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$)

0

1E+12

2E+12

3E+12

4E+12

5E+12

6E+12

7E+12

8E+12

9E+12

1E+13

Germany France Japan UK USA

GDP per capita (constant 1995 US$)

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Germany France Japan UK USA

International competitiveness

• World Economic Forum ranking

• Japan was No. 1 in 1990

• 14th in 1997

• 15th in 2001

• 10th in 2012

• 9th in 2013

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 more than twice its 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