Japan - The Consummate Mercantilist
Lecture 7

Japan's Rise

1. Japan's dramatic rise and unexpected decline
   1. Rose from the ashes of World War II
   2. Second largest economy in the world
   3. GDP grew at 9% until 1990s
   4. World's largest net creditor nation
   5. World-class producer, exporter, and financier
2. Characteristics
   1. The ability to imitate and adapt
      1. Assimilated ideas, institutions, and technologies from cultures
      2. Adapted them to their own needs
      3. Examples
         1. China – Zen Buddhism and chopsticks
         2. Korea – Confucianism
         3. Dutch – science and technology
         4. Germany – school system
         5. Prussians – national constitution
      4. After WWII – U.S. wrote Japan's current constitution
         1. Extended the right to vote for all men and women
         2. Civil rights
         3. No military – U.S. stationed troops there
            1. Japanese gov. can spend in other areas
         4. Gave Japan technology
         5. U.S. opened its markets to Japanese products
            1. Japan kept its markets closed to outsiders
            2. U.S. looked the other way
               1. U.S. wanted to stop the spread communism
   2. Japanese view the world as a hierarchy
      1. Hierarchies – Countries, empires, races, classes, companies
      2. Japanese had viewed their nation as inferior to its powerful neighbors
      3. Now disdains these countries
   3. National corporatism – relative homogeneity of the Japanese people
      1. Sense of nationalism
      2. Mercantilist view of the world
      3. Business is war; the strong prosper
      4. Called "Japan, Inc."

Japan's Economic Characteristics

1. Employers provided "three sacred treasures"
   1. Lifetime employment
   2. Seniority wage scales – the longer an employee works for employer, the higher is his/her wages
   3. Company unions – unions are usually separate from companies
   4. Employees are loyal
   5. Harmony between workers and management
2. Japan looks for long-term market share
   1. U.S. – max. short-term profits
3. Japan's tax system is conducive to high savings and investment rates
   1. Savings peaked at 40%
   2. During 1960s and 1980s, savings rate was 20%
   3. Savers invest money into financial intermediaries, i.e. banks
      1. Banks grant loans to businesses and people
      1. People buy homes and cars
      2. Businesses invest in structures, machines, and equipment
      2. Note – could led to real estate and stock bubbles
   4. Banks are important for economic development
      1. If people hide their money under their mattresses, then the money is removed from the economy
4. Keiretsu – Japanese conglomerate corporations
   1. Before WWII – powerful families controlled industries, zaibatsu
   2. Politics – U.S. allowed zaibatsus to form into Keiretsus
   3. Bank is part of the group
      1. Provides low-interest loans to its group
   4. Lack of antitrust regulations
      1. Keiretsu would supply resources and parts to each other
      2. Pool their resources for research and development
   5. Prevents hostile takeovers
      1. U.S. – a corporation takeover another corporation, incurring large amounts of debt
      2. Parent company squeezes as much money it can from the new subsidiaries
5. Ministry of International Trade and Industry (MITI) – gov. fosters Japan's economic development.
   1. High regard for bureaucrats
   2. Bureaucrats devise a coherent national economic plan
      1. “Long-term strategies”
      2. Predict the "winner" and "loser" industries
      3. Called “sunrise” and “sunset” industries
   3. Do not repress market forces when they intervene in the economy
   4. Preserve competition

Japan's Stagnation

1. Stagnation since1990s
   1. Lifetime employment – not guaranteed anymore
   2. Liberal Democratic Party – ruled Japan for 4 decades
      1. Like the mafia
      2. Politicians – corruption scandals
      3. Bureaucrats also caught up in scandals
   3. "Bubbles" – prices quickly accelerate, hit a peak, and quickly crash
      1. Land and real estate crashed
         1. High population density and limited land
         2. Prices for real estate dropped by 50%
      2. Stock market collapse
         1. Nikkei peaked at 38,957.44 in 1989
         2. Nikkei is at 6994.90 in 2008 (82% drop)
   4. Banks are financial hurt
      1. People could not pay back their loans
      2. Speculators – buy something now to sell it for a high price in future
         1. Some people bought property in order to sell it for a higher price
         2. Same for stock prices
      3. Banks foreclosed on assets that were losing value
      4. Keiretsu bank kept loaning to dying subsidiaries
         1. Kept bad performing business afloat
         2. Reluctant to let businesses go under
         3. Greatly increased the gov. bailout costs
      5. Gov. kept these banks going, hoping the economy would turn around
2. The future
   1. Use export growth strategy
      1. Yen is too strong
         1. Makes imports cheap
         2. Makes exports expensive
         3. Japanese firms brought money from abroad to prop up finances, causing Yen to strengthen
      2. Exports are a small percentage of the economy
      3. Many Japanese products are made outside of Japan
         1. Honda, Toyota, and Nissan make some cars in U.S. and Canada
   2. Consumer spending
      1. Japanese are high savers
         1. Financial crisis causes people to save more
         2. Future is uncertain
      2. Get Japanese to consume more, causing the consumer economy to expand
         1. Consumers are reluctant to make large purchases like real estate and cars if future is uncertain
         2. Asset prices are still falling in Japan
      3. U.S. did this
         1. U.S. has low savings rate
         2. Consumers financed purchases through debt
         3. 2008 Financial Crisis
   3. Keynes – gov. uses fiscal policy
      1. Increase gov. spending and/or lower taxes
      2. Japanese gov. greatly increase debt
         1. Debt to GDP ratio is approx. 170 to 200%
         2. U.S. is approx. 60 to 70%
      3. Keynesian solution is not working
   4. Interesting theory
      1. WWII – U.S. broke up the powerful coalitions
         1. Rigid
         2. Prevents change
      2. New gov. formed that shaped new institutions that was geared for growth
      3. New institutions become fixed and rigid
         1. Cannot change as society changes
         2. Need a push to force change