The Japanese Economy in the Age of Globalisation

Kumiharu Shigehara

Remarks at the Third Asia Forum

in Barcelona, Spain on December 12 2005


I am pleased to be invited to the Third Asia Forum and to talk about economic trends in Japan and its challenges in the age of globalisation. In discussing this topic, it is useful to start with a brief review of Japan's economic records over the past decade.


1. The state of the economy in the last decade

Japan's economic growth performance over the last decade is generally considered to have been dismal. Growth performance in the late 20th century was adversely affected by large swings in asset market prices not only in Japan but also in a number of other OECD countries.  But, Japan's case proved to be the most difficult to deal with.

In the late 1980s when huge increases in stock and land prices occurred in Japan, there was no noticeable erosion of general price stability. Moreover, Japan's huge current account surpluses did not decline significantly in dollar terms, despite the doubling of the yen value from 235 yen per dollar to 120 yen within a year after the Plaza accord in September 1985. Against this background, there was a strong international and domestic political pressure on the Japanese authorities not to resort to monetary restraint to contain asset price inflation.

The asset market finally burst in 1990. Despite substantial monetary policy easing, business fixed investment and housing construction collapsed. However, there was no significant decline in consumer confidence and private consumption never contracted on an annual basis as it happened in other OECD countries such as the US, the UK and some Nordic countries that had suffered asset market bubbles somewhat earlier than Japan.

Another notable feature is a sustained rise in employment, which was kept until 1997. Job increases, in particular in the construction sector, were maintained by huge expansion of public works expenditure through government debt finance. The unemployment rate did begin to pick up in 1993 from a low of 2.1 per cent in 1991 and rose to 3.4 per cent by 1997, but the level was still low by international standards. Under the lifetime employment system, Japanese firms made considerable efforts not to shed surplus labour in the face of continued weak output, hoping for an early turnaround of the business cycle. In this situation, there was no strong evidence of widening income distribution or signs of increased social instability. Such was the general economic and social situation that in its annual report on Japan for 1999, the OECD argued that it was only by high standards that Japan set itself in previous decades that its economic situation could be seen as disappointing.*1


However, a series of negative shocks, some foreseen and others unforeseen, aggravated the economic situation dramatically in 1998. A premature, sharp tightening of fiscal policy in 1997 coincided with the outbreak of the crisis in emerging Asian economies. Moreover, the sudden collapse of several Japanese financial institutions late that year triggered a panic among bank depositors and worsened consumer and business confidence. Subdued consumer spending and a sharp fall in business investment thereafter contributed to a 1.1 per cent decline in real GDP in 1998, the first negative growth since the 1974 recession in the aftermath of the first oil crisis. Activity remained sluggish in 1999 and economic growth for the 1990s as a whole declined to an annual average rate of 1.5 per cent, much lower than the US growth rate of 3.3 per cent and the Euro area growth rate of 2.4 per cent. As a result, there was a decline in Japan's position in international ranking for per capita income. True, based on the very high value of yen against the US dollar in the foreign exchange market, Japan?fs GDP per capita was some 11 per cent higher than that of the US and about 80 per cent above that of the Euro area. But, at purchasing power parities, it was 23 per cent lower than the US level, though still 7 per cent higher than the Euro area average and slightly above the French and German levels.*2