Japanese Economic Model

Japanese Economic Model
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Abstract
The growth of a country is measured in terms of economic growth. Different countries have different economies. This is often influenced by various factors like government policies, investment, availability of resources and technology. Understanding countries economic model assists in explaining its performance over the years. Japan has an interesting economic model which rose steadily at one point and later on became stagnant. The Japanese economy is industrialized and characterized by a free market. It is ranked as the fourth largest economy globally. This economy is efficient and competitive in international trade. The industrial economy of japanned was achieved through a combination of high savings, intensive promotion, skilled workforce both in industrial leadership and the technical field, good education system , attractive investment rates , foreign trade and stimulation of industrial growth and development. The economy of Japan was characterized by two phases; one being intensive growth and the other stagnant growth. In the years between 1960s and 1980s, Japan saw high rates of growth in its economy. This research addresses the economic growth of Japan and the causes of its boom and stagnation. This is achieved by gathering information about Japan and its economy from secondary sources and analyzing it. The internet, books and journals form the major sources used. After analysis of information from the above sources it was comprehended that Japan irregular economic model had two distinct phases. The first face between 1960 and 1980 saw major growth whereas the second face which started in the late 1980s was characterized by stagnation in the growth of the economy. The reasons for both phases are illustrated in depth the research findings.
Introduction
The economy of Japan comes fourth as the largest economy after EU, US and China. This implies that a decline in the Japanese economy will have significant negative impact to the global economy. Japan`s economy has had two distinct phases in growth from the 1955 up to now. The economy of Japan experienced substantial growth between 1975 and the 1980s (Denison 1976). However, it faced stagnation in growth during the 1990s. Later on in 2008 the economy of Japan faced recession due to the decline of the global economy. The economic model of Japan has undergone growth at one point and stagnation at another. Being among the top world economies Japan employs almost the same tools like US, EU and China. For instance the recession hit both Japan and the USA. In Japan the economic growth was restricted to 1% each year for a decade. According to Mosk (2001) both countries reduced interest rates in attempt to tackle the recession. Japan reduced from 6% to 1.75% while US cut from 5.25% to 2%
In addition both nations channeled billions of money into the economy in order to stabilize it. This move led to increased budget deficit to Japan at a rate of 1.8% of the 1992 and the 1993 GDP. These two nations have similar causes and comeback plans for their economies but the US will not be subjected to a 10 years recession like Japan. This is as a result of the reaction time of the policy makers. The policy makers of the USA reacted to the recession swiftly and immediately at a period of 1 year compared to Japan`s reaction in two years as depicted by Horioka (1991). This paper will assess the economic model of Japan and its disparities in the Japanese economy.
Literature review
According to the economic index of 2013, the Japanese economy is ranked among the 24th freest with a freedom score of 71.8. This is an improvement by a margin of 0.2 since 2012.This improvement is a result of better fiscal freedom, reduction in impunity, and monetary freedom from improved management of government expenditure and freedom in labor. Out of a total of 41 countries of the Asia-Pacific region, Japan is placed 6th. Economic freedom is present in all areas and contributes to the overall economy progress. Economic freedom has a strong basis which is well established and supported by a reliable and efficient judicial structure. Corruption is very low in Japan hence doesn`t hinder economic growth. On the other hand, Japan attempt at attaining economic freedom is irregular. Comparing the current economic score to that of 1995, 1995 had a higher score. Ironically, the modern and developed financial sector is still subject to rising political meddling (Mosk 2001). Other obstacles include limited mobility and existence of scanty ancient labor practices. In addition, Japan has a large debt burden that is being sidelined by the monetary policy purposed to maintain minimum interest rates. This has an impact in de-motivating the government to implement a needed fiscal reform. Japan is out run by other neighboring economies in the quest to reach free trade agreements.
Fig 1.Japan`s score with time (Mosk 2013)
Fig 2 comparison of different economies(Mosk 2013)
Japan has a well laid out and structured judicial system which ensure security for real and intellectual property. The court system is strong and devoid of political interference. However on the con side, the judicial system lacks efficiency. It is quite expensive, in terms of time and finances, to obtain and protect patents and trademarks. The court is quite effective in promoting investment since it does not discriminate against foreign investor and it respects all legal contracts. Again, low levels of corruption play a key role in the judicial system The highest rate of income tax in Japan is 40%. The corporate tax was slashed down to 25.5% with the deficit being compensated by local and enterprise tax. The government also charges value added tax on products and an estate tax. Japan is subjected to a tax burden which is at 28% of the domestic income. The government spends a total of 42% of the Gross domestic Product(Nakamura 1995). This is attached to a deficit in the budget which is at 10% of the GDP. Unfortunately public debts double up the economy size.
It is easier to set up a business in Japan since there is no minimum capital requirement. In addition there are just a few procedures (less than 10) needed to start a new business. On the other hand, the growth of entrepreneurship is hindered by rigid rules and regulations such as tedious and complex requirements for licensing. The productivity of Japan is compromised by guarantees provide by the government of lifelong employment and seniority based wages. This is also one of the factors behind the impedance flexibility of the labor market. The economy of Japan has seen miniature inflation rates over the years.
Japan has trade tariff of 1.6% however there are also non-tariff barriers. There are restrictions to foreign investment but the restrictions exist to inward investment. A major hindrance exists in acquisition of local firms by multinational and foreign firms due to intense regulation and slow court process. In addition, according to Ohkawa (1979), the finance sector suffers from political interference which prevents vigorous growth.
Japan has a small percentage of arable land. In order to maximize on the available land subsidizing and protection of the agricultural economy was put to place. Japan produces a lot of yields per hectare and is among the top world producers. Japan is self sufficient in terms of agriculture at a rate of 40%. It has achieved this by putting a mere 4.6 million hectares under crops. Japan has a surplus production of rice while it imports a variety of cereals from the United States. This includes: wheat, corn, soybeans and sorghum. Japan and the United States have been engaging in trade for a while with Japan forming the top market for exports from the US. Japan depends heavily on imported energy. As a result, it has attempted to diversify the sources of energy in order to reduce overdependence on one type of source. This move enabled Japan to reduce its dependence on petroleum from 75% in 1973 to 50% in 2009. Petroleum was substituted partially by coal, hydropower, and nuclear power.
Varied performance of the Japanese economic model
Japan experienced a strong economic growth in the 1980s which ended with the onset of the 1990. The industrial economy of japanned was achieved through high savings, intensive promotion, skilled workforce both in industrial leadership and the technical field, good education system , attractive investment rates , foreign trade and stimulation of industrial growth and development.
Factors leading to stagnation of the economy
As the 1980s drew to an end, the irregular economic system of Japan led to a false speculation of asset price bubble. This involved companies, security firms and banks. A state of increased liquidity existed in the market which was caused by high prices in the real estate together with low interest rates. As a result there was increased level of borrowing and more investment in both domestic and foreign stock. The interest rates were raised after recognizing that the bubble was not sustainable. This policy aimed at achieving stability in the economy, led to the bubble burst indicated by a crash in the stock market. This was the beginning of a debt crisis in Japan whereby the banks and insurance companies suffered bad debts. This called for the government to step in and restore the float of financial institutions by injecting capital into the economy. This included loans from the central bank. This led the banks being ineffective and is the most probable cause of stagnation.
Many firms in Japan became unsustainable with time leading to mergers. Many Firms were riddled with debts and credit becomes had to secure. This forced borrowers to look for alternative sources of loans. This led to a low interest rate of 0.1% that has persisted for a long time. The stagnation was in the 1990s also known as the lost decade. This was followed by a recovery in the 2000s but the high level of spending that was part of 1980 never returned. In addition Japanese firms like Sony and Toyota which had a bigger share of the market in the 1980s was faced with tight competition from other firms in Asia like South Korea and Taiwan (Japan Statistical Association 1987). Continued deterioration of the economy led to laying off of numerous workers in Japan especially those with no proper job security. The above stagnation was as a result of liquidity trap. This is a situation whereby the producers and consumers saved a lot leading to a slow growth in the economy. Johnson (1982) stipulates that the high personal savings rate of Japan was influenced by aging population caused to a scenario whereby firms relied on traditional bank loans as opposed to bonds and stock through the capital market in order to get funds.
The lending standards of Japanese banks went down as a result of the banks extension of loans to corporations with a guaranteed of bailout using taxpayers money in case of bad debts. This brought a bought an atmosphere described by economists as a crony capitalism. This is where the banks issued loans with no regard of the credit worth of the borrower. This led to blowing the bubble economy dangerously out of proportion. Concerns over this bubble made the banks increase interest rate after 1991 which was followed by a 60% plunge in the prices of land and stock. According to Maddison, the attempt by the government policy makers to rescue the situation by implementing programs for economic stimulus including bailouts to banks did less to improve the situation. For instance a budget surplus of 2.4% was introduced in 1991 but ended up as a 4.3% deficit in 1996 and reaching 10% in 1998. The debt to GDP ratio also reached a staggering 100% (Maddison 2000). The recovery of the Japanese economy be 2003 to a growth rate of 2% was influenced mainly by imports from the USA and china
Another school of thought is considering the recession in Japan in 1990 as a balance sheet recession. Here the GDP reduces by a ratio of the debt repayment and personal savings not borrowed. This renders stimulus spending of the government as the solution to restore balance in the borrowing and spending. The major cause of the recession was the poor performance of stock and land process leading to a state of insolvency to the Japanese firms (Maddison 2000). At insolvency the liabilities exceed the assets. The government injected money into the economy and offered zero interest rate on loans to promote borrowing but the Japanese firms didn`t opt for borrowing. Instead these firms opted to service their debts from business revenue and instead of borrowing to invest. This caused the corporate investment which is a key contributor to the GDP to decline tremendously to a mere 22% of the GDP between 1993 and 2003. This is to say that the firms at Japan became spenders and not borrowers contributing to a slow growth of the economy.
Growth of the economy
Industrialization was rampant in Japan between 1880s and 1970s. This led to significant growth in the per capita income between these periods. Just like Japan, the US, Canada and Australia also reached high per capita income levels by shifting from agrarian was of production to manufacturing together with technology (Minami 1994). Development instigated by industrialization is characterized by some distinct characteristics. First is the proto-industrial base. The Japanese agricultural production was sufficient to cater for both the rural and urban areas even before e the country sought to industrialization. The major factor that led to economic growth in Japan was investment. There was increased inves...