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Japan's prolonged economic slump

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JAPAN'S PROLONGED ECONOMIC SLUMP 1. Introduction In only fifty years, Japan has moved from poverty to the highest levels of income, from economic insignificance to leadership from the import of technology and capital to being a major source of their export, from less developed status to the lead of economic position after the United States. After being the best performer in the Organisation for Economic Cooperation and Development (OECD) during the forty years, Japan has experienced economic stagnation since the beginning of the 1990s. The revival of the Japanese economy is of great importance not only to Japan but also to the well being of global economy. Therefore, the question now is "What has happened to the Japanese economy supremacy"? In order to answer the question, my task is to identify the factors and causes that contributed to Japan's economic supremacy and the subsequent downturn. Also in the process, I will identify the reform processes initiated by the government to address the economic woes. This paper begins with a presentation on the Japanese dynamic economy. The following sections present the Japanese model and Japanese management style respectively. Economic crises and reformation will be presented in the consecutive sections leading to some conclusion. 2.0 The dynamic economy The rise and decline of the Japanese economy has been an important feature of the world economy over the last decade. In 1945 Japan was totally ruined but became the second largest economy over a 50-year period. Japan's rise from the devastation of military defeat to the second largest economy in the world has been exceptional. The primary characteristic of Japan's post-war economy is the 15-year period of high growth, beginning in the mid-1950's that enabled it to catch up with the developed economies of Europe and the United States (US). The reasons for this include high rates of both personal savings and privates-sector facilities investment, labour force with strong work ethic, ample supply of cheap oil, innovative technology, and effective government intervention in private sector industries (Asianinfo). ...read more.


This has created a close cooperation between the conservative politicians, bureaucracy and big business to plan and co-ordinate grand strategy for Japan's economic development. Through these means, the post-war Japanese government helped concentrate Japanese capital and business skills in rebuilding the Japanese business. This link between the state and the business world is commonly known as the Japan Incorporated. This model decision making still continues to be popular among Japanese politics. 4.0 Japanese style of management Any management that can rebuild a nation prostrated by war and in less than thirty years, turning it into the second most powerful economy in the world, deserve attention. Barnwell (2000) states management as utilisation of organisation resources i.e. people, plant, and various inputs to create a product which is in demand in the market place. Japan's success in many respects could be put down to the overall pattern of the organisation of the modern Japanese economy. The key features are the business structure, quality control, production techniques, concentration on human capital (lifetime employment, wages system, bonuses, socialisation, decision making, and company unions). All the elements highlighted above played an integral part to the success of the Japanese economy. However for this assignment I will concentrate on two key elements, which is the unique business structure and quality control. 4.1 Japanese business structure - keiretsu The government initiated the rebirth of zaibatsu by allowing MITI to create cartels known as keiretsu. Major manufactures and trading firms were under strong pressure to join a few leading business groups that had begun to develop soon after the war. Six large conglomerates emerged: Mitsui, Mitsubishi, Sumitomo, Dai-ichi Kangyo, Sanwa and Fuji (XXXX). The first three were largely re-creation of the pre-war Zaibatsu, whereas the others were established under the leadership of the leading "city banks". Each of these keiretsu are held together through cross-holding of stocks, president's clubs, interlocking directorships, and other institutional contacts, and the resources and activities of the different member companies are integrated and coordinated. ...read more.


The government should try to create exceptions of increased inflation, which would make real interest rates (nominal interest rates minus expected inflation) negative, and give enough stimuli for growth to recover. He also mentioned that the government should start to push down the long-term interest rate by buying government long-term bonds. The government can also affect assets prices by buying corporate bonds and other marketable financial instruments. Also Eggertsson and Woodford emphasize the critical importance for policy to change the expectations of economic agents. They recommended that the government should try to credibly commit to a policy that aims to achieve a time-varying price-level target. They argue that policy pursued so far has not changed exceptions about future monetary policy of the Bank of Japan (Bigsten, 2004, p.9). Svensson (2003) suggests an approach with three ingredients. First the central bank should set an upward-sloping price-level target path. Second, it should bring about an initial depreciation of the yen, followed by further depreciation via crawling peg mechanism. Third, the government should exit strategy with abandonment of the peg in favour of inflation targeting once the initial inflation-target has been reached. Yoshino and Sakakibara (2002) argue that macroeconomic measures are insufficient. Their argument asserts that what is needed is for the government to undertake further financial reform, to pursue competition policy, and to reallocate public investment to more productive areas (Bigsten, 2004, p.10). The specific ingredients of the Japanese model that need reforms include labour market structure and industrial relations, financial structures, and the industrial conglomerates. The structure may earlier have given Japan considerable advantage, but it is quite likely that it now has outlived its usefulness (Bigsten, 2004, p.14). The world economy is now changing rapidly. To keep up with the other leading countries, Japan needs to be able to adjust more rapidly than before. Japan is trying to increase the flexibility of the economic system by deregulation and market reforms. If the country succeeds with these reforms at the same time as it manages to maintain the social discipline of the old system, the economy should be able to make a comeback. ...read more.

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