Japan's economic development and rise to a world power

Japan and South Korea

Japan

Japan is an island nation in East Asia (Duus 2009). It is located in the North Pacific Ocean on the coast of the Asian continent. Japan is made up of the main islands of Honshu, Hokkado, Kyushu and Shikoku and many smaller islands. It is called Nihon or Nippon by its people. This means "origin of the sun." It is also referred to as "the land o the rising sun. Tokyo is its capital and largest city (Duus).

An Isolated Nation

Japan was ruled by an emperor from the 7th century (Duus 2009). In the 12th century, military rulers, called shoguns, surfaced and shared power with the emperor for more than six centuries. From the 17th century, a powerful military government sealed the country's borders to foreigners. In the 19th century, it prospered economically. A strong centralized ruler separated it from the rest of the world. Hence, it could not benefit from development and progress from outside. It was way behind Western nations in technology and military might. During the rule of a Meji emperor from 1868-1912, Japan set up a crash program of modernization and industrialization. It embarked into a colonial expansion into Korea, China and other parts of Asia. By the early 20th century, it rose to become a major world power (Duus).

Japan was one of the Axis powers, which fought the Allies during World War II from 1939 to 1945 (Duus 2009). By the end of the War, most of Japan's industries, transportations, and urban structures were eradicated. The War also took its colonial holdings. The Allies occupied Japan and ran its government. The emperor became a symbolic head of state in a constitutional monarchy under a revised constitution (Duus).

A Developed Nation, the World's Second Biggest Economy

When the Allies left Japan in 1952, it was considered a less developed country with a per capita consumption of only a fifth of that of the United States (Asianinfo 2009). In

the succeeding 20 years, it rose to a developed status during the post-war era. And in

1968, its economy ranked as the world's second biggest, second only to that of the United

States (Asianinfo).

The urban population almost doubled in size between 1950 and 1970 and increased the demand for services (Asianinfo 2009). Average exports in the 60s went up 18.4% in the 60s. These developments changed Japan's industrial structure. Its traditionally agricultural and light manufacturing bases shifted to heavy industry and services. Main industries were iron and steel, ship-building, machine tools, motor vehicles, and electronics. Even higher growth rates could have been predicted for the 70s if not for a recession, which deterred growth expectations. A double-digit inflation, the Middle East oil crisis and other factors reduced the volume of private investment. These reduced economic growth from 10% before 1974 to an average of 3.6% after 1974 to 1979. The growth level went up slightly by 4.4% in the 80s until the surfacing of the "bubble economy." Despite the pitfalls, however, Japan's major export industries remained strong and competitive because of its cost-cutting and increasing efficiency policy. It decreased energy demands and by manufacturing lighter and more economical vehicles, Japan even improved its global position. The second oil crisis in 1979 moved Japan's emphasis from heavy industry to new fields, which reaped rewards. These new fields are computer semiconductors and other technology and information-related industries. The shift spurred rapid growth (Asianinfo).

The Bubble Economy

After the 1985 Plaza accord, the value of the yen soared to thrice its value in 1971 (Asianinfo 2009). Increased prices of its exports reduced global competitiveness. Domestically, corporate investment went up steeply in 1988 and 1989. Land value prices doubled and there was a 180% rise in the Tokyo Nikkei stock market index. The government tightened its monetary policies to contain the rise in the value of assets, like land. But high interest rates pushed stock prices down. The stock market fell by 38% at the end of 1990 and decimating $2.07 trillion in value. Crashing land prices plunged financial institutions into deep debts or bankruptcy. Some survived by limiting the supply of capital to private businesses through loans. The recession broadened in October 1993 and recovery since then was slow (Asianinfo).

The Industrial Sector

Japan's slow growth in the late 90s drew doubts on its capability to remain competitive (Asianinfo 2009). Although the U.S. retained leadership in the information technology industry, technological innovation enabled Japan to retain its marketing might. Its leadership in the semiconductor and automobile industries stayed. The yen was also a rallying point. Its steep rise led Japanese companies in the major import industries to bring production outside of the country. Assembly plants were set up in China, Thailand and Malaysia for the manufacture of electrical products, such as TV, VCRs and refrigerators. This would retain high quality in workmanship but reduce labor costs in those countries where labor is cheap. Industrial and market globalization increased the export of components and capital financing and importation of finished good. Overseas production by Japanese manufacturers constitutes 10% of total production. It is swiftly rising although comparatively lower than the shares of the U.S. And Germany at 27% and 17%, respectively (Asianinfo).

Postwar Economy

This was characterized by a 15-year period of high growth and prosperity in the mid 50s (Asianinfo 2009). High rates of personal and private-sector facilities investment, strong labor force work ethic, sufficient supply of cheap oil, innovative technology, and effective government support of private-sector industries accounted for this. Japan took advantage of the incentives under the principles of free trade made available during the period by the International Monetary Fund and te General Agreement on Tariffs and Trade. From the mid-60s, it achieved a balance surplus every year, except during the oil crisis of 1973. With net external assets of $129.9 billion, Japan surpassed the United Kingdom as world leader, next only to the U.S. Records make it clear that Japan's economic growth owes to its exports and private-sector facilities investments (Asianinfo).

A review of Japan's economic history shows that its prolonged economic troubles are attributable to its 50-year postwar economic system (Asianinfo 2009). Taking this into serious consideration, the Japanese government has been taking earnest steps in preventing another economic bubble and reforms to accommodate the demands of industrial globalization. It adopted measures to stabilize the nation's financial system and refresh the sluggish economy. Some of them began in 1998, following the filing of bankruptcy by some financial institutions. Another problem is the increasing number of elderly. This means higher demands for social security, reduced workforce and increased tax burden for the labor force. And a reduced workforce can also stunt economic growth (Asian info).

Chief economist Jesper Koll of Merrill Lynch Japan predicted a 1.5-2% growth for Japan's economy early in the decade (Kyodo 2000). He foresaw better performance in the private sector and renewed investments by Japanese firms in foreign countries. But he also warned about policy mistakes, such as high interest rate or tightening fiscal policy. On the whole, he forecast economic growth as more Japanese technology companies compete globally. Toshiba Corporation, Hitachi Ltd. And Sony Corporation are competitors to U.S. firms in the information technology and technology media fields. His opinion was that more capital infusion into Japan's financial system and more substantial savings could prop up overseas investments by Japanese firms, especially in the technology and basic industrial sectors. He saw the dollar trading between 115 and 120 yen instead of only 85-90. Economist Bruce Steinberg, also at Merrill Lynch and Company, saw the U.S. dollar defeating the yen, though (Kyodo).

A Review of Contemporary Japanese Economy

Despite some serious economic and financial straits, the Japanese economy manages to stay as the second largest in the world (Yamori & Jinushi 2006). It means that it inevitably affects the world, especially Asian countries. Japan's 1990 woes are of international value for at least two reasons. One is that knowing and understanding what led to Japan's woes would help other countries avoid them. The other is the lesson other countries' central bankers can derive from Japan's monetary policy in prolonged deflation. A review of 1990 woes showed that banks continued to lend huge amounts to real estate and construction companies in the early 90s. They did this despite the havoc wreaked on them by the bubble economy. In the late 90s, banks decreased loans granted to financially-troubled borrowers (Yamori & Jinushi).

In 1994, Japan's per capita GDP was $37,618 (Asianinfo 2009). It made Japan the top-ranking OECD country. The figure suggested that the average Japanese then enjoyed a comfortable standard of living. But an EPA survey conducted in November 1994 showed that Tokyo's commodity prices were 52% higher than those in New York and 50% of those in London. The figures meant that the Japanese consumer had a relatively low purchasing power. Residential land prices in Japan at the time, especially in big cities, were so steep that mortgages and rental payments were a burden to the average citizen (Asianinfo).

Loosening Up

From their traditional tight spending habits, Japanese consumers are learning from past lessons and letting loose and letting go on expenses (Gordon 2006). This phenomenal change of behavior is deemed to benefit not only their deflation-ravished economy. It will also be a relief to the country's neighbors and trading partners. Japan keeps its rank as the second largest world economy. It remains a record-holder with a 5.5% annual rate of growth in the fourth quarter of 2005 largely because of the revival in consumer demand. It registered five times higher than the U.S.' annual growth rate at 1.1% during the same period. It also registered as thrice the GDP growth in Europe in that quarter (Gordon).

Quarterly growth rate in GDP rose 4.5% in four quarters and this compensated for the slow 2004 count (Gordon 2006). China's domestic demand and import slowdown did not affect Japan's improved growth rate, although China's slowdown contained Japan's net export for a while. The chief factor in Japan's GDP growth was and has been domestic demand. The current acceleration of the U.S. economy may mean that Japan's GDP would run faster. But if the Americans could learn to save more and the Japanese to spend more, global imbalances would be resolved (Gordon).

The South Korean economy was traditionally dominated by conglomerates or big

Enterprises, called chaebol, like Samsung and Hundai (Microsoft Encarta 2009). These conglomerates were the targets of recent reform legislation for inhibiting competition. South Korea was among the hardest-hit during the financial crisis, which razed the tiger economies of East and Southeast Asia from 1996. Korean currency and Korean assets were cracked down. Major conglomerates were collapsing or got heavily indebted. The value of the currency fell and international credits were withdrawn for Korean banks. In November 1997, South Korea was compelled to seek emergency assistance from the IMF. The following month, a U.S.$8.8 billion aid package was finalized by the IMF. At that time, Kim Dae-jung was elected as president. His rule at first plunged the Republic deeper into an economic crisis when he proposed a renegotiation of the IMF package (Microsoft Encarta).

In January 1998, President-elect Kim Dae-jung went to work on the economic reforms demanded by the IMF (Microsoft Encarta 2009). He sought a restructuring of South Korea's short-term debt while the citizens donated gold to help out in the foreign exchange crisis. The new President was threatened by a boycott of his ministerial appointments but received support from trade unions on labor reforms. In that same month, North Korea unexpectedly proposed talks with South Korea. The first was held in Beijing that April but bogged down on account of North Korea's connecting food-aid issues with political matters. By 1999, restructuring schemes and stringent compliance with IMF conditions produced signs of economic recovery (Microsoft Encarta).

Commerce and Trade

Exports increased at a brisk 27.2% from 1965 to 1980 and rose to 14.7% from 1980 to 1988 (Microsoft Encarta 2009). Major imports at the time included industrial machinery, petroleum and petroleum products, chemical products, transport equipment, raw materials and electronic components. Chief exports were textiles and clothing, transport equipment, electrical machinery, electronic equipment, footwear, fishery products, and steel Imports in 2004 cost U.S.$224 billion and exports at approximately U.S.$24 billion. Principal trading partners were Japan, U.S., Germany, Singapore, Saudi Arabia, Australia, Malaysia, the United Kingdom, Canada and Hong Kong (Microsoft Encarta).

The total labor force in 2006 was 24.5 million (Microsoft Encarta 2009). In 1996, 11.6% of the workforce was in agriculture, forestry and fishing; 32% in industry; and 55% in services. The leading labor organization is the Federation of Korean Trade Unions with more than 1.5 million members (Microsoft Encarta).

Light manufacturing was dominated by labor-intensive industries, such as textiles and clothing, footwear and foodstuffs (Microsoft Encarta 2009). Emphasis, however, moved to heavy industry in a bid to reduce imports. The new focus was on chemicals and fertilizers, cars, electric and electronic equipment, non-electric machinery, ships, iron and steel, textiles, food products, copper, tungsten, plywood and cement. Its ship-building and motor industries became major world producers. The Republic's annual industrial production in 1996 consisted of cement at 58.4 million tons, pig iron at 23 million tons, passenger cars at 2.26 million units, and television sets at 21.4 million units (Microsoft Encarta).

South Korea's monetary unit is the won and 928.65 was equivalent to U.S.$1 in

2008 (Microsoft Encarta 2009). . The bank of issue was the Bank of Korea. The won depreciated from speculative attacks during the economic crisis of the 90s. South Korea has 23 national and provincial commercial banks. There are also several government banks and agricultural cooperatives in existence (Microsoft Encarta).

Following Japan's Example?

The economy's growth in the first quarter of 2005 was the slowest in almost two years (Lingle 2005). GDP increased at only 2.7% from the previous year and the slowest since the third quarter of 2003. In 2004, the economy once more failed to meet expected growth at only 4.6%. Finance and Economic Growth Minister attempted to soften the situation by sending messages of economic growth. But these did not palliate the pessimism of South Korean consumers and businesses. The Federation of Korean Industries said that they had no expectations of their businesses improving in the ensuing months (Lingle).

South Korea might just suffer a similar and long economic slump as Japan's (Lingle 2005). South Korea confronted heavy debt burdens similar to the credit-card crisis and a low-level job creation. There was also a probability that consumer prices would increase following the 5.1% commodity price increase from the previous year. Furthermore, China's attempts to dominate along with higher U.S. interest rates could bring South Korea's export growth to disrupt farther. Because it depended more heavily on export than did Japan's economy, South Korea's domestic demand would be more vulnerable to incomes from exports. This would be the worst scenario, considering that many South Korean exporters had little pricing power (Lingle).

What compounded the situation was the inappropriate and ill-advised response of South Korea's political leaders to falling economic growth figures (Lingle 2005). Instead of coming up with policies that would address structural deficiencies in the domestic economy, their attention centered on variables. South Korea's central bank misguidedly held interest rates down for a long time, widened government deficits increased public-sector debts and raised tax burden. Deficit spending would not inspire corrective measures at times like this. Decisions such as these indicated that short-term political motivations took priority over long-term economic considerations. Japan's economy faced the same structural disaster as did South Korea's (Lingle).

Restructuring maybe undertaken according to certain crucial elements (Lingle 2005). Small and medium-sized businesses should be given access to more capital. A new entrepreneurial class could develop and act as the drawing board of future economic growth. South Korea can avoid the wrong decisions made by Japan. South Korean policymakers should understand the importance of improving the functioning of domestic capital markets. This will reduce the dependence of business investments on bank financing. This will be an important step in restructuring the economy. Current inefficiencies in South Korea's financial system may be corrected with better-functioning domestic capital markets. Stock and bond markets would be wider and deeper. Capital markets possess greater transparency and accountability. This will reduce the likelihood of massive failures. Changes in South Korea's corporate and political cultures should also be undertaken to encourage new and young entrepreneurs to set up initiatives that will boost economic growth. In other words, restructuring should go beyond mere cutting down on costs, which deal only with temporary and surface difficulties. It should plunge into deep reform of management practices, which would maximize shareholder value and constantly seek and improve competitive overall advantage (Lingle). #