June 5, 2013Japanby EW World Economy Team

Japan Economy

Japan has one of the largest and most prosperous economies in the world. As of 2013, it had the third largest economy in the world by nominal gross domestic product (GDP), the fourth largest by purchasing power parity (PPP) and was the second largest developed economy overall. According to the Heritage.org, Japan's per capita GDP is $36,899.

Japan is a member of the Asia-Pacific Economic Cooperation (APEC), the World Trade Organization (WTO), the Organization for Economic Co-operation and Development (OECD), G-20, G8, and several others.

Economic History

Japan has had three distinct economic and political periods in its very long history. The first of these periods, called Edo, began in 1603, and ended in 1868 with the Meiji Restoration. The third period began after the defeat of Japan at the close of World War II in 1945 and extends to this day.

Japan was an island nation rich in some resources but poor in others. Volcanic activity brought many minerals to the surface long before large-scale mining became possible. As such, Japan became a major exporter of silver, copper, and gold until the isolationist government banned such exports.

The nation enjoyed a highly sophisticated feudal society and densely packed urban areas. Early European visitors marveled at Japanese culture and craftsmanship. Iron was scarce, so Japanese metalsmiths became famously skilled at working with the scarce resources they had.

The Edo period began with a great deal of trade via European merchants that brought Chinese products to Japan. This period also saw the beginning of international relations with foreign powers and the establishment of embassies on foreign soil. Unfortunately, Japan soon felt as though it was losing its national identity and needed to fight the influence of Christianity. This led to a period of isolationism during which the economy remained largely stable and self-sufficient with only mild progress. Rice formed the base of the economy during this period and often was similar to currency. In addition, urban centers swelled to hundreds of thousands of people, some of the densest urban populations in the world at the time.

In the mid-19th century, the Meiji Restoration saw a reopening of Japan's borders to western trade. This led to a period of enormous economic development that lasted until the end of World War II. The Meiji government started a new, Western-based education system for all young people, sending thousands of students abroad to study while importing thousands of Westerners to teach in Japanese schools. Although somewhat late to the game, Japan industrialized during this period at an enviable rate. Before World War II, Japan had gone from a society living in the Middle Ages to an industrial power in less than a century. The government adopted a strongly pro-business mentality, often subsidizing the startup of large conglomerates.

By the mid-1930s, these policies had taken a toll on the Japanese people. Japanese employees earned an average wage that was 10 times less than that of US workers. However, Japanese culture sustained this model thanks to a unique loyalty between the Japanese people and their leaders.

Japan was financially devastated after World War II. It took two decades for the economy to begin to recover, but by the 1960s, economic growth reached an extremely robust 10 percent annual average. The 1970s saw that growth slow to 5 percent in the 1970s and 4 percent by the 1980s. By the end of the 1980s, the world recognized Japan as the economic power it is today.

Unfortunately, Japan saw a collapse in the 1990s that considerably eroded its rate of growth. The collapse resulted from a bubble in stock prices and real estate. To compensate, Japan began a policy of massive budget deficit spending to finance large public works programs. These policies were largely ineffective, leading to a new approach called Quantitative Easing. As opposed to flooding the economy with newly printed money, under the Quantitative Easing policy, the Bank of Japan expanded the money supply internally to raise expectations of inflation. The policy initially seemed a failure, but by late 2005, the economy finally began to show signs of sustained recovery.

Current Economic Situation

Because of its size and rugged terrain, Japan lacks the natural resources to support its growing economy and large population. As a result, Japan exports goods in which it has a comparative advantage—such as high-tech products—in exchange for the import of raw materials and petroleum. Japan is one of the biggest agricultural importers in the world. While lacking in resources, Japan has become one of the largest processors of raw materials imported from abroad, relying on a strong infrastructure and highly skilled workforce.

Agriculture makes up just 1.4 percent of GDP each year and employs a mere 3.9 percent of the population. Industry, on the other hand, accounts for 24 percent of GDP, employs 26.2 percent of the population and has given Japan the title of world's third largest automobile manufacturer and largest electronics goods manufacturer. Most of Japan's manufacturing today focuses on high-tech and precision goods: such as optical instruments, hybrid vehicles, and robotics.

As with most industrialized nations, services account for the bulk of Japan's economy, making up about 71.4 percent of GDP and employing about 68.9 percent of the population. Finance is one of the biggest services in Japan, and the Tokyo Stock Exchange is the world's fourth largest stock market. Japan is also the world's largest creditor nation, generally running an annual trade surplus and having a considerable net international investment surplus. As of 2010, Japan held 13.7% of the world's private financial assets: making it second largest holder of private financial assets in the world. The total estimated value of those holding equaled an estimated $14.6 trillion. Moreover, in 2013, 62 of the Fortune Global 500 companies base themselves in Japan.

As of 2015, the island nation's labor force of 65.93 million experienced a relatively low 3.4 percent unemployment rate despite economic growth of just 0.9 percent. Inflation, on the other hand, continues to hover at around 3.2 percent.

While the Japanese economy has rebounded from the global recession, that recovery has been slower than in some other nations. Nevertheless, rising wages and declining unemployment point to strong growth in 2015, and consumer confidence appears to be on the rise, as well. Low oil prices and a weakened yen have also helped Japan's export industries.

Economic Forecast

There has been little progress in implementing several pro-growth reforms. This has led to some uncertainty among foreign investors, who remain reluctant to invest too heavily. As a result, Japan will probably only experience growth of 0.9 percent by the end of 2015, but a significant uptick in 2016 should grow this figure to 1.5 percent by the end of that year.

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