The economy in Japan is a potent force around the world. Japan's economy is second only to the United States in nominal GDP and follows only the United States and China in purchasing power parity. Japan imports massive amounts of raw materials and energy so that it can export technology and finished goods. The economy is also heavily invested in services such as banking, transportation and telecommunications.
History of
The economy in Japan experienced a spectacular expansion in the decades following World War II and then plateaued at the end of the 20th century. Japan's economic growth reached its peak in the 1960s, averaging 10% per year. It then slowed to an average of 5% per year in the 1970s, 4% per year in the 1980s and less than 2% per year in the 1990s. Economists blamed this reduction on over investment, too much debt and labor inflexibility. The Japanese government launched a series of reforms designed to create a leaner and more adaptable economy. Recovery was slow. Japan is heavily dependent on imports of raw materials and exports of finished goods. As a result, weak economies in Europe, America and other parts of Asia impeded Japan's economic progress. Economic growth crawled back to 2% per year in 2003 and 2004 then 2.8% in 2005. It slowed again when the home mortgage crisis hit the United States in 2008.
The Facts
Japan is a strong market oriented economy. It is a world leader in technology, services, high end electronics and finished goods. Many of the most innovative discoveries come from research and development done in Japan. The country has very few natural resources so must rely on imports of raw materials and energy. There is only a very small agricultural industry, so much of their food must also be imported. All of these factors link Japan closely with other economies around the world. There are about 130 million Japanese living on land about the size of California. Even though the population is fairly dense, the Japanese people enjoy one of the highest standards of living in the world. The Japanese also have the longest average life expectancy on Earth.
Evolution
The way Japan does business has evolved through the years to adapt to the worldwide economy. Japanese companies used to guarantee lifetime employment to their loyal workers. This turned out to be a major impediment during tough economic times and many Japanese companies have abandoned the practice. Another Japanese business tradition is "keiretsu." These are groups of business people who work together to make the manufacture, supply and distribution of products a streamlined process. Keiretsu worked well for Japan when it was a fast developing economy. As Japan is forced to compete on a global level, the ideals of keiretsu have weakened somewhat.
The Facts
Since World War II, Japan has spent very little on defense. Only about 1% of Japan's GDP goes to its armed forces. The United States protects Japan from foreign enemies, allowing Japan to spend billions of dollars on things other than defense. Japan has an educated workforce with nearly 100% literacy. There is also a culture emphasizing a strong work ethic. Japanese workers are very productive and invest their money wisely. Taxes are low compared to western nations. All these factors contributed to Japan's economic success following World War II.
Risk Factors
The economy in Japan faces significant challenges in the near future. The country has an aging population and a falling birth rate. Since the Japanese have the longest average life expectancy in the world, there are fewer workers supporting retired workers who live longer. Currently there are only 67 million workers out of a population of nearly 130 million. Within a generation this disparity is expected to push the pension system to its breaking point. Japan is also heavily dependent on imports of oil, coal and other energy sources. Increased energy prices had a severe impact on the economy. Japan is in the process of developing alternative energy sources. These will be costly and time consuming.
