ECON 330 Lecture 7 Notes From Professor

7/30/2019 ECON 330 Lecture 7 Notes From Professor

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Economy of Japan



Japan: Introduction

(i) Population 127m (ii) scattered over 4 major islands, (iii) territory smaller thanCalifornia (iv) mostly mountainous and (v) less than 20% arable, (vi) imports 60% of its food (vii) nearly all of its energy, iron ore, copper, tin, aluminum, nickel, uranium.

(viii) Longest life expectancy, (ix) lowest infant mortality, (x) smallest per capita prisonpopulation, (xi) one of most equal income distribution among industrialized countries

GDP : $5.869 trillion (2011 est.)GDP per capita: $35,200 (2011 est.)

Growth rate: -0.7% (2011 est.)

Labor Force: 65.93 million (2011 est.)

Unemployment Rate: 4.6% (2011 est.)

Population Below Poverty Line: 16% (2007)

Distribution of family income- Gini Index : 37.6 (2008)Inflation Rate: -0.3% (2011 est.)

Current Account Balance: $120.5 billion (2011 est.)



Japan Brief History

(i)700-1603 AD. Monarchy, Jap. Lived in a chronic state of civil war. (ii) 1603-1867 AD:The Tokugawa shogunate (a military-led, dynastic government), provided 250 years of political stability, peace and law and order but imposed a feudal economic order andpolicy of total isolation from the outside world. . (iii) The Japanese people developedculturally and achieved a relatively high rate of literacy but fell behind West inscience and technology. (v) Japanese became aware of their backward state in in1853 when Commodore Perry arrived with his fearsome fleet of steam poweredships, (vi) delivered a letter from US president Franklin Pierce demanding the openingof trade relations. (vii) Japan opened its ports after signing the Treaty of Kanagawawith the US in 1854 and began to intensively modernize and industrialize. During thelate 19th and early 20th centuries, Japan became a regional power that was able todefeat the forces of both China (1892) and Russia (1902). It occupied Korea, Formosa(Taiwan), and southern Sakhalin Island. In 1931-32 Japan occupied Manchuria, and in1937 it launched a full-scale invasion of China. Japan attacked US forces in 1941 -

triggering America's entry into World War II - and soon occupied much of East andSoutheast Asia. After its defeat in World War II, Japan recovered to become aneconomic power and an ally of the US. While the emperor retains his throne as asymbol of national unity, elected politicians hold actual decision-making power.



Japan Economy: Introduction

In the years following World War II, government-industry cooperation, astrong work ethic, mastery of high technology, and a comparatively smalldefense allocation (1% of GDP) helped Japan develop a technologicallyadvanced economy. Two notable characteristics of the post-war economywere the close interlocking structures of manufacturers, suppliers, anddistributors, known as keiretsu, and the guarantee of lifetime employment

for a substantial portion of the urban labor force. Both features are noweroding under the dual pressures of global competition and domesticdemographic change. Japan's industrial sector is heavily dependent onimported raw materials and fuels. A tiny agricultural sector is highlysubsidized and protected, with crop yields among the highest in the world.Usually self-sufficient in rice, Japan imports about 60% of its food on acaloric basis. Japan maintains one of the world's largest fishing fleets andaccounts for nearly 15% of the global catch. For three decades, overall realeconomic growth had been spectacular - a 10% average in the 1960s, a 5%average in the 1970s, and a 4% average in the 1980s.




Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of theafter effects of inefficient investment and an asset price bubble in the late 1980s thatrequired a protracted period of time for firms to reduce excess debt, capital, and labor.In October 2007 Japan's longest post-war period of economic expansion ended after69 months and Japan entered into recession in 2008, with 2009 marking a return tonear 0% interest rates. The Japanese financial sector was not heavily exposed to sub-prime mortgages or their derivative instruments and weathered the initial effect of the global credit crunch, but a sharp downturn in business investment and globaldemand for Japan's exports in late 2008 pushed Japan further into a recession. The10-year privatization of Japan Post, which has functioned not only as the nationalpostal delivery system but also, through its banking and insurance facilities, as Japan'slargest financial institution, began in October 2007, marking a major milestone in theprocess of structural reform; however, in December 2009, the Democratic Party of Japan-led government passed a law to freeze future sales of Japan Post shares, halting

the privatization process begun by Liberal Democratic Party governments. Debatecontinues on the role of and effects of reform in restructuring the economy andfunding to stimulate consumption in the face of a tight fiscal situation.




Measured on a purchasing power parity (PPP) basis that adjusts for price differences,Japan in 2011 stood as the fourth-largest economy in the world after second-placeChina, which surpassed Japan in 2001, and third-place India, which edged out Japan in2011. A sharp downturn in business investment and global demand for Japan's exportsin late 2008 pushed Japan further into recession. Government stimulus spendinghelped the economy recover in late 2009 and 2010, but the economy contractedagain in 2011 as the massive 9.0 magnitude earthquake in March disruptedmanufacturing. Electricity supplies remain tight because Japan has temporarily shutdown almost all of its nuclear power plants after the Fukushima Daiichi nuclearreactors were crippled by the earthquake and resulting tsunami. Estimates of thedirect costs of the damage - rebuilding homes, factories, and infrastructure - rangefrom $235 billion to $310 billion, and GDP declined almost 0.5% in 2011. PrimeMinister Yoshihiko NODA has proposed opening the agricultural and services sectorsto greater foreign competition and boosting exports through membership in the US-

led Trans-Pacific Partnership trade talks and by pursuing free-trade agreements withthe EU and others, but debate continues on restructuring the economy and reining inJapan's huge government debt, which exceeds 200% of GDP. Persistent deflation,reliance on exports to drive growth, and an aging and shrinking population are othermajor long-term challenges for the economy.



People, Work Ethics, and Groupism

1.The People: ( i) An island people, poor in natural resources, developed hard

working habits to compensate (ii) WWII carnage, destruction, necessary to work hard(iii) developed a remarkable uniformity in race, language, and culture (iv) This, inturn, encouraged the development of a social philosophy known as groupism .

2. Groupism: a social philosophy that elevates the importance of group over

the individual.

3. Benefits of Groupism: (i) Encourages a tight system of familial and socialobligation ( divorce low and eldely live with families) (ii) familial relations extend into

the business world (iii) The individual worker, company, Zaibatsu all derive security,

stability (individual from family and company, company from a loyal employee and

Zaibatsu, and Zaibatsu from member companies and government) (iv) The system of

familial relations encourages resolution of conflicts through conciliation and

compromise rather than conflict and litigation. (Japan has less lawyers than one US

city Philadelphia, PA.



Groupism

4. Burdens/Costs of Groupism: (i) low level of occupational, socialand managerial flexibility. ( elder son must take over after father’sdeath even if he does not like the occupation, a zaibatsu membercompany must buy/sell deal with companies within the Zaibatsueven if better deals possible with outside companies. (ii) Excessive

conformity which may discourage individual initiative andcreativity. Education system , respect for authority, less initiativeand critical thinking. Yet, an unsurpassed nation of assimilators (iii)Japanese engineers have mastered technologies from othercountries, incorporated them into marketable products anddeveloped sequential improvements in quality standards and

production processes. These incremental innovations are theessence of success in competitive process.



Meiji Reforms of 1867

Meiji Reforms of 1867: (i) 1867 Tokugawa militarydictatorship overthrown, monarchy restored and youngemperor Meiji came to power (ii) open door to foreigntrade (iii) abolished feudalism.(iv) Serious attempts

made to close gap between Japan and the West (v)legal equality and freedom to choose occupation (vi)agricultural land distributed among peasants (vii)monetary taxes replaced with taxes in kind (viii) allinternal travel restrictions abolished (viii) Primary

education with western curriculum made compulsory(ix) foreign teachers, consultants, corporate officialsemployed. (x) government established many largestate owned businesses.



Japan’s Growth Since WWII:

Contributors

(1) Outbreak of Korean war 1950s : Us recognizes the importance of Japan as an outpost against

communism in the Far east, Japan now considered an ally not an adversary.

(2) Growth of Capital Stock: High rate of K accumulation driven from high saving rates caused by (i)

modesty of social security system (ii) bonus income (20% USA 1%) (iii) tax exempt saving accounts in

post offices (iv) low overall tax burden (v) increase in consumer spending< increase in income.

(3) Knowledge, technology, factor productivity: (i) intellectualism of Confucian heritage (ii) realization

human resources are the only resource that Japan has (iii) LTE encourages employees to accept new

technology (iv) LTE encourages employers to provide more training.

(4) Growth in Quantity and Quality of Labor: (i) Low rate of unemployment contributed to quantitative

growth of labor (ii) low UE due to LTE and flexibility of bonus and wages (iii) Confucian culture and fact

that labor Japan’s only natural resource encouraged improvement of education, thus quality of labor.

(5) Expansion of Markets: Domestic and foreign demand up after the war destruction, Korean war.(6) Systematic Movement of workers from low productivity agriculture to high productivity industry.



Bubble Economy (1985-89)

(i) 1980-1981s recession USA and Japan (ii) 1983-84 recovery (iii) Imbalance in US-Japan trade,

US imports from Japan>US exports to Japan (iv) 1985 Plaza accord, Yen appreciated, dollar

depreciated (v) Expansionary monet. policy, MS increase, interest rates decline to stimulate

domestic demand (vi) easy money policy triggered one of the most remarkable episodes of

financial speculation in world history. (vii) Value of commercial property in central Tokyo

increased ten fold 1985-89 (viii) The aggregate real estate value of Japan was 4 times larger

than the value of US (ix) Govt. allowed Jap companies to take out bank loans backed byinflated real estate wealth to purchase securities. (x) Jap PER 54) US PER 15)(xi) with

confidence in their economy and encouraged by the increased value of real estate and

securities, Jap consumers and purchasers of K equipment went on a buying spree. (xii)

During the first 5 years it was possible to argue that high asset prices were sustainable

based on expectations of future earnings. (xiii)When prices continued to climb 88-89 the

speculative nature of the boom grew increasingly evident (xiii) May, 1989 BOJ shifted to amore restrictive monetary policy and increase interest rates (xiv) The expansion paused and

then the bubble burst (xv) Between 1989-96 real estate and stock price fell by 50%, bad

debt, bankruptcies of borrowers and lending institutions (xvi) Reversal of consumer and

investor expectations, full fledged recession and high rates of unemployment.



Japan’s Industrial Organization

Japan’s Industrial Organization:

(i) In an average J industry, 27% output by 1, 54% by 3, 83% by 10 largestcompanies (ii) Level of concentration higher than USA (iii) Japan firmsamong the world 100 largest: 1965 (2), 1970 (8), 1990 (16), 1995 (37) (iv)Ind. concentration began in 1880s when Some nationalized Cos. bought bywealthy Jap. families from gov. Eventually conglomerates called Zaibatsu.

(vi) Zaibatsu organized around a family owned holding company thatcontrolled shares in smaller subsidiaries, suppliers. (v) Zaibatsu are closeinterlocking structures of manufacturers, suppliers, and distributors. (vi)Zaibatsu bank provide financing for the firms in the group, tradingcompany handled intelligence and marketing functions for the entiregroup. (vi) During US administration, efforts to create a more competitive

and decentralized economic structure, Zaibatsu broken up. (vii) 1952, Jap.Govt. relaxed anti trust laws. Zaibatsu name changed to Keiretsu. (viii)Today nearly all the large and midsize Jap enterprises connected to oneor more keiretsu organizations. (ix) The Keiretsu include banking cos.,manufacturing , general trading, and financial companies.



Industrial Organization

(x) Just in time (kanban) system allows dominant firm to shift costs of handling inventories to

subcontractors. During recession large firms able to maintain employment by lowering

amount of sub-contractors. (xi) Toyota as head of production Keiretsu owns stocks in

many of the 230 regular suppliers that produce about 75% of tools and materials that

Toyota needs to build a car. 140 of these factories located in Toyota city company complex

near Nagoya. (xii) By working closely with its subcontractors Toyota able to exercise strict

control over product quality, can adjust production more rapidly in response to consumerdemand and maintain small inventories of parts and finished vehicles through Kanban

system. (xiii) Japanese companies do not join Keiretsu to earn monopoly profits, instead

members seek the security and stability that of a family relationship. (xiv) Zai Kai: Large

corporations wield an unusual measure of influence over govt. through their participation

in 4 big business federations whose leaders are known collectively as Zaikai. Prominent

members of Zaikai hold regular meetings with govt. officials and serve as chairmen of

advisory boards and panels of government agencies. Senior bureaucrats allowed to retire

into well paid jobs in the private sector in exchange for favors.



Japan Labor Markets

The Labor Markets in Japan: (i) Before WWII no success in unionization (ii)US introduced reforms to weaken Zaibatsu and to guarantee basic rightsto labor organization and unionization (iii)1948, 50% of LF unionized (iv)1950s and 1960s unions weakened due to influence of LDP andassociation of labor with socialism/communism (v) 90 % unionscomprehensive enterprise based, include all blue collar and white collar

workers (vi) 1987 all private sector unions merged into a single federationRENGO (coalition), 1989 RENGO expanded to include public sectoremployees. (vii) The Spring offensive: Shunto(a) Each December/JanuaryRENGO announces targets for basic wage increases (b) These counteredby recommendations from Nikkeiren (federation of employers association)(c) March-April the unions stage a 1-2 day strike demonstrations to asserttheir solidarity (iv) Next negotiations conducted at industry level andsettlement reached at company level (v) Shunto process allows theJapanese labor market to work smoothly generating reasonable wageincreases and limited strike activity.



Labor Markets

Life Time Employment: (i) Permanent commitment system of employment . (ii) Corporations andselected employees are honor bound to maintain their employment relationship until retirement.(iii) Company promises : it will not dismiss the employee except under extreme circumstances(embezzlement) (iv) the employee pledges: will not abandon the co. for a more attractive job.

LTE Positives: (i) security to both (ii) worker loyalty, less labor unrest, labor willing to participate afterworking hours (iii) System explains Japan’s quick assimilation of production technologies (iv)Employees do not resist introduction of new technology and innovations that make their jobs

easier (v) Employers willing to spend time and money to train their employees for new technologyknowing that the company will benefit/employees stay (not look for another job)

LTE Negatives: (i) From Employer perspective: incompetent, unmotivated, and redundant employeesmust be retained (ii) From employee perspective: difficult to leave a job for a better one (survey59% Japan workers, 89% Americans happy with their jobs)

Seniority Pay and Bonus wages: (i) Seniority system reinforces the loyalty of employee as costly to loseseniority with a change in job . But seniority pay decreases loyalty of employer, older higher paidworkers forced to retire early. (iii) Bonuses to all regular employees from janitor to the president.Production workers in manufacturing sector paid 20% of income paid in compensation comparedto only 1% in USA. A larger % of income from bonuses is saved compared to regular income.

ECON 330 Lecture 7 Notes From Professor

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