Take Home Test

1. Hart-Landsberg describes Japanese economic development after WWII as “scrap and build.” It means that some industries were eliminated, and others replaced them. It also shows the significant changes in production, labor, export, etc. The American policy and the Korean War enabled Japan to reconstruct bureaucratic planning and the system of labor control. The wages were quite low. However, the economy changed soon. Japan shifted its economy to export orientation. Japanese exports were growing fast. In the beginning, the export industries were based on light manufactures. Then, capital-intensive and chemical-intensive industries started growing. After the formal independence from the USA in 1952, the expansion of heavy and chemical industries (aluminum, chemicals, electric power, shipbuilding, etc.) started. Up to 1970s, the industries became huge and even overtook American competitors (Burkett & Hart-Landsberg, 2000, pp. 107-108).

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Exports remained important to the Japanese economy. The most significant of them were chemicals and metals. However, by the 1960s, many other industries appeared and developed. They included light sectors with production of toys, textiles, electrical appliances, etc. They employed mostly women. Light industries export soon became very important for the country that was dependent on imported raw materials. In 1950-1960s, exports to the USA grew dramatically; therefore, the American authorities were forced to limit them. Meanwhile, Japan managed to increase wages. As a result, light-manufacturing plants moved to countries with cheaper labor (South Korea, Taiwan, and ASEAN countries). Gradually, heavy industries started to replace light ones. Electronics and automobile industries started to grow. It contributed to a rapid economic growth in Japan. From 1965 to 1970, the average annual GNP growth rate was 14%. Manufacturing output growth rate was 15.8% (Burkett & Hart-Landsberg, 2000, pp. 108-111).

Nevertheless, the development of heavy and chemical industries causes some problems including environmental pollution. Moreover, Japan suffered from sharp oil prices increase in 1973. Heavy and chemical industries were influenced negatively. A new “scrap and build” round started. Machinery industries grew quickly. They soon became the main export industries. Foreign direct investments grew from $47 billion to $170 billion from 1985 to 1989. Because of high labor costs, Japan started to shift the production of mass electronic products to ASEAN countries. Nevertheless, the economy remained export-dependent (Burkett & Hart-Landsberg, 2000, pp. 111-119).

When the heavy, chemical, and electronics industries were growing, some other industries were scrapped. Among them appeared traditional Japanese agriculture. The US occupation contributed to that. The US did not see the agricultural industry very important to Japan. In addition, the US exported its surplus agricultural products to Japan. In fact, Japan was under American “military and food umbrella.” At the same time, the US sponsored a great land reform and other measures in order to increase national food production in Japan. The reform weakened the role of rural landed property. The urbanization of Japanese population started, and the process was very fast. In fact, the agricultural sector was not of high priority for economic development. The country relied on heavy and chemical plants located in towns and cities. The farming in Japan shifted from full-time to part-time. The country started to import more agricultural products. Japanese ruling class was not interested in the development of agricultural sector (Burkett & Hart-Landsberg, 2000, pp. 130-134).

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2. Since the bursting of the bubble economy, Japan has suffered a balance-sheet recession. It means that monetary policy mistakes caused some economic problems. Starting from 1995, most Japanese companies stopped taking new loans. In addition, they paid back their old loans. Short-term interest rates were very low. The economy lost its demand in two ways. Businesses did not reinvest their cash flow, and the corporate sector did not borrow and spend the savings. The contraction in aggregate demand caused the recession (Koo, 2009, pp. 12-13).

Foreign investors made more than 50% of net purchases of Japanese equities. At the same time, most Japanese investors were not interested in equities because of the recent bubble. The loans used to buy properties remained. As a result, Japanese companies suffered from balance-sheet recessions. The liabilities exceeded the value of assets. In addition, Japan had trade surplus, because its products were very popular abroad. Japanese firms were too leveraged, but foreign investors considered them healthy because the managers spread the information about good expected earnings. As a result, Japan experienced the destruction of ¥ 1,500 trillion in wealth. The main reason was that domestic companies did not borrow enough, even at low Japanese interest rates (Koo, 2009, pp. 13-18).

Fiscal policy of Japan assisted in the recovery from stagnation and deflation. The country coped with the great financial bubble. In 1990s, the level of savings among households fell dramatically. The financial deficit of government sector was growing. Government spending was critically important in supporting the economy. The first element of fiscal policy implemented in Japan was the issue of bonds by the government. The second element was a blanked deposit guarantee in 1997. At the same year, banking sector problems became significant. When it happened, Japanese government immediately announced that it would guarantee all deposits provided by banks. The government coped with this problem successfully (Koo, 2009, pp. 22-28).

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The monetary policy played a great role too. As it was mentioned above, in Japan there were few borrowers, and existing borrowers were repaying their debts. The Bank of Japan experienced a great pressure from the foreign and domestic economists, as well as some politicians. They wanted the bank to increase the money supply to recover the Japanese economy. In 1998, Japanese private sector continued to pay off debt. At the same time, the money supply grew. In the private sector, net borrowing was negative, and in the public sector, it was positive. Money flew back to the banking sector. Therefore, banks had a money surplus. At the same time, the government had a fiscal deficit. As a result, banks used their funds to buy the government debt. That is why, money supply expanded during the Japanese recession (Koo, 2009, pp. 29-32).

It can be stated that the monetary policy of Japan completely depended on the fiscal policy. Increase of government borrowing cause the increase of money supply. Private firms had problems with their balance sheets. However, the government did not force them to stop returning debts. It borrowed itself. Due to that, Japan avoided the depression of the economic situation in 1990s (Koo, 2009, pp. 32-34).

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