The rise and relative decline of the Japanese economy.

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The rise and relative decline of the Japanese economy has been an important feature of the world economy over the last decade. The Government-industry cooperation, a strong work ethic, the mastery of high technology, and a comparatively small defence allocation (1% of GDP) have helped Japan advance with extraordinary rapidity to the rank of second most technologically powerful economy in the world after the US and third largest economy in the world after the US and China. One notable characteristic of the economy is the working together of manufacturers, suppliers, and distributors in closely-knit groups called keiretsu. A second basic feature has been the guarantee of lifetime employment for a substantial portion of the urban labour force. Both features are now eroding. Industry, the most important sector of the economy, is heavily dependent on imported raw materials and fuels. The much smaller agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. For three decades overall real economic growth had been spectacular: a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s. Growth slowed markedly in the 1990s largely because of the after effects of over investment during the late 1980s and contractionary domestic policies intended to wring speculative excesses from the stock and real estate markets. Government efforts to revive economic growth have met little success and were further hampered in late 2000 by the slowing of the US and Asian economies.

 Japanese economic activity has been stagnant since the collapse of the speculative asset-price bubble in 1990, despite highly expansionary monetary policy which has brought interest rates down to record low levels. Although several reasons have been put forward to explain the sustained weakness of the Japanese economy, none is more intriguing from the viewpoint of a central bank than the possibility that monetary policy had been largely ineffective because the Japanese economy entered a Keynesian "liquidity trap."

Japan's economy has serious structural problems, such as the weak financial system, which requires more competition by expanding stock and bond markets to improve its efficiency. However, as a result this may increase unemployment. Therefore, it is dubious that structural reform will create demand. Japan's problems can be attributed to a variety of factors, including low aggregate demand, import barriers, bad loans, poor productivity, heavy government regulation, crony capitalism, corruption, an aging population and so on.

The Japanese economy expanded by 1.5 percent in 2000, mainly because of a turn-around in business investment and net exports. Private consumption remained stagnant as ongoing corporate restructuring depressed households’ take-home pay and the decline in the stock market and pessimism about longer-term prospects dampened consumer sentiment. Public investment underwent sharp contraction.

Unemployment rate contains the percent of the labour force that is without jobs. Employment conditions deteriorated after the first oil crisis in 1973, however, pushing the unemployment rate to over 2 percent in the latter half of the 1970s and to nearly 3 percent in the latter half of the 1980s. In 1990-91, the rate settled down again to just over 2 percent, but it began another gradual rise from 2.2 percent in 1992. This trend has continued for eight consecutive         years.  

In 2000, there were 3.2 million unemployed people in Japan, representing an increase of 30,000 people over the previous year. It was the second straight year that unemployment exceeded the 3 million mark. The prolonged economic slump had serious impacts on the labour market raising the level of unemployment and putting downward pressure on wages. Unemployment rate has remained high throughout 1999 and recorded a historical high at 4.9 percent in 2000.

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A sluggish rate of GDP growth is the most important issue facing Japan's economy today. Low inflation, a strong trade surplus and low interest rates are signs that Japan is operating below capacity, which suggests that a deficiency in aggregate demand is the short-term culprit. In fact, it is so low, presently, that Japan seems to be caught in a "liquidity trap", an economic state that previously had only existed in theory. This is a situation in which interest rates fall so low that demand does not react.  Certainly, this can be related to the structural problems that plague Japan: ...

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