Japan Economic Policies and Development Dynamics

The island nation of Japan has always intrigued me because of the way it has surged after its destruction during the Second World War. Japanese to me have always been hard working and very technology focused added to that, company focused and sincere to their jobs.

The social culture in Japan encourages men to devote their lives to the company and that is reason for their growth and sustenance. It is not uncommon for a man to be working late into the night, in fact if people come back home early it is assumed that their jobs are not important enough. Its funny, but most people would hang out at a café in the evening than go back home else they would be thought of as having lesser important jobs by their family members. The culture is Japan is very job dependent, your standing in society is dictated by your standing in your company. The way of life is very standardized, promotions happen based on the number of years you have put in with the organization, most people tend to worked for the same company all their lives.

However, with the changing times and the new generation stepping in, things are changing and the people are asking for skill-based promotions rather than time based promotions. However, getting back into the dynamics of the country and basic details about it, Japan is a nation of 128 Million people. The GDP of Japan is nearly US$3.5 Billion and the GDP in PPP (Purchasing Power Parity, what you can actually buy with that money in the US) basis is around US$4.8 Billion. It is ranked as two and three on those counts respectively.

The reason I have chosen to write about Japan and its economic policy is because I am always enthralled with the way a small country half the population of US and a tenth the population of China has developed and grown into becoming the 2^nd largest producer of goods and services (in terms of value). Their culture, which is different from ours in many ways, is also geared towards meeting the goals and targets of the country. Most people in Japan are geared towards seeing their lives in the terms of the company they work for or the nation, very much like JFK’s famous “Think not what your country can do for you, but what you can do for your country”. They have practiced it, but is that the only reason for their success?

We have examples of many Japanese companies becoming extremely successful worldwide and that includes the high quality and very demanding US market. There are different reasons for their success, we have Honda who succeeded when their engineers felt a need for a small bike that people could use for their day-to-day activities where it was more important to get to another place and say pick up your grocery than looking good cruising a Harley.

I would use this article to talk about how Japan has grown as a country and what has been the impetus behind the growth of this nation. I will take the cultural and political perspective to this as I feel both these things have a critical part to play in how we develop as people and nations are no different. Different nations have grown with different impetus, we have the Korea who like Japan have grown after the war, we have Taiwan which continues to grow and grow further with companies like Acer who CEO professes that every inch of land in the country should be turned into a laboratory so that there can be more and more high end work that can be done in Taiwan, but perhaps the reason for Taiwan’s’ development is its adverse relationship with China.

On a similar note, the speech by the Emperor of Japan saying that Japan has surrendered, the speech that brought joy to the world and the sense of impossibility to the Japanese is the speech that changed the perspective of the country. The Japanese think very highly of themselves and have always been that way, they never considered themselves to be a part of Asia, and in fact, they always felt that Asians were lower than Japan.

The same mentality is there to see when the Supreme Court of Japan refused to allow compensation to a Korean woman for the atrocities that were committed by Japanese soldiers during the war. Japan has still not apologized or compensated the countries it invaded, well compensation was given after the war but that was forced and the apology has not come. Even Her Highness the Queen Elizabeth of England apologized for a massacre when she visited India, but the Japanese Prime Minister continues to visit shrines of soldiers in spite of all the international criticism that follows such visits.

The nation of Japan never thought that they could lose the war and that is why they felt humbled, in my opinion it was the reason for their success as a country after the war and that is why the Japanese people devote their lives to the company they work for, it is a higher devotion, a devotion to their country. The generation that faced the war and the generation that followed faced a lot of hardships and went through that passage of time when they were humbled, they felt the need to rise from there and devoted themselves for that, however the new generation or the current generation has not been subjected to something like that and so we see a change in attitudes of people, a change towards their attitude to the company and their devotion to the company/nation.

From a political perspective, after the war, Japan was destroyed, it took a decade and the United States started investing into Japan, it was in the interest of the United States to put in money into Japan. The reason given is usually the theory that propagated a nation that is self sufficient and affluent would not go to war or cause the havoc that it caused in the first half of the century. The real reason however is stated to be USSR, now Russia, and the cold war obviously meant that we needed soldiers across the world, not only to guard us, but our allies and our thought/culture/ideas.

With the backing of the United states and all the money that we put into Japan, Japan had stupendous growth and saw GDP growth at 10% plus growth rate for the decade of the 60’s and over 5% for the 70’s, their growth slowed down and they grew by an average of 4% in the 80’s. However, after that, there was a problem. In fact, it came from a multitude of reasons, the political one: The disintegration of the USSR, US did not need a Japan anymore in that part of the world. However, an economic one still existed. There was a lot of American money invested in Japan and a lot of Japanese money invested in the United States. Countries buy bonds of different nations, just as China is buying many of our bonds nowadays, more trading gaps and more money goes into the bond market.

Let us look at how the country of Japan grew after the world war. The Japanese had a Ministry of International Trade and Industry (MITI) this ministry had control over everything in the country. It was taken over by METI (Ministry of Economy, Trade and Industry).

During the early 50’s MITI found a few industries that were thought of as the core of the Japanese economy and hence the ministry supported these industries to grow.

It is important to first understand the word Keiretsu – Keiretsu is the closely inter-linked way of working in Japan. It is also a way of avoiding takeover and providing help to each other.

Most companies in Japan are tied into the Keiretsu system; it popularizes cross holding and working and is the basis of the political and economic working in Japan. An example would be Nissan, when Carlos Ghosn took over Nissan, the broke the Keiretsu system of Nissan and so he got it free of all the baggage that it was carrying, which means all the suppliers that were a burden (wish GM could get rid of Delphi the same way) and helped the company grow on its own potential.

A similar thing was seen by Mitsubishi in which Daimler Chrysler held a 20% stake, in its troubled time Mitsubishi asked Daimler to take over the 20% stake that it had and bail out the company, Daimler refused. In the Japanese society as a member of the Keiretsu this would have been impossible and that is the basis of the system, bail me out when I am in deep trouble. Everyone does it for each other and that is a baggage. Most companies in Japan do not think that they are fallible and they depend on the Keiretsu system to save them if they are ever in trouble. In a way, it is the progression of the pre war days when they felt that they could not lose the war.

Getting back to MITI, MITI helped form a lot of Keiretsu’s and helped them get stronger and stronger. MITI underlined the importance of technology and brought about a huge change and forward movement in technology in different industries. MITI supplied the money and took control of almost everything yet keeping the Keiresu’s and helping the nation grow further.

The economic model professed lots of low interest loans and facilities to the companies. The companies were not overly interested in increasing profits but were focused on increasing market share and improving technology. That is why the porter model is very successful in Japan, most of the companies are competing on similar products and hence there is a lot of innovation that happens. Although I think, the porter model to my mind does not bring about lots of profits for the players involved.

As companies fought amongst themselves to be superior in their technology and made US, their hub for sales the companies continued to grow and make more and more products that suited the US market, something that our companies did not do. A case in point is the struggling automobile industry in the US, with GM and Ford lagging behind in their losses and Toyota on its way to be world’s largest manufacturer at the end of 06, with 10 Billion dollars a year in profits and over 30 Billion of cash in its coffers. MITI wanted to develop more and more companies like Toyota; the companies that would take the country forward and help it get back to being the proud nation that it once was.

MITI used its power and money to help shape the economy till the 80’s and helped many industries primarily construction and technology based. MITI used its influence to change the laws, labor market and get tax incentives into place for all the important industries. They wanted a highly developed manufacturing industry (similar to china today), they wanted high end and high value work to be done in Japan (similar to the example of Taiwan that I mentioned) and they wanted good and sound trade and domestic policies.

Trade was and is extremely critical to the existence of the Japanese economy, they are a nation of 128 million people and cannot consume the Billions of dollars of good that they produce, however it is worth noting that they only exported 500 million dollars worth of goods from Japan and imported 400 Million worth of goods, seems odd? Not really, most of the manufacturing does not happen in Japan. The big companies have plants across the world to make the goods that they are selling. That is why the difference of a 100 million in trade is quite misleading.

Currently the Japanese economy is in a decade long slump and the economists and everybody else in and outside Japan want Japan go get out of the rut. Off late there is renewed hope and enthusiasm about the Japanese growth, the Nikkei (their stock exchange index) has grown by over 40% in the last year and money is again being put into Japanese companies. The numbers for growth in other terms are quite impressive actually, there is a lot of money being put into technology and other areas and people are confident that Japan will bounce back and be the force that it once was.

References:

1. CIA World Fact Book http://www.cia.gov/cia/publications/factbook/geos/ja.html#Econ
2. Country Profile BBC http://news.bbc.co.uk/2/hi/asia-pacific/country_profiles/1258586.stm
3. Economic and Fiscal Policy http://www5.cao.go.jp/keizai/index-e.html
4. The Economist what ails Japan from the economist print edition http://www.economist.com/surveys/displayStory.cfm?story_id=1076723
5. Wikipedia Economy of Japan http://en.wikipedia.org/wiki/Economy_of_Japan
6. Japanese economy and fiscal policy http://www5.cao.go.jp/keizai/index-e.html
7. Japan Information Network http://jin.jcic.or.jp/