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Japan in 1990s
Changes in political economy
Changes in political economy
• Challenges to stability of equilibrium
– domestic socioeconomic or political problems
– external economic or security problems
• Changes of different magnitude
– adjustments in public policy
– changes in socioeconomic basis
– changes in economic or political institutions
– major shifts in two or three spheres
Bubble burst (1990-01-01)
Bubble burst (1990-01-01)
• Massive stock and land price collapse
• annual GDP growth rate around 1%
• manufacturing productivity decreased
• corporate bankruptcies
• unemployment rate
• economic performance at bottom of
industrialized democracies
– opposite from 1960s
Japan slows down
GDP (constant 1995 US$)
1E+13
9E+12
8E+12
7E+12
6E+12
5E+12
4E+12
3E+12
2E+12
1E+12
0
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Germany France Japan UK USA
GDP per capita (constant 1995 US$)
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
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Germany France Japan UK USA
International competitiveness
• World Economic Forum ranking
• Japan was No. 1 in 1990
• 14th in 1997
• 15th in 2001
Political earthquake of 1993-95
• Economic stagnation since late 1980s
• Major corruption scandals of LDP leaders
– 2.5 billion yen contribution from a company
– 1 billion yen income tax evasion
– media revelation of systematic corruption
• Businesses‟ demand for political reform
– high cost of doing business
– political bribes and contributions
Industrial contributions
Party Realignment („90s)
Prime Ministers 1993-2001
• non-LDP Prime Ministers 1993 - 1996
• LDP coalition cabinets since 1996
New Electoral Rules (1996)
• 480 members in House of Representatives
– 300 elected from single-member districts
– 180 elected from 11 proportional
representation districts
• 252 members in House of Councillors
– 100 elected from proportional representation
district
– 152 elected from 47 prefecture constituencies
More shocks in 1990s
• Large and rising government deficit and
debt (~150% of GDP)
• Aging population
• Banking crises and non-performing loans
• Asian financial crisis (1997-8)
• “Hollowing out” of industry
• natural disasters and terrorist attacks
Economic transformation
• capital market and currency had become
deeply integrated into world markets
– investment abroad
• formal trade barriers and limits on foreign
direct investment largely eliminated
• Japanese-owned firms became
multinational
– overseas production, financing, R&D, and
technological alliance
Appreciation of yen
Changes in economic policies
• New reliance on
– consumption taxes
– borrowing
– debt service
• public debt higher than GDP
• move away from monetary restraint
• zero interest rate
Zero interest rate
Changes in economic policies
• privatization of nationalized industries
• official effort to support declining industries
• protect the inefficient
• promote the competitive
Inconsistent policies
• Lack of cohesiveness and singularity in
economic policy
– internal contradictions
• no longer a cohesive strategy directed at
structural improvement of economy
• eclectic mixture of ad hoc efforts to deal
with economic problems
Still an outlier
• Comparison with other industrialized
democracies
• markets for imports remained skewed
against high value-added manufacturing
goods
• imports from overseas subsidiaries of
Japanese-owned multinational
corporations
Still an outlier
• Comparison with other industrialized
democracies
• limited amount of foreign direct investment
in Japan
• FDI per capita in Japan is less than 10%
of that in Germany, less than 5% of that in
UK
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