Japanese Economic Development

The economic environment of Japan today is plagued with problems. Scholars hypothesized endlessly on the determinants, not least debt and inequality. But I believe the defining issue holding Japan back is a lack of demand. The country has both low foreign demand, with a trade/GDP ratio compared to the world at 23% to 60% (Minami, 169), and low consumer demand exemplified with capacity utilization falling by 17% in 1993 (Itoh, 27). With no one to buy your goods this obviously leaves a huge issue, while others such as population and terms of trade are useful problems, but common. The demand issues facing Japan are ones that the world has not seen within the Japanese Fordist/development framework. As such Keynesian policies from the post WWII era should not be implemented in Japan today because the institutional framework was meant to take full advantage of those policies when Japan was developing and as a developed country those same policies would not have the same effect because it’s position has changed. It is in fact its status as a developed country filtered through the domestic Fordist/developmental framework Japan set up post WWII that has caused the demand issue. The keynsian policies have both a global and domestic lens, with fiscal and monetary expansion as a keynesian policy on the domestic end and the Bretton Woods institutions as keynesian policies on the global side.

It is difficult to talk about the domestic side of Keynesian policies in Japan as there were none in the post WWII era. Japan’s above average growth is a result of their advantageous global position being fully utilized by it’s style of capitalism, sometimes known as developmental capitalism for its efforts at creating fast industrialization along a directed path, but for the sake of this paper lets use the term “coordinated” capitalism found in the paper by Westra as it fits nicely with what Itoh says about the domestic Japanese structure.

“although expansion of effective demand was essential for high economic growth, it was brought about not by Keynesian policies but mainly by the coordination (or spontaneous regulation) of the social relations between capital and labour in advanced countries…to raise real wages roughly in line with labour productivity” (Itoh, 5)

While this kind of coordination was in line with Fordist models in other 1st world countries, the strength of that relationship, and the level of government support for it is a staple of Japan. Companies would hire workers and their jobs would be guaranteed for life. Lifelong employment along with strong income of agricultural labour gave the large Japanese population capital to buy the ever increasing Japanese goods developing as the export oriented developmentalism flourished. The hallmarks of Keynesianism such as debt from fiscal stimulus are not even present. The development of that export oriented plan hinged on capital accumulation and access to markets. This is where the global environment came in.

As WWII wrapped up it became obvious that the United States would lead the world as the new hegemon. A role they took on in effort to avert economic calamity like the Great Depression. The Global Plan, in order to stem communism, wished to see Japan as a strong economic block to Soviet aggression. To do this Japan needed capital in order to grow. Which they gained from the re-engaging Marshall Plan capitalizing Japan during the Korean War amounting to 30% of total trade in Japan (Varoufakis, 77). To further intertwine Japan into the global economy the US backed the admission of Japan into GATT, which granted it favourable access to new markets instrumental in securing the increase of its % of world GDP by 156% (Varoufakis, 88). These efforts to grant Japan more export markets gave them the needed mobilization to start their export oriented development. Today the global environment has different politics. Communism is gone and the goal of Japan as an economic epicenter has come to fruition. The US has shrank from international leadership. No longer are there any grand US schemes to increase trade or thwart enemies like China’s silk road initiative (which does not involve Japan). Like the Global Plan tried to create export zones for Japan. While before preferential access garnered industrialization now Japan has only its favourable advantages to lean on. With capital to produce and access to markets it was necessary for goods to be able to compete globally.

While the dollar peg system initially hurt Japanese exports, once they had gained a comparative advantage it turned in their favour (Itoh II, 8). Early comparative advantages lied in Japan’s cheap and docile labour due to increases in population (From 1950 to 1970 the workforce increased by 20 million) (Itoh, 3). Taking advantage of that Japan began exporting to countries it had a favourable exchange rate, namely the United States at ¥360 per US dollar (Itoh II, 9). As well, a pegged yen to dollar lended stability to primary products priced in dollars, to go along with the low prices from oversupply. Once the disadvantages of subsidizing the Japanese economy boiled over Nixon in 1973 ended the Bretton woods established system. With the abandonment of the dollar peg system exports became erratic in line with currency valuation. The value of the Yen rose as high as ¥80 per US dollar in 2013 (Itoh II,10). That spurred the outsourcing of the large manufacturing sector in Japan abroad, to cheaper destinations such as South Korea and Taiwan. This lines up with figures of economic growth declines by almost 8% and manufacturing by over 50% from 1973 (Nixon drops dollar peg) to 1975 (Itoh, 9). The larger effect on demand is the decrease in Japanese employment (especially lifelong) as a share of employment in secondary industry, which peaked in 1970 at 25% and fell from there (Itoh II, 73). So would a renewal of the dollar peg system increase manufacturing and employment once again? No it would not. Any new pegs would take into account the new economic world, one in which Japan is the 3rd largest economy and drastically increase the yen (which was severely undervalued under the dollar peg system). As well, the cheap and plentiful labour Japan relied on for a comparative advantage is gone as countries like China and Vietnam soak up the high labour industries with their large working age populations comparable to Japan’s, predicted to drop by 8 million from 2012 to 2025 (McKinley, 1). With such a drop in manufacturing employment Japan lost a pillar to its Fordist model and a broad stroke of dependable consumer demand as many well paying manufacturing jobs moved to cheaper countries.

I have tried to link high unemployment as the predictor of such weak demand and the overall issue in Japan, yet unemployment is lower than most developed nations (4% in 2009). While true it hides the fact that there is a growth in part time employment to 30% of all employment in 2009, a new record high (Iyoda, 2). Part time, casual and other types of uneasy employment do not provide the security to spend. So while official unemployment is low the real ability of people to consume is as low as ever. The growth in part time employment is a breakdown in the original coordinated capitalism. Unemployment along with economic malaise should not happen with proper Keynesian policies, yet recent policy has shown otherwise. Since the 80’s there has been a push to use Keynesian policies and as probable they failed. Shinzo Abe’s three arrows of monetary expansion, fiscal expansion and structural reforms follow basic keynesian tenets and have done very little for genuine growth as the real growth rate (first two quarters of 2013 at 4 percent then 0.9 percent and 0.7 percent in third and fourth quarter of 2013) (Itoh II, 10). Monetary expansion has also failed. During the “lost decades” of the 1990’s interest rates were below 2% and growth did not take off whatsoever (Itoh, 22). As for structural reforms a huge push has been made to get women into the workforce, while bold it will not mean anything if the jobs are of low wage and casual as they do not inspire confidence to raise consumer demand sufficiently. The reason these policies never worked is because they did not directly deal with the failure of the Japanese Fordist model to deal with the new Japanese economy.  .

So what else can be done? While I agree with Itoh on the need for a basic income and green technology growth (Itoh II, 14), he puts no economic reasoning to their need. With the great amount of debt Japan has it seems risky to bet on basic income. But this alone will not bring up the whole economy. More beneficial may be to lean in as a tertiary sector economy with more women participating. Along with that a temporary increase in credit growth in households would increase spending to allow economic growth. Once debt is lower Itoh’s basic income can secure consumer demand. Hopefully by taking bold initiatives guided by the past Japan can see the rising sun.


Halevi, J. and Varoufakis, Y. (2003). The Global Minotaur. Monthly Review, 55(3), p.57.

Itoh, M II. (1990). The world economic crisis and Japanese capitalism. Basingstoke: Macmillan.

Itoh, M. (2001). The Japanese economy reconsidered. Choice Reviews Online, 38(09), 


Iyoda, M. (2010). Postwar Japanese economy. New York, NY[u.a.]: Springer.

Matsuba, M. (2001). The contemporary Japanese economy. Tokyo: Springer.

Mckinley Global Institute. The Future of japan: Reigniting Productivity and Growth. March 2015. Mckinsley & Company.

Minami, R. (1994). The economic development of Japan. Houndmills: MacMillan.
Westra, R. (2012). The Japanese Economy in the Crossfire. Journal of Contemporary Asia, 42(4), pp.697-706.

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