From fast to last: the Japanese economy in the 1990s

doi:10.1016/S1049-0078(02)00113-6

Journal of Asian Economics

Volume 13, Issue 2, March–April 2002, Pages 213-235

https://doi.org/10.1016/S1049-0078(02)00113-6 Get rights and content

Abstract

Japan is the first country that achieved the economic miracle of rapid growth. From stellar performance in the 1960s, it shifted to slow growth (1975–1990) but it still maintained the highest growth, and lowest inflation, among G7 economies. However, in the 1990s it had the lowest growth rate among the G7. This stagnation is due to three major factors. The first factor is the short-term reaction to the over-expansion of the economy in the late 1980s. The financial sector still is struggling with the aftermath of the bubble. The second factor is the on-going contraction of manufacturing. Manufacturing drove Japan’s growth, especially productivity growth, but now employment is falling in that sector. The third factor is long-term changes in the population structure, specifically, the rapid aging of the population and the low level of the birth rate. All these changes have serious macroeconomic effects on the economy. If the Japanese economy is to be revitalized, an intensive and extensive overhaul is required, urgently. If Japan does not succeed at this task, its future will be dismal.

Section snippets

Overview of Japanese growth

The last half of the 20th century can be divided into rapid growth (1952–1974), slow growth (1975–1990), and ultra-slow growth (1990s) periods.

By 1952, when the occupation of Japan came to an end, Japan had regained its prewar level of production. From then on, the economy stayed on a rapid growth trajectory, especially in the 1960s when annual rates averaged a bit over 10%. This “economic miracle” brought per capita real GDP from 30% of the U.S. level in the early 1950s to 60% by the end of

The real economy in the 1990s

Actual and potential GDP growth, as well as labor force and labor productivity growth all have slowed in each successive decade since the 1960s, as shown in Table 1.

Manufacturing led the spectacular growth of the 1950s and 1960s, and continued to grow faster than the economy as a whole through the 1980s. Even though manufacturing in the 1990s grew less than the economy, labor productivity continued to increase faster in manufacturing.

Employment in the manufacturing sector grew much more rapidly

The financial side: the 1990s

The real side and the financial side of an economy are two wheels of a cart, so they have to work together in harmony. When one fails, the other invariably collapses. The collapse of Wall Street in October 1929 is alleged to have led to the Great Depression of the 1930s. Likewise, the collapse of the Japanese stock market in December 1989 is alleged to have led to Japan’s recessions and ultra-slow growth in the 1990s.

The Japanese economy: quo vadis?

After a decade of stagnation and ultra-slow growth, where will the economy go in the 21st century?

The government issues a national economic plan every 5 years or so, among other things setting a growth target. Table 14 gives the projected and actual growth rates for plans since 1988. The 3.0–3.5% growth target for the 1990s corresponds to the potential growth rate of 3% which was generally believed to apply to this decade. But the actual fell far short of the potential. Having miserably failed

Conclusion

Japan is the first country that achieved the economic miracle of rapid growth. From its stellar performance in the 1960s, it moved into a slow growth period (1975–1990) during which it still maintained the highest growth and lowest inflation, among the G7 economies. However, in the 1990s it had the lowest growth rate among the G7. This stagnation is due to three major factors. One is the short-term reaction to the over-expansion of the economy in the late 1980s, especially on the financial

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^☆: This paper was presented to the Japan Economic Seminar in April 2001 and issued as Working Paper No. 187 (May 2001) of the Center on Japanese Economy and Business (Columbia Business School). The basic data is from the Annual Report of National Accounts (ARNA) by the Economic Planning Agency (up to 2000) and the Cabinet Office (2001). Up to the 2000 edition, Japan’s national accounts were based on the 1968 version of the UN System of National Accounts (which we call the “old” series). In the 2001 edition, Japan’s national accounts were shifted to the 1993 version of the UN SNA (which we call the “new” series). The revision goes back to 1990 and is very significant for 1995 and thereafter. The new series is extended back to 1980 for gross domestic expenditure.

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From fast to last: the Japanese economy in the 1990s☆