Japan was the 3rd largest economy in the world for 2012, by GDP (current prices, US dollars) and the 4th largest by GDP (PPP). In 2012, Japan's GDP (current prices, US dollars) was US$5.963 trillion and its GDP (PPP) was US$4.628 trillion. Much of Japan’s modern economic success can be traced to two significant periods in its history- the pre-war Meiji Era and the post-war Economic Miracle.
The Japanese were one of the earliest nations in Asia to industrialise. During the Meiji restoration period in the mid 19th century, the Japanese government actively pursued Western-style reforms and development – hiring more than 3,000 Westerners to teach modern science, mathematics and technology to Japan.
The Meiji government also created a conducive business environment for private businesses to thrive. Shipyards and factories were built by the government and sold at extremely low prices to entrepreneurs. These entrepreneurs eventually began businesses that quickly expanded into conglomerates known as the Zaibatsu.
The Zaibatsu controlled much of Japan’s economic and industrial activity. By the start of World War II, the Big Four Zaibatsu – Mitsubishi, Mitsui, Sumitomo and Yasuda – had control of over more than 30 percent of Japan's mining, chemical, metals industries, 50 percent of the machinery and equipment market, and 60 percent of the commercial stock exchange. The Zaibatsu also developed interlocking relationships among themselves and Japanese policy makers, thus allowing them a level of control over government policies.
Although World War II devastated most of the Japanese economy, the social foundations laid down during the Meiji Era contributed to the post-war economic miracle from the 1960s to the 1980s. New constitutional and economic policies implemented by the US during the American occupation of 1945-1952, also contributed to the eventual recovery of the Japanese economy. Furthermore, although there were attempts to dissolve the Zaibatsu system, the Zaibatsu managed to evolved into the Keiretsu with the six major Keiretsu being Mitsubishi, Sumitomo, Fuyo, Mitsui, Dai-ichi Kangyo and Sanwa Groups.
However the greatest contributing factor of the Japanese Economic Miracle was the establishment of the Ministry of International Trade and Industry (MITI) in 1949. MITI implemented numerous policies that led to heavy industrial growth in Japan. Many scholars have described MITI to have had the greatest impact on the economy of a nation than any other governmental regulation or organisation in the world. According to prominent political scientist Chalmers Johnson, author of MITI and the Japanese Miracle, “MITI formalized cooperation between the Japanese government and private industry. The extent of the policy was such that if MITI wished to “double steel production, the neo-zaibatsu (keiretsu) already has the capital, the construction assets, the makers of production machinery, and most of the other necessary factors already available in-house”.
During the post-war economic miracle from the 1960s to the 1990s, Japan experienced huge economic growth – at an average of 10 percent annually in the 1960s, 5 percent in the 1970s, and 4 percent in the 1980s.
Growth in the 1990s slowed down largely due to the asset price bubble in late 1980s, and the crash of the Tokyo Stock Exchange in 1990-92. This period is termed as the “Lost Decade” in Japan.
In 2012, Japan posted a GDP growth rate (constant prices, national currency) of 1.996 percent – one of the fastest growing economies among the G-7 nations for the year.
In 2013, GDP growth is expected to reach 1.584 percent or higher, with a new economic strategy – labelled Abenomics after Prime Minister Shinzo Abe – set to encourage private investment and end persistent deflation. But while Abenomics is likely to revive and boost the economy in the near future, it fails to address significant long-term economic challenges: A huge government debt (the highest debt to GDP ratio in the world), a shrinking and aging population and weak consumption are problems that continues to weigh heavily on the economy.