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Japanese Economy

INTRODUCTION

While retaining its time-honored culture, Japan rapidly absorbed Western technology during the late 19th and early 20th centuries. After its devastating defeat in World War II, Japan recovered to become the second most powerful economy in the world and a staunch ally of the US. While the emperor retains his throne as a symbol of national unity, actual power rests in networks of powerful politicians, bureaucrats, and business executives. The economy experienced a major slowdown in the 1990s following three decades of unprecedented growth.

ABOUT JAPAN

Located in Eastern Asia, Japan is an island chain between the North Pacific Ocean and the Sea of Japan, east of the Korean Peninsula. The area of Japan is total 377,835 sq km

Of land: and 3,091 sq km of water. Compared to the United States of America, the area of Japan is slightly smaller than California (12)

The population of Japan is 126,771,662 (July 2001 est.) and population growth

Rate:  0.17% (2001 est.) (12). In comparison, the population of the

United States is 284,500,000

The GDP of Japan is as under:

GDP: purchasing power parity - $3.15 trillion (2000 est.)

GDP - real growth rate: 1.3% (2000 est.)

GDP - per capita:  purchasing power parity - $24,900 (2000 est.) (12)

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THE ECONOMY OF JAPAN

The Japanese economy is one of the strongest in the world. Only the USA has a higher GDP. Despite the collapse of the bubble economy and almost a decade of problems, Japan is still the world's second largest economy. Currently, Japan's economy is seven times the size of China's and the Japanese produce seventy percent of all goods and services in East Asia. Japan and the United States have the most extensive economic relationship of any of the world’s major powers. Japan's post-war economic rise and its current relative stagnation offers students and teachers opportunities to both learn more about Japan and better understand economic concepts. Through understanding recent Japanese economic history, students gain knowledge about what causes economic growth and the relationship between economic flexibility and continuing prosperity (4)

From 1997 through 1998, the Japanese economy experienced its most serious recession in the half century since the end of the World War II. To counter this recession, the administration implemented policies in every field including fiscal, tax, and financial measures, and struggled to prevent Japan from falling into a deflationary spiral.

Meanwhile, the Bank of Japan has adopted the so-called "zero interest rate” policy since February 1999 to help underpin the economy via monetary policy. As a result of these efforts, since the summer of 1999, confidence in the outlook for the Japanese economy has been recovering, albeit slowly, leading to a rise in stock prices and a recovery in capital investment. (8)

THE JAPANESE ECONOMIC MIRACLE

After World War II, East Asia was the only region of the world that experienced continual substantial economic growth and no other East Asian country enjoyed more economic success than Japan. The Japanese economic pie grew at an annual rate of ten percent from the mid-1950s until the Arab oil shocks of the early 70s. The Japanese then managed to maintain much more modest but steady growth rates until the early 1990s. Many factors contribute to economic growth, and although some reasons are more important than others, economists and economic historians agree that all of the following contributed to Japan's economic rise: 

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• The Occupation. Although the occupation of Japan did not result in the kind of rebuilding Europe experienced under the Marshall Plan, American-introduced policies resulted in higher Japanese savings rates and lower inflation.

• The Korean War. While the U.S. did not defend South Korea with the intention of helping the Japanese economy, massive American purchases of goods and services during the war served as a major economic boost to the still-recovering Japanese economy.

• The World Free Trade Boom. Due in part to the post-war climate engineered by the U.S. and Britain, free trade substantially increased relative to the 1930s, creating a favorable situation for Japanese exports.

• Shift From Dependent to Less Dependent Industries.  By the latter part of the 50’s, the Japanese were producing goods such as cars that required fewer imports. This made Japanese exports less expensive. Even though Japan's miracle was not export-led and the country did not begin substantial exporting until the 1960s, when the export boom did occur in Japan, it made a strong economy even stronger.

• A Surplus of Well-Educated Workers. As late as 1950, fifty percent of Japan's population lived on farms. Japan’s excellent schools and a high birth rate placed employers from the 1950s until the late 1960s in the enviable situation of having a large supply of young, well-educated, rural high school or junior high school graduates who were no longer needed on farms and who desired industrial employment.

• Surplus Funds for Investment. Private savings, which banks and other financial institutions in turn lend to expanding businesses, are extremely important for economic growth. Japan’s high savings rates enabled Japanese industrialists during the miracle years to obtain massive amounts of funds for expansion very cheaply.

• Trade Union Structure/Industrial Relations. Japan has industrial rather than craft unions which means management negotiates with one rather than several labor unions.

• Competition and Entrepreneurship. Even though the government played a larger role in the Japanese economy than was the case in the United States, domestic private competition in such industries as motorcycles, automobiles, and consumer electronics was fierce. Successful Japanese entrepreneurs in these, as well as other industries were able to build powerful companies that benefited the entire economy.

• A Stable Political Situation. During the miracle years, the voters continued to elect members of one political party, the Liberal Democratic Party, thereby avoiding the political unrest that hurt the economies of other nations during this time.

•  Low Military Expenses. While Japan today has one of the largest armed forces in the world, because the U.S. viewed Japan as strategically important during the Cold War and thus shouldered a major portion of the costs of Japan’s defense, Japan was freed from the burden of spending a large portion of its wealth on its military. (4)

JAPAN'S RECENT ECONOMIC PROBLEMS

Although far from the danger of collapse, Japan today faces some of the same serious structural economic problems that triggered its decade-long recession, such as low productivity   growth relative to the past, continuing high consumer prices, post-war record unemployment rates, and a general societal malaise. The most important lesson to be learned from Japan’s recent troubles is that economic circumstances change quickly, and if a system is incapable of adjusting to those changes well, the economic quality of life will certainly suffer.

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During the miracle years, Japan had few economic competitors in Europe and none in Asia.  The United States valued Japan as an ally in the Cold War and was relatively tolerant of Japan's policies that discouraged most imports. By the end of the 1980s, the situation was dramatically different. Japan had strong economic competition in Asia and Europe, and since the Cold War was over, the U.S. became much more concerned with perceived unfair Japanese economic policies that discouraged American imports and investment. Also, as a result of the communication and computer revolutions, the very nature of global economic competition had changed by the 1980s, requiring companies to make swift business decisions in order to remain competitive. The centralized and regulation-laden Japanese system made it difficult for Japanese companies to respond as quickly to competitive challenges as their foreign counterparts. In the face of dramatic new economic challenges the Japanese system continues to change much too slowly, creating a situation where Japanese households spend twenty percent of their income on food compared to the ten percent spent in the United States in part because of informal and formal trade barriers that still keep much foreign produce out of Japan. Japan has one of the most regulated of all capitalist economies, which increases prices and drags down productivity. Because until very recently large Japanese companies would not lay off employees, today Japanese industry has the highest costs in the world and in many sectors has at least temporarily lost its competitive edge.

As of 2000 there is little disagreement among economists or policy leaders as to what reforms Japan needs.  The Japanese should move more in the direction of freer and more unregulated capitalism and away from the now inflexible state-directed system that was created to solve a different set of economic problems than the ones that exist today.  Because Japan's post-war political-economic system is so entrenched, according to virtually all economic analysts, change is proceeding too slowly. However, since Japan’s leaders largely recognize what reforms need to occur and the countries’ enviable history of adaptation, the needed reforms will probably eventually occur and Japan's economy will probably markedly improve in the future. (4)

TECHNOLOGICAL DEVELOPMENT AND IT IN JAPAN

Japan's IT activities can be comparable to those in the U.S. in terms of production capability of IT-related equipment.  However, the acceleration of economic growth and improvement of productivity resulting from the IT revolution has not yet been realized. Japan is particularly behind the U.S. in development of software and in the creation of versatile content. Japan has the outstanding advantage of creating content in the fields of animated cartoons and software for games. However, the financial system and the social evaluation system are not sufficient to develop them.

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In many respects, the United States and Japan have been headed in opposite directions since the 19th Century, says Eleanor Westney, MIT associate professor of management. Common to both countries, however, is the ongoing debate about the appropriate role of research and development. (6)  In the 1980s, Japanese and U.S. industrial R&D budgets were headed in opposite directions. As budgets grew an average of more than 10 percent per year in Japan, expenditures shrank in the U.S.

Things were very different in America. During the '80s, business leaders complained that corporate R&D was doing too much unfruitful and fundamental research. The credo in the U.S. was to scale back R&D and make it more responsive to the business side. The result was that the bottom line showed incredible profits for the Japanese and dwindling markets for the U.S. Then in 1992, just when Japanese industry thought it was on top of the world, the bubble burst. Concurrently, American industry, which had looked like it had lost its ability to compete globally, began to turn around. (6)

Japan has no counterpart to America's research universities, and the problem cannot be solved on a company level. Rather, she said, this is a national problem that is rooted in the culture. Product orientation is so strong within corporate R&D programs that fundamental science programs can quickly transform into applied efforts.  In the United States, corporate fortunes have see-sawed and improved in the 1990s. The trends show that Japan has caught up with, or surpassed, the United States in some leading indicators of scientific and technological strength, and lags behind in others. Japan leads the United States in the percent of GDP invested in total and non-defense R&D, as well as government investments in civilian R&D.

Japanese science agencies have growing R&D budgets to provide a boost to the funding and realization of world class research facilities, within Japan and abroad. The increase in government sponsored research in Japan, at a time when the United States and Western European governments have constrained science budgets, creates several opportunities for the international research community. Japan is providing additional funds to intensify international research cooperation on global issues, such as food, energy, environment and infectious diseases, and in basic sciences, such as the Human Frontiers and

Human Genome Project. Japan is establishing international centers for R&D in Tsukuba Science City, and expanding both post doctorate fellowships for foreign researchers and accommodations for foreign scientists at national laboratories. (14)

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BANKS AND INTEREST RATES IN JAPAN

The central bank of Japan has lowered interest rates to nearly zero over the last decade. And the Japanese economy is still mired in deep recession. The once-hot Japanese stock market and real estate markets are in a slump along with the rest of the economy. In spite of the fact that there's plenty of money available at low interest rates, Japanese consumers are wary of buying anything now. They figure prices of stocks and houses may drop even further. And without any aggressive buyers, that's exactly what's been happening. The Japanese economy keeps slowing, and prices keep dropping. (9)

Why US won’t follow in Japan's footsteps in needs some comparison, after all, the central banks of both countries raised interest rates to discourage stock speculation. And it worked. In Japan the Nikkei stock index fell from more than 39,000 to below 11,000. And in the United States the Dow Jones industrial average dropped from 11,722 to 8, 500. (9) .And both countries fell into recession, whereupon the central banks started cutting interest rates to get their respective economies going again.

There are important differences between Japan and the United States.:

• The U.S. banking system is on solid footing, while Japan's was riddled with bad loans and unrecognized losses.

• Japan made huge policy mistakes. The United States is cutting taxes, while Japan actually increased taxes on both capital gains and retail sales in the mid-'90s. And the U.S. Federal Reserve started early on a policy of cutting rates and re-liquefying the economy, even before the recession began.

• Although the U.S. population is aging, they have better demographics than Japan,where a greater portion of the population has moved out of the labor force.

• The United States creates, and Japan copies.

• Finally, the U.S. dollar is the world's de facto reserve currency, so US attracts global investment, while money flowed--and is still flowing--out of Japan.(9)

Many people believe the United States was once the greatest economy in the world, but beginning in the 1970s the Japanese "caught" the Americans. Today, so the assumption goes, the Japanese are superior and America is on a downward economic spiral.  First of all, Japan never "caught" the U. S. in an economic sense. From the early 1950s until the Arab oil shocks of the 1970s, Japan experienced one of the most impressive periods of economic growth in recorded history. Still, when Japanese output, per capita income, and productivity are compared to that of the U.S., the latter country is much stronger in most respects. (3)

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While together the U.S. and Japan are responsible for  between 30% and 40% of world output, the overall output of  the Japanese economy is only approximately 42% that of the U.S. Japanese per capita income is 83% that of the U.S.  Greater U.S. output of goods and services per labor hour, or higher productivity is a major reason our economy is stronger than that of Japan. The American worker continues in the 1990s to be the most productive in the world, as has been true throughout this century. (3)

While the Japanese enjoyed higher annual productivity growth rates than the U.S. in the 1970s and 1980s, America had such a productivity lead that there was no chance the Japanese could "catch" us in this vital economic index. By the late 1980s, American annual productivity growth rates were again equal to that of Japan. Media pundits misinterpreted the higher annual Japanese growth and productivity rates in certain industries such as automobiles and consumer electronics, and claimed that Japan was more productive and economically successful than the U.S. (3)

Productivity concerns constitute one of Japan's major current economic worries. Recently in one of the most accurate measures of productivity, GDP per capita, Germany took Japan's place as second to the U.S. Japan's overall productivity rate is 82% that of the U.S. The United States’ biggest productivity lead is in services, but even in manufacturing, Japanese levels are significantly lower than in the U.S. While Japan is more productive in machine tools,  consumer electronics, and motor vehicles, estimates are that  Japan is a generation behind the U.S. in the  telecommunications and software industries.(3)

JAPANESE - U.S. ECONOMIC RELATIONS

World War II was the last time when overall U.S.-Japan relations and the economic relationship in particular, were as bad as appears to be the case in the 1990's. The United States and Japan are respectively the two largest economies in the world. Japan is the second leading market for American products, trailing only Canada. Japan buys more U.S. goods than France, Germany, and Italy combined. The U.S. is the leading foreign investor in Japan. The United States is the number one market in the world for Japanese products. Japan is the second leading foreign investor behind the British in this country. Given the high level of economic interaction between the two nations, it behooves educators to separate the rhetoric about U.S.-Japan economic relations from the reality. (2)

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There is substantial evidence from public opinion polls that, as of the early 1990's, many Americans look upon Japan as an economic threat to America's economic well-being. There  is also considerable contrasting evidence from some of the same opinion surveys that Americans have admiration for the  Japanese and think US’s current economic woes are  largely our own fault and not that of another nation.

Japanese investments in the United States are certainly something many Americans fear. In one recent New York Times/CBS News poll, 62 percent of Americans surveyed believed Japanese investment in the United States threatened U.S. economic Independence (2). Beginning in 1989, Japan’s annual rate of investment in the U.S. began to contract relative to earlier years and still continues to do so. For example, in 1990, 134 new firms in the United States were bought wholly or in part by Japanese investors. In 1988 and 1989 the figures were, respectively, 225 and 215.

Another American public misperception is that it is virtually impossible for our businesses to succeed in Japan. While the United States does have a large trade deficit with Japan, numerous U.S. companies such as Coca-Cola, IBM, and Shick, Kentucky Fried Chicken and McDonald's have enjoyed large market shares in Japan for years. In 1991, the average Japanese consumer purchased $394.00 worth of U.S. goods while his or her American counterpart bought $360.00 worth of Japanese goods. (2)

Industries obtain financial capital both from their own savings and from the savings of millions of citizens, which are funneled by financial intermediaries to companies. In the United States, both net corporate and personal savings declined in the 1980's to historic lows. Since savings are the major source of funds for business investment, an examination of Japanese and U.S.  savings rates provides an understanding of why the U.S.  productivity growth rate is stagnating compared to Japan.

JAPANESE ECONOMY AFTER WORLD WAR II

Japan is a textbook case of an economy that once thrived through the selective use of protectionism but soured because it failed to evolve. The Japanese economic model -- industrial policy, import protection, corporate collusion, and bank-centered finance -- once served as a marvelous transition belt, helping a poor agricultural country catches up to the world's industrial leaders in record time. But after reaching economic maturity in the 1970s, the country failed to move on. As a result, Japan now has a deformed "dual economy" of super-strong exporters and extraordinarily inefficient domestic sectors. (7) 

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Most of the star industries from Japan's export sector owe their initial takeoff to the promotional policies of the 1950s and 1960s. These include autos, consumer electronics, semiconductors, and machinery. Back then, these really were infant industries, lacking the economies of scale and learning-curve efficiencies to compete globally. A temporary period of import restrictions and subsidies gave them an indispensable jump-start. But in the 1970s, Japan also extended protection to a host of industries that had either ceased to be competitive (like basic steel) or never had been (like cement, glass, and petroleum refining). In so doing Japan made a critical shift from promoting winners to protecting losers. Like a permanent crutch that atrophies the muscles, protection left whole industries ossified. (7)

The deep industrial slump that followed the 1973 oil shock was the initial impetus for Japan's renewed protectionism. Such industries as aluminum, petrochemicals, shipbuilding, textiles, and basic steel -- accounting for half of Japan's manufacturing output and a third of its factory workers -- were permanently priced out of the market. Explicit protectionism was also accompanied by other government policies that had the effect of shielding Japanese industry from the consequences of slack productivity. Throughout the 1970s and 1980s, Japan's government officially authorized "recession cartels" in industry after industry. These cartels allowed industries to fix monopolistic prices and to allocate production cuts and investment quotas to their members. Efficient companies that could have undercut the cartel price were sometimes coerced into joining under pressure of government fines.

While there were no formal restraints on imports in the cartelized sectors, imports were nonetheless negligible. And in fact, import impediments acted as indispensable supports for the domestic cartels. How could Japanese producers have charged? domestic customers 60 percent more than world prices for steel, 70 percent more for cement, and 64 percent more for petrochemicals if imports had been allowed to come in freely? They couldn't have. Not surprisingly, in each of these industries imports as of 1992 remained negligible, comprising only 1.2 percent of cement, 7 percent of steel, and 8 percent of petrochemicals. (7)

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In the long run, the Japanese economy’s “safety net” was sustainable only as long as the super efficient export sector could continue subsidizing the inefficient domestic sectors. But by the late 1980s, the exporters could no longer afford the burden. They were caught in a squeeze between high costs at home and a rising yen, which made it difficult to pass along those high costs in exports. But what made this such a bind was that the high value of the yen was itself rooted in the need to rein in Japan's growing trade surpluses.

Japanese economic growth in the post World War II era is unmatched by any other country in any other era.  In a short 18 years, Japan was able to move from a country with per capita GDP of India in 1990 to Korea in 1990. To be specific, per capita GDP jumped from $3500 to $13,500.due to the market conforming industrial policy.

Japan's protectionism not only raises costs for consumers at home but also limits the country's ability to export cars, VCRs, and computer chips The protectionism that was supposed to protect jobs ended up exporting some of the country's highest-paying, most productive jobs. And the biggest losses have come in the export-oriented high-productivity sectors of manufacturing. This “hollowing out" of the export sector has left the economy increasingly dominated by  its low-productivity sectors, which has in turn steadily reduced the country's growth  potential. Today, even at full capacity, the fastest Japan could grow is 2 percent -- half the rate of 1975 to 1990. (7)

Today, Japan's budget deficit and trade surplus are growing, but not enough to overcome an even worse case of anorexia. Since 1992, Japan's growth has averaged only 1 percent and industrial production is below the peak hit eight years ago. Officially measured unemployment is already above 4 percent, and economists say it is heading toward 6 percent. (7)

SAVINGS AND INVESTMENT IN THE JAPANESE ECONOMY

Another striking feature of Japan's economy is the high level of   investment, both in the private sector and, more recently (largely as a result of fiscal stimulus packages), in the public sector. In 1996-2000, for example, gross fixed investment stood at around 27-30% of GDP, a considerably higher level than in countries such as Germany and the US over the same period. In the 1960s and 1970s high levels of investment, using the large pool of domestic savings, were needed as Japan tried to catch up with high-income countries. Now that Japan has caught up with (and in some cases,  overtaken) these countries, however, such high investment levels  are less justifiable, suggesting that many of the funds used for this  purpose are being channeled into unprofitable projects offering low  rates of return. Thus, despite the high levels of investment in 1996-2000, GDP grew by an average of just 1.3% per year during the period. (1)

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It is a common stereotype that Japanese citizens are a high saving population. Compared to the rest of the world, they may save more, but the bulk of money that was used for investment in Japan didn't come from the household savings, but it came from corporations. Household savings rates were induced by tax-free savings accounts. Also the percentage of yearly income paid out in two bonuses increased to 20% in just 16

years. This also forced households to save more as they waited for those big lump sum bonuses.  Consumers put their money into banks and into the post office where the distribution of that money was controlled by MITI. The household savings rate as a percentage of GDP actually hovered around 10% for most of the post war period. (1)

The average Japanese household saves twice as much money as the average U.S. family. Recent U.S. investment and productivity problems result from low savings by individual citizens, by excessive corporate financial speculation in purchasing existing firms rather than capital investment, and by a preoccupation of corporate executives with short-term economic objectives. Although more difficult to measure, human capital development (education and training) is also a vital key to national productivity. Not only do international comparisons show that U.S. students in every grade lag behind their Japanese counterparts in mathematics and science, the illiteracy rate in the United States (13 percent) is higher than in Japan (approximately 1-4 percent). (2)

FOREIGN TRADE

As a percentage of GDP, Japan's two-way foreign trade in 2000 was just 16.8%, compared with 54.9% for Germany and 20.1% for the US. The closed nature of Japan's economy is also apparent in comparisons with other countries in Asia, such as China, which in the same year saw foreign trade reach 43.2% of GDP. This is largely owing to official and unofficial restrictions on merchandise imports, which remain in place, despite pressure from the US and other important trading partners, to protect the less efficient sectors of Japan's industry, such as textiles, food and pulp and paper. Japan's low degree of openness to foreign trade has often been cited as one of the reasons for the persistence of the structural problems in its economy in general and the poor

productivity of companies in the non-tradable sectors in particular.

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The comparative economic indicators, 2000 are as under:

               (13)

The mix of exports in Japan shifted very rapidly in a matter of 20 years. In 1971, 33% of exports hadn't part of the export base 10 years earlier. 40% of exported goods didn't even exist in the Japanese market 20 years previous. And in 1969, 10% of output consisted of goods that hadn't been invented 5 years earlier. In the early 70's the biggest exporters were the auto, ship and steel industry. They accounted for 40% of all exports. As domestic demand leveled in the late 70's and early 80's in each industry, exports continued to fuel the growth. In the ship building industry, only 3,000,000 tons of ships were demanded domestically, whereas 16,000,000 tons of ships were demanded abroad. This was a complete reversal from only twenty years earlier. (1)

What resulted from all of this protection at home and growth of exports was an economy that grew in the 60’s close to 9% per year. With economies of scale realized, and a great portion of those profits being held by the companies and reinvested back into production, output grew and return on investment accelerated past the normal growth cycle in a laissez-faire market. A two-tier price system was also created. What this does it to keep domestic prices relatively high, because of no foreign competition while foreign prices are dumped to drive out competitors. The profits made at home because of government protection and subsidies went to finance the losses abroad. As they gained market share, export prices rose, but domestic prices remained the same. This has been called the price sanctuary of Japanese exporting firms. (1)

JAPAN'S INDUSTRIAL POLICY

Many Americans believe that the Japanese have triumphed in nearly all their economic endeavors and that benevolent guidance by the Japanese government, particularly the Ministry of International Trade and Industry, or MITI, is the reason. The fact is that Japanese industrial policy offers very little to envy or copy. Japan has enjoyed economic success not because of government planning but in spite of it. (11)

Ironically, as some Americans and many Europeans edge toward Japanese-style industrial policies, Japan is moving away from government involvement. It has privatized the national railway and the national airline and begun privatizing the telephone monopoly and deregulating the oil industry. Deregulation and sharp reductions in ministry guidance are also under way in banking   and financial services.

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BOOM AND BUST

As a boom in an economy like Japan matures, bank portfolios are filled with loans that would not have been made, either for too much risk or too little return, in the absence of credit expansion. The longer the boom continues, the greater the errors within and emanating from banks.  Just as the boom builds outward from banks to the rest of the economy, with banks benefiting the most, the bust collapses inward to banks from the rest of the economy, with banks suffering the most. Now the balance sheets of fractional-reserve banks, swollen with loans and checkable deposits during the boom, suddenly collapse. Or rather, the value of their loans collapses initially, as the projects they lent to turn out to be unprofitable, leaving them with negative net worth and then upon bankruptcy, their checkable deposits are liquidated. (5)

From 1985-1990, the largest six banks in Japan made $215 billion worth of real estate loans. In the six major Japanese cities, commercial real-estate values have fallen 75% since the bubble burst in 1991. Risky Japanese loans were not confined to real estate. As late as 1993, Japan had the largest eight banks in the world, ranked by assets. Now, Japanese banks have the same share of the world market as they did in the early 1980s. In 1987, bank stock shares constituted 30% of all listed stock in Japan. Japanese banks currently make up only 12% of Japanese equity. (5)

The Japanese debacle has been repeated around the world. Allowing for the unique circumstances that will make the situation play out differently in each country, central banks and fractional-reserve banking systems have flooded their countries with money and credit. The result is a worldwide financial crisis and bust.

By implication all calls for people to consume more and save less or cries against "over saving" are counter-productive. The problem in Japan is not "over saving" or lack of fiscal or monetary stimulus. The problem is that the government refuses to let the market work. By refusing to allow bankrupt institutions to fail, it has forestalled the liquidation process necessary for recovery. Until it permits liquidation, the Japanese economy will remain moribund. (5)

In his writings great Austrian economist Ludwig von Mises argued that the source of each economic slump is the previous boom that is caused by monetary pumping and the associated artificial lowering of interest rates. In a free unhampered market economy interest rates are the outcome of the demand and the supply of savings. Interest rates therefore mirror consumer's preferences. In this capacity they guide businessmen in the allocation of funding in the most profitable way. By responding to interest rates, businessmen are, in fact, abiding by consumers' instructions. (10)

The economic bust that ensues is therefore the result of the artificial lowering of interest rates which leads to the employment of savings contrary to the wishes of consumers. The length and severity of the bust is dictated by the size of the preceding boom and by the state of savings. (10)

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CONCLUSION

The appropriate policy to revive the economy is a policy where the authorities do absolutely nothing as soon as possible. This means that the central bank must stop tampering with interest rates and must stop pumping money. It also means that the government must reduce its size to the bone and cut taxes. As far as banks are concerned, those who must fail must be allowed to do so. The policy of doing nothing will strengthen the flow of savings, thereby permitting genuine economic recovery. (10)

The Japanese economy has seen it all. The boom after World War II and now the bursting

Of the economic balloon, leading to the “bust.” However, the Japanese are on the right track, and are taking all possible measures to put their economy back on the road to recovery and to make Japan, again hold up its head with pride as one of the top-most economically viable nations in the world.

Bibliography

1. Cannon, Tony, “Economic Growth in Japan : Markets and Industrial Policy,” The Tony Cannon Homepage. (www.cabnnon/centre.com)

2. Ellington, Lucien, “Japanese-US Economic Relations” Japan Digest, May 1992.

3. Ellington, Lucien,” Japan’s Economy: 21^st Century Challenge”, Japan Digest, May 1995.

4. Ellington, Lucien,” Learning From The Japanese Economy”, Japan Digest, December 1999.

5. Herbener, Jeffrey, “The Saga Of Japan: Boom to Bust”, 26^th October, 1998. @ 1997-1998 vronsky & westerman. (www.gold-eagle.com/editorials)

6. Kahn, Jeffrey, “MIT Professor Eleanor Westney sees US-Japanese RD Trends Headed In Opposite Directions”, 10^th February, 1995.

7. Katz, Richard,” What Japan Teaches Us Now”, The American Prospect, Vol. 9, Issue 40., September 1 to October 1, 1998.

8. Sakaiya, J,” The Future Of The Japanese Economy and the IT Revolution,” Lead Speech at the 39^th Council Meeting, June 26^th, 2000.

9. Savage, Jerry, “Why US  Won’t Mimic Japanese Economy”, Chicago-Sun Times, 8^th November, 2001 @Jerry Savage Production.

10. Shostak, Frank, “ Can Monetary Printing Revive Japanese Economy”, The New Australian, No. 110, 8-14^th March, 1999.

11. Zinsmeister, Karl,”MITI Mouse :Japan’s Industrial Policy Doesn’t Work” Policy Review, Spring 1993, No. 64

12. CIA – The World  Fact Book- Japan, ( On-Line source : www/cia.gov/publications/factbook/geos/ja.html.)

13. EIU, IMF International Financial Statistics.

14. “The Science and Technology Resources of Japan: A comparison with US”,Chapter 7.

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