Economic Resurgence in Japan: Navigating Decades of Change Leading to the Three Arrows of Transformation.
Source: CNN
Japan’s Economic Miracle 1945 - 1991
Japan suffered huge losses after the second world war, with 3 million dead and a quarter of national wealth lost.1 However despite being left with almost nothing, Japan was able to recover at a remarkable speed and this period of sustained economic growth is known as ‘Japan’s Economic Miracle’. During this economic boom, Japan rapidly became the world’s second largest economy and there lay 3 main factors that allowed for this.
Source: Econreview
First it was the technological change that Japan experienced after the war. With most of the country’s industrial capacity destroyed Japan was able to implement and adopt new technologies without having to wait for current assets to depreciate. A lot of these assets were imported in areas like iron, steel, and motor manufacturing.
In addition to this, government policies helped the technological transformation. These were characterised by expansionary monetary policy creating ‘cheap money’, so that newly growing industries had a source of low-cost funds.1 Alongside low interest rates, fiscally governments provided tax deductions to large rapidly growing corporations.
Secondly, Japan increased not only the quantity but also the quality of their labour force. As soldiers returned from WW2, the labour supply largely increased allowing for wages to rise less than labour productivity. This kept carrying on throughout the 1950s and 60s giving firms the ability to efficiently grow and it was especially effective combined with Arthur Lewis’s model of labour moving from agriculture to high productivity sectors in major cities.
Lastly the previous factors flourished Japan’s economy combined with international trade. Japan’s exports grew drastically with the competitive advantage of tax cuts and cheaper, more productive labour. But more importantly the nature of the product they exported throughout the miracle period was ever changing. Starting off with exporting textiles, then to machinery and finally metals allowed Japan to keep ahead of its competitors internationally and maintain real economic growth by providing what was most in global demand.
The Lost Decade 1991 – 2001
‘The Lost Decade’ is a period where Japan saw a significant slowdown of their previously bustling economy. This period of stagflation and price deflation was caused due to an asset bubble that had formed within both the stock and housing market which was then combined with interest rate hikes in a bid to control inflationary pressures. This bubble burst meant several Japanese banks failed or needed to be bailed out due to them being overleveraged. As firms closed and unemployment rose Japan fell into a decade long recession. The main reason for this in hindsight was that Japan was experiencing a liquidity trap. Despite the central bank lowering interest rates, citizens spurred by low animal spirits were deterred from spending their money and a large quantity of money lay in savings.
Source: Econreview
Paralleling US actions from Roosevelt in the Great Depression, the Japanese government began large scale public projects in a bid to spur demand and consumer confidence but this just worsened deficits and what actually brought Japan out of the recession was quantitative easing from the central bank. Japan’s central bank injected mass yen supplies into the market for a period of 5 years and this eventually got Japan’s citizens spending again.2
Abenomics 2012 - 2020
The period from 2012 to 2020 in which prime minister Abe came to power for the second time and set out economic reforms is known as Abenomics. It was a plan Abe set out to bolster Japan’s stagnant economy. His agenda consisted of “three arrows”: flexible fiscal policy, monetary expansion, and structural economic reform.
To summarise Abe’s policies, he firstly set out to print an additional 70 trillion yen with the aim of making Japanese exports more attractive. The second arrow was government spending to promote short-term growth and stimulate consumption.
And lastly the most complex of Abe’s arrows was reforms in Japanese industry regulation to increase the competitiveness of the private sector and to spur new rounds of investment. This included cutting red tape and expanding the rapidly ageing workforce by encouraging greater participation of more women, foreign workers, and seniors.
In terms of success of Abenomics, it was a mixed outcome. It worked well in certain periods but became stuck in certain moments. As seen below the Nikkei index did improve under Abe’s tenure with inflation targets being met and the unemployment rate remaining under 2% but its success has been slowed by global economic forces and the biggest problem still facing the country – a worryingly ageing population.
Source: Econreview
Thanks for Reading.
Written by: Abhinav Vijayakumara, Market Analyst at Sora Capital A.C.
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