An Evolutionary Interpretation of the Japanese Depression in the 1990s
Shibata, Tokutaro, Journal of Economic Issues
Modern capitalism has entered into a transition era since the 1970s. The four institutional structures that had supported "the Golden Age of Modern Capitalism" became unstable. First, Pax Americana has been declining. Second, the increase in federal budget deficits in the 1970s did not promote economic growth, but rather promoted stagflation. Third, the system of compromise between labor unions and big businesses terminated in the 1980s. Fourth, accelerated inflation created the problem of financial disintermediation, which made the New Deal financial system unstable.
While the world economy experienced slow growth in the 1970s and the 1980s, the performance of the Japanese economy was relatively successful. However, "Japan's Miracle" came to an end in the beginning of the 1990s. Since then, the Japanese economy has fallen into a severe and long slump and has entered into a new transition period.
The purpose of this paper is to investigate the reasons why "Japan's Miracle" ended in the 1990s. First, I will analyze the institutional structures that encouraged the rapid growth in Japan. Second, I will examine the reasons why the Japanese economy performed better than the economies of other developed countries in the 1970s and the 1980s. Third, I will explore the characteristics of the Japanese depression in the beginning of the 1990s. Finally, I will investigate the reasons for the end of "Japan's Miracle" in the early 1990s.
Which Institutional Structures Supported the Rapid Growth?
From the beginning of the 1950s to the early 1970s, the Japanese economy experienced dramatic growth. Several institutional structures sustained this rapid growth.
First, the stable international environment accelerated Japan's economic growth. Pax Americana, and in particular the IMF dollar system, encouraged and sustained rapid growth in Japan. In contrast to the interwar period, the United States fulfilled its responsibilities as the key currency country by distributing dollar funds on a massive scale under the Marshall Plan to assist in the recovery of Europe after World War II. While an Asian Marshall Plan never materialized, the United States intervened in the Korean War, resulting in a large distribution of dollar funds as "special procurement" and in other forms in Asia, including Japan. The enormous level of "special procurement" income raised the ceiling of the Japanese balance of payments and helped the recovery of its economy.
In addition, the IMF dollar system supported the high rate of growth in the world economy, which was beneficial for rapid growth in Japan. Even though the Japanese economy's dependence on international trade was lower after World War II than before, its dependence on the world economy was still high. The expansion in world trade was the chief factor in the growth of Japan's exports during this period. Because all foreign currency earned from exports was spent on imports to expand production and achieve high growth, the increase in exports made rapid growth possible. Another benefit in the international environment was the availability of cheap and stable supplies of raw materials and energy needed for heavy and chemical industrialization [e.g., Nakamura 1995, 45, 64, 68].
Second, the stable financial system maintained rapid growth. In those days, the corporate sector showed a huge shortage of funds, which was made up by the surplus in the household sector. City banks attracted deposits from the individual sector and supplied funds to keiretsu firms through loans. This "indirect finance" was a main route of the supplies of funds during the rapid growth period. As the banks were bold in supplying funds through "over loan," which means the high loan/deposit ratio, they had to depend upon the fund supply of the central bank. Under these conditions, the Bank of Japan could control not only the financial system, but the Japanese economy through its monetary policy. …