Thoughts on Japanese Economic Performance

Patrick, Hugh T.

The purpose of this paper is to provide a broad overview of the strengths of the Japanese economy and to consider some of its major problems. First, however, the paper begins with two fundamental economic policy proposals. It ends with a discussion of some effects of the March 11 earthquake triple disaster. First, Japan should implement a major macroeconomic stimulus package of more aggressive monetary policy, taking on a lot more credit risk and further fiscal stimulus, and then implement comprehensive tax increases and reforms. Second, it should institute a major program of comprehensive deregulation of the economy. Predictions about Japan's economic decline are off-base. Japan is a major, high income, technologically advanced, sophisticated economy and society, and will be among the top five economies for at least the next two to three decades. Some tend to believe that China's rise means Japan's decline, but though this may be true in relative terms, economic power is a positive-sum game; it is better to do business with rich, growing economies than poor, stagnant ones. Japan has three important strengths: its people and cohesive society; its high level of technology; and its very large stock of real capital. Of course Japan has problems as well. One is Japan's mediocre economic performance for the past two decades. It has been very difficult for Japan to shift from a model of investment-led growth to consumption-led growth; this has had a number of interrelated adverse effects, including a sustained deflation of prices of goods and services and a depressed job market (though the unemployment rate is far lower than in the U.S. and Europe). A second problem is the very low productivity and lack of international competitiveness of agriculture, and in forestry and fishing, due to small amounts of arable land, in a high wage, high labor cost economy. Agricultural interests are very well organized and effective in protecting their entitlements; this is why Japan has not been able to negotiate any serious free trade agreements, and why TPP poses such a difficult political problem. Third, Japan's corporate governance system is weak, principally because of the dearth of independent directors. The management continues to give higher priority to the interests of its regular employees than its shareholders, often cannot effectively manage their foreign operations, and perpetuates their management system for its own self-preservation. Finally, I consider the effects of the March 11, 2011 triple disaster in Tohoku. This was a regional, not nationwide, disaster. It showed the impressive response of the Japanese people, as well as the strength of Japanese supply chain systems. The outpouring of support from America and around the world has demonstrated how much goodwill ““ soft power ““ Japan has built up over the years. However, it brings into serious question Japan's pre-earthquake energy policy of heavy reliance on nuclear energy. At this point, it is politically difficult to reopen these plants soon, but if they're not, there will be electricity shortages this winter, and again next summer. So either short- or long-term, Japan will probably have to either revert to more coal energy, which will increase greenhouse gas emissions as well as health-related diseases, or more sources of still expensive renewable energy.

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Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Columbia University
Center on Japanese Economy and Business Occasional Papers, 58
Published Here
December 23, 2011