Japans Technology Since back in the 19thcentury Japan has worked hard to get new techno in businesses Current R&D spending is similar to US levels

Participated in World Free Markets We know that companies like Toyota, Sony, Honda, Panasonic to be strong competitors in international market These and others were responsible for innovations and new international business practices Just-in-time inventory

Philosophy of continuous product improvement (kaizen) Quality circles groups that focus on quality in the plant

They Are All Together or Are They In the high growth period between the 50s and the 80s, Japan had more strikes than Germany or Sweden Not managed by consensus as some think

Why Growth Not what I learned in college Just boring fundamentals Education Investment Technological Free international markets Innovation

Did Japan Take Unfair Advantage? Back to industrial policy and managed trade After the war Japan s government offered subsidies often in the form of cheaper loans to favored industries Ship-building Electric power Synthetic fibers Chemical fertilizers Petrochemicals Machine tools Steel Coal electronics

How Did This Policy Work Overall? Steel and electronics flourished others did not do as well Economic studies show that high growth sectors: electrical machinery, general machinery, transportation equipment received lower subsidies than Low-growth sectors: textiles, mining, processed food

There Are Always Two Questions You Can Ask About Government Industrial Policy Is it possible to pick the future winners consistently? If yes, can you pick the winners and not be politically favored to give money to the losers instead?

In Japan? In Japan it seems very unlikely that the government bureaucrats picked the winners An example of a misstep. HDTV they were sure that HD was the future. But their focus was analog not digital and gov helped this doomed idea

Another example Fifth generation computer project No idea what one through four were But we were scared about that 5thone What happened? I do not know Everyone talk about how it would take over And how Japanese investment would take it to the top It just faded away

Just Remember That There Is Strength In Market No markets are not perfect but Competition has a basic advantage Many firms are trying different things from different angles trying to get profit without the help of the government This process improves the overall chance of success If there is a bad idea, drop it

Japans Barriers to Trade Japan had 5% of world exports in 1965 and 9% of world exports in 1990 Japan s imports have been about 7% of GDP and its exports about 9% in recent years In the US imports and exports are 12-13% of GDP Many industrialized counties are closer to 25%

Not Sure What This Proves Clearly it states that small European nations trade more than larger and more isolated countries Still it is interesting that it is such a small part of their Economy Over time US imports and exports have been about 2% of our economy

Why Do We Think Japan Is Dependent On Trade? The fact that we believe this may be an indication of our own short-sightedness We see Japanese products in high profile products like cars and electronics Then we assume that because we see these products, they must be a big part of their economy After all, I see it in America so it must be important in Japan That logic does not work

Trade Surpluses Trade surplus does not indicate anything about the fairness of trade There is no question that Japan has very large trade surpluses A common misperception is that surplus always mean a country is unfair Remember that trade deficits can because by many reasons One reason is high saving like Japan The same apply to the US in reverse

Beyond the Stories Japan does not have a great amount of explicit protectionism It does not have high tariffs Does not have many quotas If they are not explicit they must come through some bureaucratic path It is true that Japan is full of gov regulations Has powerful trade associations They do try to shut out import occasionally

70-80 & 90-00 We heard these stories in the 70s and 80s when all was well But we still hear them and all is bad It is possible that they had plain strong growth and all of these policies that we thought caused the growth were not needed and may have even been wasteful

High Rates of Saving While the Japanese wanted to save more I should note that the government actively restricted how they could save Japanese government controlled the banking and financial sector for decades after WWII Consumers were encouraged to put their money in banks and that was basically the only place to invest Consumer loans were discouraged through tax incentives