Meiji rulers adopt a guided market economy with an energetic private sector. By the 1890s, banking, tax, and commercial laws have been put in place for a modern economy. Although the state initially spurs modernization through model factories and planning, these are soon privatized and replaced with support and guidance for the private sector. Some key sectors, such as railways, are nationalized.
Japan provides the Allies with military supplies, spurring industrialization. After several decades of modernization, acquisition of technology, and heavy investment, Japan emerges as an important economic power at the end of the first world war.
The wartime boom is followed by inflation and a brief slump. The government responds with large-scale spending on public works programs. In response to fears of socialism, a 1925 law forbids the abolition of private property. The economy continues to industrialize, and by the late 1920s, manufacturing and mining account for almost one-fourth of the gross domestic product, surpassing agriculture.
Japan avoids the worst effects of the Depression as expansionary policies enable annual 5 percent growth. But unemployment, poverty, and labor unrest allow further militarization of the economy. Control laws orient industry towards military purposes, and the army takes on the huge family conglomerates (zaibatsu). Japan annexes resource-rich Manchuria as a planned economy, but with poor results.
War in Asia, and soon with the Allies, boosts support for a militarized, planned economy from both left and right. The army draws up a Five-Year Plan for Key Industries, while wartime control laws extend state authority to nearly all markets and businesses through price and wage freezes and permits for currency, loans, bonds, mergers, or production shifts.
At war's end the military and zaibatsu dominate a ruined economy. The U.S. occupation government curbs the military economy by restricting heavy industry and shipping. Land, labor, and antitrust reforms are put into place to spur competition and recovery. Coal and steel production levels are planned, while inflation and shortages are met unsuccessfully with price freezes and rationing.
The Dodge Plan cuts spending and inflation and ends price controls, allowing the return of a faltering market economy. Demands spurred by the Korean War allow Japan to avoid recession. Antitrust reforms that bust up the zaibatsu make way for the keiretsu, looser but influential groupings of firms and banks. Japan exchanges inward-looking central planning for international trade.
Recovery yields to steady growth under the 1955 system, with production shaped by collaboration between bureaucrats, firms, and politicians. In this system, labeled Japan, Inc., the Finance Ministry controls access to credit and currency, while the powerful Ministry of International Trade and Industry (MITI) shapes industry via permits, quotas, mergers, and "administrative guidance."
Hayato Ikeda moves from MITI to become prime minister and promises to double the GNP in 10 years. Capital investment sees results, while labor shortages raise wages and consumption. Large public companies, often prone to power struggles and labor conflicts, are numerous but decrease over time. The main source of government influence on the economy still comes from MITI.
Consistent trade surpluses and 10 percent annual growth result in the second largest free-market GNP in the world. Production of cars and electronics takes off in quality and quantity. Economic success and membership in international organizations begins a slow trend of liberalization. At home, fears of foreign influence, competition, and trade deficits spark calls for more "orderly growth."
Trade disputes, the now-floating exchange rate, and the 1973 and '79 oil shocks cause inflation and faltering growth in an economy reliant on cheap oil, exports, and protectionism. But energy efficiency and a move up the product chain soon allow growth at more usual levels of 3 to 4 percent annually. The state begins to reduce its role, allowing price mechanisms a greater say in industrial policy.
A shift from an energy-intensive to a knowledge-intensive economy, plus lower oil prices, allows a new round of growth. Public research funding rises, but the increasingly international and complex economy limits the effectiveness of state interventions. MITI-sponsored research consortia fail to create the "big wins" the country is looking for in areas such as software.
The bubble economy peaks, driven by soaring land and stock prices, deregulation, and low interest rates. Japan, the world's largest creditor, boasts the biggest stock exchange. Huge surpluses cause disputes with the U.S. despite Prime Minister Nakasone's diplomacy. MITI's power shrinks as trade becomes more complex. Key firms, such as phone and rail, are privatized, but some 100 remain public.
The bubble bursts as stock and land prices crash and leave banks with massive bad debts that plague the "lost decade" of the '90s. Recession sparks an unresolved debate about the future of government-industry collaboration. Many things that once worked -- state-business collaboration, reliance on exports, MITI-led innovation, even the single-party state -- cease to do so.
Ryutaro Hashimoto begins reforms in energy, air transport, and, at long last, the financial sector. Big Bang liberalization in 1998 tries to revive the financial sector, but the debt-ridden banking system stalls recovery. The new Obuchi government shifts to a stimulus package, increasing spending and injecting funds into the banking sector, creating huge deficits. A global downturn hurts recovery.
The economy is in a deep deflationary cycle; growth is flat; and unemployment is at post-World War II highs. Junichiro Koizumi vows to reduce bad debts, promote competition, and rein in high-spending fiscal policies. But actual reforms are slow to occur because of inertia and vested political interests. Structural reforms, particularly of the debt-plagued banking sector, seem as distant as ever.
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