Part II: Japan’s Great FallPosted: January 28, 2010
Japan’s fall from grace in the mid-90s was part and parcel of extreme policy failure on multiple fronts.
First, Japanese labour supply eventually hit a wall and with it came rising wages and productivity stagnation.
Second, while the protection of domestic industry worked for large export-oriented firms, it also limited competition and innovation amongst firms operating in the domestic market.
None of this mattered, however, so long as the country’s trade surplus continued growing.
But this growth, and the 1985 Plaza Accords designed to devalue the US dollar, caused a significant appreciation of the Japanese Yen, and began a slow process of “hollowing out” the Japanese manufacturing economy. Exports, which were just about all Japan excelled at, suddenly hit turbulent waters. One million manufacturing jobs were lost between 1992 and 1996.
The rising value in the Yen, and near zero costs of capital, simultaneously sent stock and real estate markets soaring. This despite the decreasing profitability and exports of the companies listed. The bubble was primed to burst, and when it did, it took the luster and shine off of America’s next great threat. As Richard Katz noted in his book, Japan: The System that Soured, “The ideas and strategies that worked so brilliantly in the era of industrial takeoff had outlived their usefulness once Japan’s economy matured.”
Japanese policy makers were never able to navigate from a protectionist export strategy towards a more holistic productivity and innovation oriented economy. Some will point to the country’s leadership in mobile phones as a sign that the latter is untrue. However it must be noted that Japan’s mobile phone industry was one of the sole areas where open markets ruled. The competition from foreign entrants thus created a virtuous circle of innovation from domestic companies. Aside from mobile telephony, Japanese industry has struggled and has seen its neighbours in East Asia replace Japan as the most successful in high-tech components, computers, electronics and perhaps soon automobiles.
Thus after having been anointed the world’s next great economic power through the 1980’s, Japan hardly grew in the 1990’s and beyond. Today we see it largely as a rather benign competitor – a far cry from the hysteria of Japan’s coming that marked the 1980’s.