Japan

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Full Report: Japan

Overview

1910-1911: The late Meiji period sees a rise in party influence through the elected House of Representatives, but key decisions are still made by an oligarchy in the name of the emperor. Meiji rulers mostly support a market economy, only occasionally intervening. Having recently achieved the first Asian victory over a Western nation -- Russia -- in 1905, Japan is ready to step up its international profile.

1912-1918: A political crisis ushers in the Taisho (Great Righteousness) period, straining but not ending the influence of the genro (unelected elder statesmen). Having undergone several decades of modernization already, Japan heeds the first world war's demand to industrialize further and emerges an important economic power, participating in negotiations on the Versailles Treaty and the League of Nations.

1919-1926: A two-party system strengthens under "Taisho democracy," as do small parties and voting rights. But when a railway worker assassinates Prime Minister Takashi Hara in 1921, fears of Western and socialist influence lead to a crackdown on leftist parties. A postwar slump is met with increased public works spending, and the economy shifts as manufacturing and mining overtake agriculture.

1927-1936: The democratic experiment ends with a nationalist revival as Emperor Hirohito takes power and launches the Showa period. Assassinations and coups lead to a more militarized state. Expansionary policies stave off the worst of the Depression, but unemployment and poverty still lead to the economy's militarization. World depression and barriers cause Japan to look to Asia for trade and conquest.

1937-1945: The military consolidates power, and parties are dissolved in 1940. War in China and with the Allies boosts support from both left and right for a planned military economy, and the state now shapes markets and businesses. After Pearl Harbor, wartime deprivation and Allied bombing make daily life difficult. It worsens drastically after the dropping of the atom bomb and eventual Japanese surrender.

1946-1951: Following the Japanese surrender, the U.S. occupation government takes over the ruined nation, drafting a constitution and beginning land, labor, and antitrust reforms. Inflation and shortages are met with price freezes and rationing until the Dodge Plan, introduced by the U.S. in 1949, cuts inflation and ends price controls. Demand spurred by the Korean War heads off recession in 1950.

1952-1954: Independence for Japan comes on April 28, 1952. Splits in the conservative parties lead to minority governments and a brief rise in socialist popularity. The economy completes its recovery phase, setting the stage for a remarkable period of growth.

1955-1959: The Liberal Democratic Party (LDP) begins 38 years in power. The powerful Ministries of Finance and of International Trade and Industry (MITI) forge strong government-business ties, and the economy, buoyed by growing world trade, shifts from recovery to sustained growth. By the decade's end, a labor consensus ends years of bitter strikes, further enabling a unified national objective: growth.

1960-1972: Investment and export growth help Prime Minister Hayato Ikeda realize his 1960 pledge to double the gross national product in 10 years. As of 1965, Japan sees steady trade surpluses and rapid growth. The car and electronics industries take off in both quality and quantity, altering the public's perception of cheap Japanese goods. Success invites criticism of the focus on growth at home and abroad.

1973-1979: Trade disputes, the floating exchange rate, and the 1973 and '79 oil shocks challenge the economy, but growth resumes, albeit at lower levels. The state reduces its role in industrial policy. Relaxation of the rules leads to increased overseas investment directed toward raw materials, energy, and low-cost labor. Prime Minister Kakuei Tanaka steps down in a bribery scandal but remains influential.

1980-1989: Shifts to lower oil prices and a knowledge economy help restore growth and trade surpluses. Trade disputes hinder Prime Minister Yasuhiro Nakasone's efforts to improve ties with America through summits and a stronger defense role. A bubble economy builds as real estate and stock prices soar, and the Tokyo Exchange passes New York's. MITI's power declines as trade expands and becomes more complex.

1990-1992: Stock and land prices collapse, leaving banks riddled with bad loans. By 1992 the economy is in crisis, causing many to question assumptions made about the economy, politics, and Japan's role in the world. The Gulf War provokes further debate on Japan's role in the international community.

1993-2000: Losing its position after 38 years as the absolute majority party, the LDP returns to lead a series of coalition governments after less than a year in opposition. The sputtering economy raises questions about government-industry ties. A weak economy and shifting alliances produce seven prime ministers in as many years, many of whom pledge reform. Bankers and bureaucrats resist.

2001-2003: A popular politician, Junichiro Koizumi, becomes prime minister in a relative surprise: His dynamism and charisma contrast with his predecessors. But his reform promises result in little concrete change, and the economy remains mired in deflation and bad debt. Japan's society has changed deeply as a result of the decade-long slump, and it remains unclear how it will return to growth.

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Political

1910-1911: Under the 1889 Meiji constitution, a small oligarchy (genro), in the name of the Emperor Meiji, dominates a weak Imperial Diet consisting of an elected House of Representatives and an appointed House of Peers. Parties gain power over time, but key decisions are made by the genro. The Meiji period ends with the emperor's death in 1912; the constitution remains in effect until 1947.

1912-1918: The Taisho period (1912-26) begins with the ascension of weak Crown Prince Yoshihito and a political crisis: A military attempt to influence the cabinet leads to public frustration with genro politics. Japan takes advantage of war in Europe to expand its influence in China. Japan's military role in politics and expansion in Asia will be primary in Japanese politics until the end of World War II.

1919-1926: A two-party system of the conservative Rikken Doshikai and the pro-democracy Seiyokai strengthens under "Taisho democracy," and voting rights increase. But Takashi Hara, the first commoner prime minister, is assassinated in 1921, and later coalitions govern ineffectively. Fears of communist influence provoke a Communist Party ban in 1923, and a law forbids change to the political system.

1927-1929: The shaky experiment in democracy begins to fade as Emperor Hirohito ascends the throne, initiating the Showa period. Nationalists help revive emperor-centered neo-Shintoism, which glorifies the emperor, traditional Japanese values, and self-sacrifice and persists through the '30s and '40s. The two major parties, the conservative Rikken Doshikai and the pro-democracy Seiyokai, alternate power.

1930-1939: Killings and coups create an increasingly militarized state. The army uses a 1931 explosion, the Manchurian Incident, to occupy Manchuria. Military officers assassinate Prime Minister Inukai in 1932, and the army now influences decisions on cabinets, prime ministers, and foreign affairs. The left is repressed, and nationalists advocate nationalization of assets and military expansion.

1940-1945: Political parties are dissolved, and Army Minister Hideki Tojo becomes prime minister. Japan attacks Pearl Harbor in December 1941. Tojo remains in power for much of the war, governing an economy and a state dominated by military objectives.

1946-1951: Some war criminals are tried and hanged, but the government remains largely intact after the 1945 surrender, albeit with General MacArthur's Occupation Force firmly in control. A new constitution creates a constitutional monarchy with a National Diet composed of a House of Representatives and a House of Councillors. Article 9 renounces war and bans a regular military. Women get the vote in 1946.

1952-1954: Independence returns to Japan on April 28, 1952. Splits within the conservative parties lead to a series of minority governments and a temporary rise in socialist popularity.

1955-1959: Major parties dominate as leftist groups form the Japan Socialist Party, while the Liberal and Democratic Parties merge to begin a 38-year run in power. Not strongly ideological, the conservative LDP has clear goals: export-driven growth and cooperation with U.S. foreign and defense policy. Factional divisions based on patronage and personal loyalty later emerge within the LDP.

1960-1963: Hayato Ikeda moves from the Ministry of Trade and Industry to become prime minister after the unpopular U.S./Japan Security Treaty causes Nobusuke Kishi to resign. Ikeda had played a key role in implementing Dodge Plan reforms in place of increased planning; as prime minister, he continues to emphasize economic progress.

1964-1971: Prime Minister Eisaku Sato expands Japan's international role while promoting peace and nonproliferation. He will win 1974's Nobel Peace Prize. The Clean Government Party (Komeito), founded in 1964, joins the Socialist Party in opposing the Japan-U.S. security pact. Supported by urban migrants, workers, and women, Komeito becomes the third largest party. The 1968-69 student protests reach Japan.

1972-1974: Prime Minister Tanaka increases defense spending and reduces trade frictions with the United States. He holds talks with Soviet and Chinese leaders, but his trips to Indonesia and Thailand cause riots there because of still-fragile relations in Asia. Tanaka resigns in response to charges of corruption and is later jailed briefly; his influence, however, remains intact.

1975-1981: The opposition increasingly accepts the Treaty of Mutual Cooperation and Security, and even small increases in defense spending, but conflicts and splinter groups within the Liberal Democratic Party (LDP) weaken consensus. After the 1980 elections, Prime Minister Zenko Suzuki steps down following fiscal weaknesses and controversy over a textbook's version of wartime aggression.

1982-1986: Conservative internationalist Yasuhiro Nakasone tries to improve ties with the U.S. through summits and a stronger defense role, even urging revisions to the constitution's antiwar Article 9. But because of a rising trade surplus, America demands that Japan open markets and allow the yen to rise. Nakasone tries to address these pressures and still change industrial policy as little as possible.

1987-1992: The conservative Noboru Takeshita resigns in a bribery scandal in 1989 after two years as prime minister. Like many prime ministers before him, he remains influential in the LDP. Emperor Akihito succeeds his father to the throne, pledging to observe the constitution. The Gulf War renews controversy over Japan's defense role; in the end a law allowing troops to be sent abroad is defeated.

1993-2000: After 38 years, opposition parties to the LDP form a government that resigns in less than a year. The Social Democratic Party forms a coalition with the LDP in 1994 and ends opposition to security ties to the U.S. Also in '94, nine opposition and LDP splinter parties form the New Frontier Party, pledging "ceaseless reform." A weak economy and shifting alliances produce seven prime ministers in as many years.

2001-2003: Junichiro Koizumi takes office in April, vowing recovery through reforms, not public spending, to reduce bad debts, promote competition, and tighten fiscal policies. But the obstacles prove great, and he soon backs away, losing popularity amid Cabinet squabbles. His stature improves in 2002 thanks to a diplomatic initiative to engage North Korea. But the economy seems intractable.

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Economic

1910-1913: 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.

1914-1918: 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.

1919-1928: 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.

1929-1936: 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.

1937-1945: 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.

1946-1947: 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.

1948-1954: 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.

1955-1959: 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."

1960-1964: 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.

1965-1972: 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."

1973-1979: 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.

1980-1984: 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.

1985-1989: 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.

1990-1995: 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.

1996-2000: 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.

2001-2003: 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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Social

1910-1919: The rise of socialist and populist ideas worldwide reaches Japan, stimulating support for universal suffrage, social welfare, workers' rights, and public protest. The socialist movement is mostly repressed, although a labor movement does emerge.

1920-1931: Even as the left is suppressed, the state adopts some emerging Western models of medical and financial assistance.

1932-1944: The social ethos stresses the citizens' duty to work, and state responsibility for citizen welfare is limited to those physically unable to do so. There is little sympathy for the working poor, and employer opposition to unemployment insurance compels alternatives such as work relief.

1945-1951: Displacement, unemployment, and food shortages plague postwar Japan. The new constitution includes social rights such as compulsory education, and a 1946 law guarantees a minimum standard of living. Land reform cuts tenant farming, while flexible labor laws increase unionization from 3.2 percent in 1945 to 53 percent in 1948. Strikes become common.

1952-1959: Surplus labor depresses wages and job security, and strikes continue until a consensus is in place for lifelong employment and wages tied to seniority. Firm-level unions include all but temporary workers and upper management and identify with the firm's health. Government, labor, and management councils set minimum wages. Low social security encourages a high savings rate, despite low returns.

1960-1964: Universal health care and pension laws come into effect. The unions' Spring Labor Offensive now achieves annual wage hikes in a predictable and negotiated way, replacing the bitter strikes of the 1940s and '50s. Incomes and living standards consistently rise, and by 1964, 87 percent of Japanese consider themselves middle class.

1965-1969: Labor shortages lead to a rise in female employment. Despite otherwise high levels of unionization, industries now employ non-union temporary and part-time workers who can be hired and fired as needed.

1970-1979: Social security spending increases through the 1970s and '80s, but continues to lag behind that of other industrialized economies. Economic downturns following the oil shocks temporarily transform the pro forma Spring Labor Offensive into a genuine surge of strikes. Economic challenges, however, ultimately reinforce business-labor collaboration.

1980-1989: By 1989, over-65s account for 12 percent of the population, straining pension plans, which are merged into the compulsory Employee Pension Insurance Plan. The worker contribution rises even as benefits are cut, and the retirement and eligibility ages both rise as well, leaving a gap between retirement at 60 and benefits at 65. Homemakers are granted pension benefits.

1990-2000: Japan's aging population continues to strain government resources. Critics argue that piecemeal reforms or health and pension systems fall short of the comprehensive efforts necessary to deal with the aging population. Despite the economic downturn, public assistance benefits reach a mere 1 percent of the population, mainly the elderly and disabled.

2001-2003: The lengthy recession is taking its toll across society. Unemployment has shattered the "salary-man" culture, and many youth, facing poor job prospects, prefer to drop out. Crime is on the rise. Even the 2002 soccer World Cup fails to energize Japan or spark its economy as it does the other co-host, South Korea. Controversy dogs new school textbooks accused of disregarding Japan's war crimes.

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Environmental

1910-1931: The drive for industrialization, in part a result of Japan's lack of natural resources, creates increasing pollution. There is, however, little if any environmental awareness.

1932-1945: The fully extended militarized economy creates environmental problems such as deforestation, pollution, and neglect of soil and water conservation. Wartime bombing creates significant damage and environmental degradation in urban areas. In 1945, rice tainted by cadmium causes just one in a series of major outbreaks of industrial poisoning.

1946-1949: Destruction caused by nuclear and conventional bombing requires massive cleanup, and illness related to radiation continues to affect the population. Years of wartime production and the resultant neglect of water and soil conservation lead to flooding and further land degradation.

1950-1964: Industrial growth causes new problems. New technologies like oxygen blast furnaces for the steel industry produce better products but generate more pollution still. Booming construction soon leads to a shortage of old-growth forests and a rise in timber imports from countries like the Philippines and Indonesia. Such environmental costs are disregarded in the drive for economic growth.

1965-1973: Environmental problems emerge as the downside of rapid growth, most notoriously the Minamata Bay mercury poisoning. Lawsuits and public pressure lead to the birth of the Environmental Agency, laws establishing the "polluter pays" principle, and real emission standards. Many dirty industries once in Japan now invest in plants in Asia and Latin America, where regulation is more lax, labor cheaper.

1974-1979: Oil shocks force greater energy efficiency through better technologies and industrial restructuring linked to the rise of a knowledge economy. But the government also responds to slowing growth by promoting large-scale land development, such as roads, industrial zones, dams, and ports, which cause much environmental damage and consumption of resources such as timber.

1980-1989: By the 1980s environmental activism has peaked, although an Environmental Agency report finds that even tougher regulations on industry environmental problems are inadequate. Japan comes under fire internationally on forestry and whaling issues.

1990-1999: At the 1997 Kyoto Conference, Japan pledges to cut greenhouse gases to 1990 levels, despite a decade of rising carbon dioxide emissions. Power-sector liberalization leads to pressure to slash costs, and plants turn to cheap but dirty coal. Plans to cut emissions include 20 new nuclear power plants by 2010, but delays are announced after 1999 sees the worst nuclear accident in Japanese history.

2000-2003: Japan adopts the Kyoto Treaty, but doubts surface over the country's political will and regulatory ability to meet the targets to which it has committed its industrial sector. Controversy over whaling revives, which Japan continues to favor despite the opposition of most nations; even Japanese conservationists take a moderate position on the issue.

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Rule of Law

1910-1929: During the 19th century, a legal code had been adapted from European law, in part to fend off foreign powers. The Meiji constitution, in effect from 1889 to 1947, exerts little restraint on the emperor, but also calls for a representative government. The new legal system requires a word to be invented for the concept of rights.

1930-1936: A series of military coups emboldens factions in the military. The first economic control laws set the stage for later state control and expropriation of private enterprises for military purposes, but the laws are not yet fully implemented.

1937-1945: Far-reaching control and mobilization laws allow military branches to seize control of businesses. A black market emerges in response to price controls.

1946-1951: Following the surrender, the U.S. issues the Basic Initial Directive, laying out a program of democratization, demilitarization, and reform. A constitution drafted by the Americans passes in 1947, introducing a variety of rights and reinforcing the concept of rule of law. But as the occupation government becomes institutionalized, problems such as favoritism and politically motivated loans arise.

1952-1969: Lawyers and judges are few, trials long, and civil judgments rarely enforced. Contracts are brief and flexible, while "administrative guidance" is often verbal and at the discretion of bureaucrats. Vague and unwritten rules put foreigners at a disadvantage in the administration of laws, and also delay a modern financial system, a problem that growth obscures until the 1990s.

1970-1979: Links between organized crime and legitimate business have economic consequences as gangsters regularly extort money from firms by threatening to disrupt shareholder meetings. Prime Minister Tanaka resigns and is later jailed briefly in connection with a Lockheed bribery scandal, but he retains behind-the-scenes influence.

1980-1989: New laws increase auditing requirements for firms, but reporting is still inadequate, misleading, and insufficiently independent. This allows troubled companies to misrepresent their health and continue to access capital through affiliated banks. Banking reforms in 1988 attempt to reduce ties between finance and organized crime.

1990-2000: The flexible, unwritten rules and personal relationships praised during the boom years are now blamed as the slump reveals the need for transparency and consistency. Domestic reform advocates now join foreign businesses in pushing for rule of law. In the late 1990s new administrative, financial, and judicial reforms are enacted.

2001-2003: In a sign of the disruptive effects of the lengthy recession, crime rates surge, and arrests plummet in 2001-02. Both crimes by youth and crimes against children are on the rise. The government fears that Japan is losing its reputation as the "safest country on earth."

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Trade Policy

1914-1920: By the end of the first world war, military exports to the Allies help Japan move from debtor to creditor nation.

1921-1928: A series of treaties on China with other major powers attempt to maintain good relations while protecting Japan's influence in China, an important source of raw materials and markets.

1929-1939: Global depression and tariffs hurt trade with the West, leading Japan to look to Asia for trade possibilities. Japan devalues the yen to help exports, sparking boycotts abroad but boosting exports for most of the Depression. But by 1937 ongoing depression abroad and falling production cause a drop in exports. Import bans cause a vicious cycle of falling production, exports, and imports.

1940-1945: Japan responds to a trade embargo with a military push into the Dutch East Indies in search of oil and other raw materials. The so-called Greater East Asia Coprosperity Sphere attempts to achieve political and economic integration of Asia under Japanese leadership.

1946-1948: During the war, 82 percent of Japan's ships and many factories have been destroyed, hampering postwar trade. Most of the production infrastructure is oriented toward satisfying military demand rather than consumer or other peacetime goods. Imports are initially limited to essential food and raw materials through the careful allocation of scarce foreign exchange.

1949-1954: The U.S.-implemented Dodge Plan helps international trade recover, putting an end to high inflation and price controls, and fixing exchange rates at a rate that gives Japan a competitive edge.

1955-1959: Central planning is rejected, although policies focus on increasing exports and moving to higher-value goods. Guided by the Ministry of International Trade and Industry (MITI), the export economy thrives in an increasingly open world, while tariffs and quotas protect domestic producers and deal with trade deficits. Foreign currency controls restrict imports, notably cars, until the late '50s.

1960-1964: In response to foreign pressure, a five-year plan for trade liberalization reduces the long list of restricted imports, though cars, some electronics, and many other goods remain restricted. In addition, less formal but effective restrictions remain a source of conflict with the United States, and some farm goods are officially protected through the 1980s.

1965-1972: To conform to IMF standards, Japan pledges not to restrict trade to improve its balance of payments and to end tax-free export earnings. Exports grow 17 percent annually in the 1960s, and after 1965 periodic trade deficits are no longer a problem. Higher-quality cars and electronics reach new markets, while at fixed exchange rates, exports became more competitive due to productivity gains.

1973-1979: Trade deficits caused by the rise in oil prices lead to a renewed push to increase exports. Merchandise exports rise 21 percent over the decade, though imports rise as well, so no huge surpluses result. The new round of oil shocks in 1979 lead to brief trade deficits again.

1980-1986: The '80s are marked by trade disputes and tensions over high Japanese investment abroad. These tensions transforms MITI, which now advises voluntary restraint on steel, TV, and car exports, going so far as to open an import-promotion office. Huge trade surpluses lead to U.S. calls for yen revaluation and open markets. Restrictions on imports fall, but nontariff barriers remain an issue.

1987-1989: Rising demand for imports eases some trade frictions and builds domestic pressure to reduce barriers in a country that has always prioritized producers over consumers. But huge surpluses and conflicts continue, particularly with the U.S., which classifies Japan as an unfair trading nation in 1989 and holds talks to reduce structural impediments such as distribution and investment practices.

1990-2000: The trade balance declines annually in the 1990s, hurt first by increasing competition from Asian countries and then by a regional and global economic slowdown. U.S. talks continue to include demands on the Japanese to open their markets to goods and retailers, but the talks also now include efforts to support the Japanese economy, unthinkable a decade before.

2001-2003: Japan depends on exports for some economic good news; when the dollar loses value in 2002, the government is suspected of intervening to keep Japanese exports competitive. The slowdown in the U.S. and the world economy, however, puts a damper on export growth.

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Money

1930-1936: After delays caused by depressions, earthquake, and a financial crisis, the yen is briefly put on the gold standard. The government abandons the gold standard in 1932 and expands the money supply through mandatory loans and credits from private and state banks. A competitive devaluation helps exports.

1937-1945: Currency controls are imposed, and limited foreign currency makes financing imports of raw materials a major bottleneck. The state also controls business and investment through permits and loans. The war exacerbates shortages, leading to price and wage freezes.

1946-1948: The ruined economy coupled with expansionary fiscal and monetary policies means that too much money is chasing too few goods, leading to high inflation. Unsuccessful fixes include an asset freeze in February 1946 and price controls in March.

1949-1952: The Dodge Plan, introduced by the United States in 1949, slashes inflation by curbing the money supply and the budget, fixing exchange rates, and boosting exports. The yen is pegged at 360=1$ for the next two decades, which gives Japan a further advantage in competitive exports.

1953-1964: Monetary policy aims to address trade deficits and shape the economy through loans to power, shipbuilding, coal, and steel firms. The Central Bank's "window guidance" informally restricts the money supply. Policies also encourage high savings but low interest rates, and the main source of funds for corporations shifts from the Bank of Japan to private savings channeled through the state.

1965-1972: This high-growth era sees trade deficits end and credit crunches result. An improving trade balance leads to international calls to liberalize trade and financial controls. Membership in the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) demands financial and currency liberalization. The undervalued yen is allowed to appreciate slightly in '71.

1973-1979: Like many currencies, the yen is allowed to float in 1973, but the government continues to intervene in currency markets to ensure competitive exports. Relaxation of tight investment controls leads primarily to more overseas investment, as firms seek raw materials, energy, and inexpensive labor. Post-shock inflation is brought under control by conservative monetary policies.

1980-1983: The strong yen leads to a surge in investment abroad, particularly in wealthy countries. Investments in U.S. car plants, for instance, are meant to deal with import restrictions and reduced competitiveness resulting from the high yen. The Foreign Exchange and Foreign Control Law officially frees external transactions from government control. As in trade, however, informal state control continues.

1984-1989: Accords with the United States lead to appreciation of the yen and further liberalization of capital controls, mainly on domestic instruments like CDs and Treasury bills. By 1988, capital controls are no longer the issue, but rather the enormous imbalance in capital flows themselves, as Japan becomes the world's largest net creditor, buying Van Goghs, Hollywood studios, and land in Australia.

1990-1997: The bubble bursts as stock and land prices go into free fall, leaving banks with massive bad debt. The problem is exacerbated by loan decisions based on bureaucratic influence or business ties rather than on how good the investments are. The falling yen and interest rates, and increased government spending, are not enough to revive the economy.

1998-2001: "Big Bang" liberalization in foreign exchange, banking, securities, and insurance tries to revive Tokyo as a financial center and improve investment opportunities. Two big banks are nationalized, and others are recapitalized. High public spending continues, and the Central Bank briefly institutes a zero interest rate in 1999. But a mild recovery is hurt by the global slump.

2002-2003: The economy cannot find its way out of the doldrums; when the dollar falls against the yen in late 2002 on fears of global instability and war in Iraq, the government is suspected of selling yen to stop its rate from rising and hurting exports. The stock market hovers at decade-low levels, and the banks remain under threat of collapse.

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Categories: Overview | Political | Economic | Social | Environmental | Rule of Law | Trade Policy | Money
Graphs: Growth | Income | Inflation | Unemployment | Well-being | Trade Volume | Trade (CAB) | Spending

Related: Video | LinksView all categories for years from to | See Full Report | Print