Editor's letter

Japan Management Review Volume 4 Number 4 1996

Major changes have taken place in the Japanese economy, to move the country from export-led growth to domestic demand-led expansion

Japan's old economic system was based on charging high prices to domestic consumers and extorting forced savings from wage-earners to subsidize over-investment in domestic production for export.

But the USA - Japan's biggest export market - began for political and economic reasons to step up the pressure on Tokyo to cut its massive trade surplus. Japan was stuck with a massive export machine which could not export as much as before, and hence delivered lower growth.

The Japanese government began to ease the massive burden of regulation and to stimulate domestic demand. A big part of the recovery can be credited to the Bank of Japan. The bank has abandoned its strategy of further cuts in Japan's already low interest rates, to focus instead on increasing the money supply. One reason the bank can afford to do this in the absence of inflationary pressures in the economy.

The politically sensitive, and huge, trade surplus between the USA and Japan fell by 27 percent last year. Further falls are likely, as Japanese consumers increasingly discover an appetite for foreign goods.

Car manufacturers, in particular, appear to be making inroads into the Japanese market. But there is great potential for other western firms. The number of personal computers in Japan is 14 per hundred people, compared with 46 in the USA. The comparable statistics for mobile telephones are seven per hundred in Japan, compared with 12 per hundred in the USA.

Harsh domestic conditions and international competition have made Japanese firms tougher, more innovative and better equipped to seize opportunities created by each step towards deregulation at home. But companies which are not satisfied with the pace of deregulation simply move their production out of Japan.

Deregulation is particularly slow in agriculture, food processing, medical care, publishing, warehousing and transportation. Productivity in the Japanese food industry, for example, is one-third that of US levels.

Nevertheless, the broad picture is of Japanese industry gradually breaking free from the government, bureaucracy and irrational price structures. The effect is beginning to make itself felt on the Japanese economy as a whole. Some commentators predict a 4 percent rise in gross domestic product in the year up to March 1997.

These fundamental changes probably could not have taken place without a crisis, and few could deny that the Japanese economy has been through hell. To adapt a phrase recently used by the Conservative Party in Britain: "Yes it hurt. Yes it appears to be working."

David Pollitt