Jamar Johnson, Economic Environment and Country Analysis, IE Business School

March 2013

How did Japan perform until 1991? How do you explain this performance?

The performance of the Japanese economy from the 1970s, up until the recession

of 1991, was nothing short of sensational (See Annex 1). From structural institutions

tailored to the needs of the business market, to a highly-skilled labor market, and

effective corporate governance in place, the Japanese economy was equipped to be major

player in global business on par with many Western markets. Japan’s resurgence,

economically, existed in its ability to work toward its unified national goal by looking

long-term and tapping into financial resources paired with its unique vision for the

futurei.

Before major economic change could be implemented, it was important for

Japanese bureaucrats to determine which industries would serve as an asset to transform

this former feudal society into a world-class player through export trading. This

responsibility was placed with the Ministry of International Trade (hereafter MINI)ii. This

government agency was characterized as, “us[ing] its control over trade and investment

to ‘pick’ and support a handful of industries for leading Japan’s export-oriented

growth.”iii In addition, MINI and its subcommittee not only sought out additional

industries showing tremendous upside to Japan as telecommunications and service, but

this government-body worked to adopt then-considered sophisticated economic practices

found elsewhere in the world to foster innovation and free-market competition such as

“deregulation, promotion of competition, and [the] acceleration of intellectual-capital

formation.”iv

Japanese businesses also received substantial local support provided by keiretsu’s.

This local corporate structure allows for the interlocking of equity interest amongst

Japanese-based businessesv. Free from the external sentiment of stockholders, market

fluctuations, and investor pressures as commonly found in the West, Japanese business

owners effectively insulated themselves to achieve long-term corporate objectives during

the 20th Centuryvi. Another benefit to Japan’s unique finance borrowing was the tax

incentives the government provided corporations incorporating the practice of keiretsu.vii

Lastly, and albeit controversial, amakaduri’s worked to protect and enhance the business

interests of private sectors in its dealings with the Government of Japan. It is important to

mention that the above mechanisms allowed for Japan to reach its collective success.

Why has Japan stagnated since 1991? Why does neither fiscal nor monetary policy

seem to work?

Since 1991, Japan has applied much effort to surmount its economic deficits and

spells with periodic recession. There are many causes to the foregoing. Ironically, many

of the government institutions—such as the Bank of Japan and MITI-- helped to facilitate

Japan’s meteoric rise, can it serve as one of the blames for its eventual stagnationviii. For

instance, agencies that once served to propel Japan’s competitiveness within the global

business community ultimately transitioned to hubs for bureaucratic infighting and policy

bottlenecks.ix

In the past, a general consensus required within many bureaucratic institutions of

Japan ensured that policy proposals were well-reasoned, examined to maximize

feasibility, and supported among leading figures within the business community to move

forward. Unfortunately, as the influence of bureaucrats and grew, so did institutional

inefficiency thereby curtailing the ratification of progressive economic policies.

In relation to international trade, a weak Yen, commonly known as en'yasu, had

served as a boon for remarkable GDP growth (See Annex 2). However, after 1991, the

opposite happened. Endaka is a state in which Japanese Yen increases in value in relation

to global currencies (See Annex 2). The hike of the Yen spelt less competitive exports for

the Japanese economy (See Annex 3). Together with the issues affecting the Japanese

Yen, there were also many social issues which have compounded their economic

challenge. From 1991 and onwards, the increased standard of living, pension costs, and

an ever-growing aging population has added additional pressures to Japan. In Annex, 6,

we that nearly 20% of government subsidies were allocated to care for Japan’s elderly

and will increase in the coming decades.

Quite expectedly, this trend will continue in the coming decades. More pointedly,

from 1975 up until 2005, Japan has experienced a population increase of close to 100%

(See Annex 4 and 5). x Adjacent to its surge in population, Japan also suffers from major

barrier to entry obstacles which stand in the way for free-market competition and

entrepreneurship compared to many other advanced market nations.xi In conclusion,

Japan must work to integrate its structural components and social institutions in line with

the current global economy; should it seek to achieve long-term growth.

How long can Japan’s current account remain in surplus? Is this a good time to buy

Yens (assume that we are at the time of the case)?

Judging from the economic performance of Japan in terms of GDP in comparison

to the global economy and its strengthening Yen against the U.S. Dollar (See Annex 7

and 9 ), I contend that buying Japanese Yens on the exchange markets are for individuals

with an enormous appetite for risk. A weakened Yen is a boon to Japanese traditional for

export-led growth (See Annex 8). From a geo-political perspective, the bilateral relations

between Japan and China have been lukewarm, at best. This is mainly due to what the

People’s Republic of China considers Japan’s predilection to engage in revisionist history

in response to War World 2 adjacent to its support of Taiwanese Independencexii.

In addition, China views Japan as not only a competitor to its economy, but a

strategic ally with the United States for balance of power in the region. Not to mention,

China has joined the United States and Continental Europe in accusing Japan of

participating in a veiled currency war for export advantages.xiii. This can spell a disaster

for current Japanese export-led growth if economically-allied countries enact policies to

curtail, what can clearly be perceived as asymmetrical tradingxiv.

In conclusion, it is important to note that the current surplus in which Japan is

enjoying is actually the lowest since 1985xv. The country faces great pressure from its

geo-political skirmishes, internal pressure of a growing economy, illiquid companiesxvi

and bank assetsxvii, and experiencing one of the lowest entrepreneurship levels

globally.xviii Should the tensions increase within the international economic community

and/or the clashes and threats occur with China, I am confident that the value of the

Japanese Yen will plummet. In light of the aforementioned, I think the Japanese Yen

would be a strong short-sell.

i Ohmae, k. (1982), the mind of strategist: The art of Japanese business.1stedn, McGrow-Hill, Inc., New York. Accessed on March 7, 2013. http://www.economist.com/media/globalexecutive/books/mind_of_the_strategist_e_03.pdf ii Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published on June 2, 2005. Accessed on March 5, 2013, pg. 7 iii ibid iv Ibid

v The Economist, Keiretsu Idea, Tim Hindle. http://www.economist.com/node/14299720. Accessed on March 6, 2013. vi Dr. Jerzy Grabowiecki, Institute of Developing Economies. Keiretsu Group: Their Role in the Japanese Economy and a Reference Point (or a Paradigm) for Other Countries. http://www.ide.go.jp/English/Publish/Download/Vrf/pdf/413.pdf. Accessed on March 7, 2013. vii ibid viii Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published on June 2, 2005. Accessed on March 5, 2013, pg. 7 ix Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published on June 2, 2005. Accessed on March 5, 2013, pg. 7 x Japan Ministry of Internal Affairs and Communications, Statistics Bureau. http://www.stat.go.jp/data/nenkan/pdf/z02-1.pdf. Accessed on March 6, 2013. xi OECD, Product Market Regulation Database, May 2011. Accessed on March 7, 2013. xii Ministry of Foreign Affairs of the People’s Republic of China, Some Sensitive Issues, http://www.fmprc.gov.cn/eng/wjb/zzjg/yzs/gjlb/2721/2722/t15974.htm xiv Harvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published on June 2, 2005. Accessed on March 5, 2013, pg. 2. xv AFP, Japan current account surplus lowest since 1985, http://www.google.com/hostednews/afp/article/ALeqM5jcQFyXcX8z-h9qAANk-GYfNUO2eQ?docId=CNG.5150739a24f7c5dd770577f39274d37f.71 xviHarvard Business Review, Japan: Beyond the Bubble, Richard H.K. Vietor and Rebecca Evans; Published on June 2, 2005. Accessed on March 5, 2013, pg. 5. xviii Doing Business, Ease of Doing Business Ranking, http://www.doingbusiness.org/rankings.

Annex 1

Source: United States Louis Johnston and Samuel h. Williamson compilation of previous

historical estimates and National Accounts.

Annex 2

Source: The Japanese Economic Institute of America.

http://www.jei.org/AJAclass/JEcon20thC.pdf

Annex 3

Source: The Japanese Economic Institute of America.

http://www.jei.org/AJAclass/JEcon20thC.pdf

Annex 4

Annex 5

Source: Japan Ministry of Internal Affairs and Communications, Statistics Bureau

Annex 6

Source: Textbook for the 7th Study Programme for Asian Social Insurance Administrators, Japan

International Corporation of Welfare Services; The World Bank, Averting the Old Age Crisis, New

York: Oxford University Press, 1994.

Annex 7

Source: Asia Times, Time Running Out for Japan. Found at:

http://www.atimes.com/atimes/Japan/LI14Dh01.html

Annex 8

Source: Ronon Lyons, A Brand New Scare Graph, Japan’s Collapsing Exports

Annex 9

Source: Jerry Furst, InvestorsEducationNetwork.com