1. Introduction
Since its astonishing growth during the 1960s, Japan's economy has attracted extensive worldwide attention. It enjoyed especially high esteem in the 1980s, when its performance was by many measures the highest among developed nations, and Japan stood among the world's most successful economies. However, the world's admiration has plummeted since the 1990s, when the Bubble Economy burst, bringing on chronic stagnation. Since then, the world has regarded the Japanese economy less as a desirable model and more as an evident failure with many lessons for other economies. These external judgments, positive and negative, have affected how the Japanese perceive their own economy. After Japan's opening to the world late in the Tokugawa Shogunate, the Japanese regarded their economy as despairingly backward, trailing Western economies and with little hope of catching up. However, Japan's growth in the 1960s and its performance relative to other developed countries until the 1980s dispelled Japan's economic inferiority complex. This conversion reflected the world's rising estimation and rising fear of Japan. Developing economies seeking to industrialize hoped to emulate Japan's progress. In contrast, developed economies felt threatened by Japan's ascent, and controversy erupted between Japan and several developed economies, especially the US. In retrospect, this antipathy towards Japan was another form of evaluation; however, domestic and international perceptions of the Japanese economy shifted again after the 1990s.
This article reviews how domestic and international perceptions of Japan's economy have varied. It situates the companion articles in this issue by Insang Hwang (2012) and Yutaka Harada (2012) in the historical context of studies of the Japanese economy. In particular, it discusses one recurring fixation that muddles comprehension of factors underpinning Japan's economic success and failure, the tendency to overestimate characteristics that supposedly are specific to Japan and different from other market-oriented economies. From the 1960s through the 1980s, scholars, commentators, policy-makers, and the public insisted these characteristics were singular and significant contributors to Japan's remarkable economic development. Since the 1990s, they have considered them the root causes of Japan's remarkable stagnation. Both are exaggerations. Although some singularly Japanese attributes perhaps contributed to Japan's economic ascent and decline, it is equally plausible they did not. It is more likely that poorly conceived and executed macroeconomic policies, especially monetary policy, had greater influence on Japan's post-1990s stagnation. This article complements Hwang (2012) and Harada (2012) in referencing studies that endorse this view.
This paper proceeds as follows. Section 2 summarizes how Japanese perceptions of Japan's economy have shifted historically. Section 3 discusses the emergence and development of international interest in Japan's economy. Section 4 introduces alternative domestic and international interpretations of Japan's economic stagnation. Section 5 draws conclusions from the investigation.
2. Shifting Japanese regard of Japan's economy
Before its high-growth 1960s, Japan perceived its economy with a sense of inferiority. The perception that it was abaft of the West originates in Marxist analysis of Japanese capitalism after the Meiji Restoration in 1868. Japanese Marxist economists proposed the first systematic analysis of Japan's economy and their portrayal long influenced the thinking of Marxist and non-Marxist Japanese intellectuals.Footnote 1 In the most influential of these studies, Yamada (Reference Yamada1934) described Japanese capitalism as a ‘military semi-feudal system’ characterized by semi-feudal tenant farming and pre-modern capital−labour relations under the domination of Zaibatsu and a military bureaucracy.
Pessimism overshadowed Japan's economic self-perception long after World War II and not even the growth of the 1960s swept it away entirely. The controversy during the 1960s regarding external liberalization of the Japanese economy exemplifies the situation. At that time, Japan was under continuous foreign pressure (Gaiatsu) to open its economy further to international trade and capital flows. This pressure resulted in trade liberalization in the early 1960s and capital liberalization at the decade's end. The process was, however, far from smooth. The Japanese public feared that external liberalization would crush Japan's economy, which they regarded as backward compared to other developed economies. Japanese economists who preached the virtue of liberalization and downplayed those fears were a minority within their profession. The few who endorsed liberalization and the greater number opposing it engaged in continuing controversy.
Trade policy officials, particularly in Japan's Ministry of International Trade and Industry (MITI), also fretted about the outcome of external liberalization and erected measures to counteract it. They believed that Japanese industry was decidedly less competitive than other developed economies and would not survive economic invasion without governmental protection. Liberalization policies planned and executed by MITI came to be called ‘industrial policy’ and were viewed suspiciously by their opponents.
This historical context shows the original intent behind Japanese industrial policy as it later evolved. Initially, although MITI's industrial policy was not essentially a positive policy to promote exports, it was a passive policy to survive competition with advanced economies. That intention was notably evident in the ‘Special Measures Law for the Promotion of Designated Industries’ presented to the Diet on 22 March 1963. Although the bill was shelved and ultimately discarded, it became one of the most frequently referenced documents relating to industrial policy.Footnote 2 Its main purpose was to designate which industries required assistance to strengthen their international competitiveness in the age of trade liberalization. Its secondary purpose was to promote mergers and rationalizations within these industries through governmental cooperation. The bill's original title—‘Special Measures Bill for Strengthening the International Competitiveness of Designated Industries’—speaks to this intent. These legislative attempts were motivated by the perception among policy officials that Japan's economic backwardness was evident in such phenomena as ‘smallness of firm size’, resulting in ‘excess competition’.Footnote 3
Only after the early 1980s did Japan's pessimistic self-assessment fade, and even then the perceptual shift was externally inspired. Two books by foreign scholars were especially influential: Japan as Number One by Ezra Vogel (Reference Vogel1979) and MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 by Chalmers Johnson (Reference Johnson1982). Vogel praised Japanese-style business and management, which earlier experts called ‘pre-modern’, as factors that had propelled Japan's economy to ‘number one’. His book triggered a conversion among Japanese economists, who began to interpret Japan's economic characteristics as strengths rather than weaknesses. The fact that the translation of Vogel's book remains Japan's all-time non-fiction best-seller by a Western author attests to its influence in Japan. Writing for a specialized audience, Johnson focused factually on industrial policy and presented a historical view of MITI's policies. He evaluated MITI's role in the ‘Japanese miracle’ positively as his book's title suggests.Footnote 4 That was noteworthy, as MITI long had been described abroad and at home as ‘notorious’ and ‘domestically minded’.
Johnson and Vogel contributed greatly to changing the tone of journalistic commentary about the Japanese economy, especially estimations of Japan's economic characteristics. Many Japanese experts began to explore the distinctive attributes of Japan's economy. Although they disagreed about which were relevant ‘Japanese characteristics’, they shared a consensus that they contributed to the economy's exceptional performance. The characteristics which they identified as singularly Japanese included combinations of companies descended from big families (Zaibatsu), company groups with interlocking business relationships (Keiretsu), corporate governance by a main bank instead of stockholders, lifetime employment commitment to employees, cooperative relationships between management and labour, strong power of an governmental authority concerned with directing private companies’ business, and close relationships among business people, politicians, and government.Footnote 5 During the first half of the 1980s, international interest in those distinctively Japanese characteristics had been growing, in turn motivating Japanese economists to analyze what characterized Japan's economy. The pessimism and scepticism formerly endemic to Japan's economic self-regard vanished.
Around the mid-1980s, a different topic entered the discussion. Although the Japanese no longer regarded their economy's distinctive features as weaknesses or signs of backwardness, they faced another problem: friction between the US and Japan over a growing trade imbalance. US journalism became increasingly shrill about the closed nature of Japan's economy, seen as tied to Keiretsu, complicated public regulations, and governmental protections for targeted industries that apparently hindered US companies from penetrating the Japanese market. ‘Japan-bashing’ in the US intensified until the mid-1990s. The Japanese were frustrated by this criticism, believing it was based on a caricature of their economy; however, they began to question whether Japan's economic success necessarily enriched people's lives. The experts argued that Japan's economic system had been producer-centric and called for a shift to a consumer-centric economy.
The 1986 Maekawa Report from a group led by Haruo Maekawa, a former governor of the Bank of Japan, shows a conspicuous policy shift during the period. Established in autumn 1985 to advise Prime Minister Yasuhiro Nakasone, its official name was the ‘Study Group on Adjustment of the Economic Structure for International Cooperation’. The group was convened primarily to propose guidance for accommodating Japan's economic structure to closely related foreign economies. The report recommended expanding domestic demand and imports to reduce Japan's current account surplus and ease external frictions. While the reduction of Japan's current account surplus had become the policy target, the promotion of domestic consumption became its policy measure.
Furthermore, the Maekawa Report is significant because it first proposed the concept of ‘structural reform’, a term popularized after the 1990s when Japan entered prolonged recession. By the early 2000s, ‘structural reform’ was counted among the most-used economic phrases in the media. The Junichiro Koizumi cabinet, installed in April 2001 with enthusiastic support from Japanese voters, adopted the phrase as its slogan. By then, however, its meaning had changed completely, for economic stagnation since the early 1990s had radically altered the nature of policy proposals. The Maekawa Report proposed structural reforms to make Japan less producer-oriented; the Koizumi cabinet advocated structural reform to make Japan more productive. When Koizumi took office, the Japanese public predominantly believed that structural economic issues had created Japan's persistent stagnation and that structural reform was essential to recovery.Footnote 6 During a decade of stagnation, the Japanese people's perception of their economy had relapsed into pessimism.
3. International interest in Japan
Japan's growth in the 1960s, its favourable subsequent performance and works by Vogel (Reference Vogel1979) and Johnson (Reference Johnson1982), attracted international interest in the country's economy. Research projects and institutional departments devoted to Japanese economic studies proliferated worldwide during the 1980s, attracting competent young researchers. That momentum continued until the mid-1990s, and then declined sharply.
However, extended international interest from the 1980s to the mid-1990s was not necessarily welcome in Japan, for it often featured more antipathy toward Japan than sympathy. In the mid-1980s, economic friction between Japan and the US was serious and harsh opinions about Japan were conspicuous throughout the US media. Anti-Japanese commentators were called ‘revisionists’ because they disputed the then-prevailing belief that Japan would modify its practices to accord with US interests. They insisted Japan was fundamentally not a market economy, at least as they understood it, and the US should take drastic measures to counter Japan's trade practices.
The 7 August 1989 cover story of Business Week (‘Rethinking Japan’, Neff, Reference Neff1989) expressed the consensus within US journalism of that time:
After years of haggling, the US still runs a $52 billion annual trade deficit with Japan, and Japanese society remains closed in crucial ways. As a result, a radical shift in US thinking about Japan is under way. This revisionist view holds that Japan is really different—and that conventional free-trade policies won't work. Once, such views would have been dismissed as ‘Japan-bashing’. But now they have an intellectual base.
In that same issue, Business Week featured articles by four influential revisionists: Clyde Prestowitz, Karel van Wolferen, Chalmers Johnson, and James Fallows (Neff and Magnusson, Reference Neff and Magnusson1989). Although their backgrounds and emphases differed, they promoted the shared vision that Japan's economic system was incompatible with market-oriented economies. It is ironic that Johnson, who had praised Japan's industrial policy highly, became a leading critic of Japan and was called the ‘godfather of revisionists’.
Although US journalism seemed preoccupied with anti-Japan views during the period, less inflamed inquiries into Japan's economy continued. From the mid-1980s to mid-1990s, research into the Japanese economy was extensive at institutes and universities worldwide, motivated by sincere desires to learn what had empowered Japan's economic miracle and to gather insights applicable to other economies. The topics centred upon what seemed characteristic of Japan's economic system—namely, its corporate governance, employment practices, and industrial policies. In some cases, researchers provoked heated controversy about the transferability of these Japanese attributes to other economies. The typical concern was industrial policy. Influenced by the accumulated studies since Johnson (Reference Johnson1982), notable US economists adopted pro-industrial policy positions and urged the US government to act more concertedly to enhance the competitiveness of US industries. Emphasis on a larger governmental role in fostering domestic industries spread into the early 1990s and influenced the economic policies of the Clinton administration.Footnote 7
As Hwang (2012) explained, Korean government and business have long sought to harness lessons from Japan's economic growth and Japanese business practices to aid Korean economic growth. Proximity to Japan and the two countries’ historical economic and political connections had made it commonplace for South Korean students to study in Japan. During the 1970s, South Korea and Taiwan had sent the most students to Japan, surpassed by China in the 1980s. In Section 3 of Hwang (2012), he identifies six categories of South Korean research into Japan's economy. Among them, (1) economic growth, industrial policy and structural changes, (5) corporate governance, zaibatsu and venture and (6) labour market, labour-employer relations, and wage determination are subjects of frequent international interest, as in Vogel (Reference Vogel1979) and Johnson (Reference Johnson1982). As is to be discussed in the next section, (3) financial crisis, deregulation and Japan's depression have attracted international research into Japan's economy since the 1990s. Hwang cited two topics of specific interest to South Korea—(2) manufacturing productivity, technology, innovation, and (4) FTA, FDI, regional integration and trade deficit. The former cluster of categories might reflect the competitive as well as cooperative relationships existing between Japanese and South Korean industries. The latter might be related to South Korea's policy since the 1990s of enhancing economic integration with other economies.
4. Alternative views of Japan's persistent stagnation
Until the 1980s, the Japanese economy was regarded as the most successful among industrialized economies, and industrializing economies saw it as the model to emulate. After the Bubble Economy burst in the early 1990s, Japan devolved into severe and prolonged recession, characterized by meagre GDP growth, rising unemployment, worsening deflation, and non-performing loans. These circumstances damaged international perceptions of Japan as an economic power. At home, speculation about the causes and remedies for this unprecedented stagnation settled into a supply-side view and a demand-side view. The former attributed Japan's stagnation to ‘structural problems’ and argued that Japan's economic system, so effective during earlier catch-up stages, had become antiquated and counterproductive following globalization in the 1990s. Demand-side proponents argued that insufficient aggregate demand, not low productivity, explained Japan's anaemic growth. They pointed out that the output gap between potential and actual GDP had widened consistently because of decreasing aggregate demand as evident by increasing unemployment. The demand-side view implicitly implied failures of fiscal or monetary policy, and its adherents diverged into those who primarily criticized fiscal policy, especially tax increases by the Ryutaro Hashimoto cabinet in 1997, and those who blamed the Bank of Japan's monetary policy for the continuing deflation.
Harada (2012) presented a more detailed picture of the subject. In Section 1 of his article, he categorized explanations for Japan's great recession into five hypotheses. Among them, (2) the efficiency shock hypothesis mirrors the supply-side view, whereas (3) the fiscal policy hypothesis and (5) the monetary policy hypothesis mirror the demand-side view. Harada examined two additional hypotheses—(1) the bubble hypothesis and (4) the financial system hypothesis. His categorization differs from this article's because authorial purposes differ. Harada presented the opinions of professional economists; this article concerns opinions aired mainly in mass-circulation journalism. Professional scholarship and mass-market journalism were and remain interrelated; however, academia dismisses imprecise reasoning and loosely defined concepts that journalism might embrace if they have popular appeal. That circumstance is apparent in the supply-side view. As mentioned, during the post-Bubble era the Japanese public accepted as conventional wisdom that structural problems created Japan's persistent stagnation, especially at the time the Koizumi cabinet was installed. As Harada indicated, however, ‘no economist can explain what the shock was that caused GDP growth to shrink from 4.6% to 1.2%’. Nevertheless, journalism calling for ‘structural reform’ of the Japanese economy had become ever more feverish.
A similar contrast is noticeable among arguments that developed abroad about possible causes of Japan's stagnation. Many journalists blamed Japan's stagnation on its system having become outdated and inefficient. Katz (Reference Katz1998) embodied this viewpoint; professional economists disagreed. They focused on Japanese monetary policy since the end of the 1990s, specifically the persistence of deflation under a zero interest rate. They considered that situation not only curious but also dangerous because it eliminated interest rate adjustments as a counter-deflationary monetary weapon. They believed that Japan's stagnation persisted through the combination of chronic deflation and the zero interest rate policy. Krugman (Reference Krugman1998) highlighted this problem first, followed by Bernanke (Reference Bernanke, Mikitani and Adam Posen2000), Ahearne et al. (Reference Ahearne, Gagnon, Haltmaier, Kamin Christopher Erceg, Faust, Guerrieri, Hemphill, Kole, Roush, Rogers, Sheets and Wright2002), and others.
5. To what extent were Japan's structural economic characteristics important?
This historical retrospective has shown that domestic and international attention to Japan's economy, in general, has fixed on Japan-specific characteristics outlined above. Until the 1980s, these were praised for creating Japan's economic miracle; after the 1990s, they were condemned as responsible for its stagnation. Although commentary about Japan's structural economic characteristics remains prevalent, at least among mainstream journalists, its justification demands scrutiny. Some attributes of Japan's system—e.g. guarantees of lifetime employment—might augment productivity in manufacturing by promoting investments in human capital. However, it is doubtful that Japan's ‘miracle period’ was due to any bureaucrats’ directions to Japanese industry. Certain Japanese economists had pointed out the groundlessness of MITI's industrial policy, even in the 1960s,Footnote 8 and Japanese specialists in the subject have denigrated Johnson's (1982) ‘smart MITI’ hypothesis. Similarly, arguments by Japanese and foreign economists point to the baselessness of the conventional notion that economic structural problems contributed foremost to Japan's stagnation. These circumstances show that economists should make greater effort to present their research results to the public if they want their findings utilized more effectively by society.
About the author
Asahi Noguchi is a professor in the School of Economics at Senshu University in Kawasaki, Japan. He studied international economics, particularly, the history of international trade theories, in the Graduate School of Economics at the University of Tokyo. His research covers multiple areas in international economics, the history of economic theory, macroeconomics, and economic policy. He has published numerous books in Japanese and articles in Japanese and English about Japan's economy and economic policies, international economic problems, macroeconomics, and macroeconomic policy in general
