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The Japanese Economy in US Eyes: From Model to Lesson

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Japan’s meteoric rise from the ashes of World War II has been described by many as an economic miracle. Between 1960 and 1985, real income per person in Japan grew three times as fast as in the U.S. Remarkably, with few natural resources of its own, the Japanese economy became second in size only to the United States without creating serious inequality of income and wealth among its citizens. Indeed, of all industrialized countries, Japan has the most equal distribution of income.

Many of us grew up with newspaper and magazine stories about the technological wonders of Japan in the 1970s and the managerial and economic wonders of the Japanese corporations in the 198 0s. It was a surprise to learn that a part of Japan’s postwar economic miracle might have been a bubble that burst in the 1990s. While the sharp drop in land and stock prices (note 1) has been singled out as the chief source of the ensuing recession, the slow and sputtering economic recovery and declining productivity growth suggest that the collapse of the real estate and stock markets may have been mere symptoms, not causes, of the problem. Many experts now believe that the Japanese economy needs structural overhaul before it can be expected to resume sustained, long-term economic growth. (note 2) 

In his superb book, Frederick L. Schodt sketches the development of four American views of Japan: friend, foe, model, and mirror.3 In the 1970s and 1980s, Japan served as a model for other aspiring countries in Asia. However, in the nineties, a fifth view of Japan as a “lesson” is emerging. The “lesson,” as the Japanese are painfully discovering, is that economic institutions and policies that worked so well to enable the country to catch up to the Western industrialized countries might not work very well when the country has caught up to, and in many cases leap-frogged past, its competitors.


Professor Takatoshi Ito of Hitotsubashi University recently identified several key policies and institutional features of the Japanese economy which he believes contributed to Japan’s rapid economic growth in the post-World War II period. (note 4) 

INDUSTRIAL POLICY—During the 1950s and 1960s, the Japanese government picked certain “sunrise” industries thought to be potential winners in the global economic race and helped them through low-interest loans and allocation of scarce foreign exchange so they could import what they needed. Pushing exports lay at the heart of this so-called “industrial policy” to promote economic development. The government protected the producers in these favored industries by restricting domestic competition and by raising tariff and quota barriers to keep imports out. Given breathing room to learn and become efficient, these favored infant industries were supposed to grow into world-class competitors and then be weaned from government protection. Import restrictions would then be reduced and Japanese domestic markets opened to foreign goods.

Whether this policy of nurturing selected industries to become winners achieved the goal of accelerating Japanese economic growth is still being researched and debated. We do know that during this high-growth period the composition of Japanese exports changed rapidly from low-quality, cheap goods such as textiles and toys in the 1950s to world-class quality automobiles and semiconductors in the 1980s. Japan sold far more goods abroad than it imported and accumulated persistent and large annual trade surpluses.




1. The Nikkei stock price index has fallen to 40 percent of its peak, and commercial land prices have fallen to around one-third in recent years.

2. For a more pessimistic view of Japan’s ability to transform itself in the coming decades, see Taichi Sakaiya, What Is Japan? Contradictions and Transformations (Translated from Japanese by Steven Karpa). Tokyo: Kodansha Publishing, 1993.

3. Frederik L. Schodt, America and the Four Japans (Berkeley: Stone Bridge Press, 1994).

4. Takatoshi Ito, “Japan’s Economy Needs Structural Change,” Finance and Development, June, 1997, pp. 16–19. While we summarize the main points of Ito’s paper in this section, the descriptions of the institutions are largely taken from the essays in our recent book, James Mak, Shyam Sunder, Shigeyuki Abe, and Kazuhiro Igawa (eds.), Japan: Why It Works, Why It Doesn’t, Economics in Everyday Life (Honolulu: University of Hawaii Press, 1998). Twenty-three authors in the U.S. and Japan contributed the twenty-six short essays explaining aspects of everyday life in Japan in economic terms.