Japan’s Economic Miracle - PowerPoint Presentation

Slide1

Japan’s Economic MiracleSlide2

Not That Long Ago Japan Was The Economic Model For The World

I finished my Undergrad in in 90s and we were still exploring the Japanese management style

Which by the way was started by an American consultant in JapanSlide3

80s & 90s

Widespread thought among thoughts leaders, politicians, business leaders, & the media that Japan had discovered a new business model

This model was going to allow Japan to overtake the US economy in just a few short yearsSlide4

Chalmers Johnson

A political scientist named Chalmers Johnson wrote

MITI

and the Japanese Miracle

Required reading in my business program at

TOSU

MITI

was reorganized into the Ministry of Economy, Trade, and Industry (

METI

) in 2001

This is a cabinet branch of Japan’s

gov

Clyde

Prestowitz

, former US trade negotiator

Trading Places: How We Are Giving Our Future to Japan and How to Reclaim ItSlide5

Quote From Prestowitz

The power behind the Japanese juggernaut is much greater than most Americans suspect, and the juggernaut cannot stop of its own volition, for Japan has created a kind of automatic wealth machine, perhaps the first since King MidasSlide6

Michael Crichton

From the 1992 novel Rising Sun

Sooner or later, the United States must come to grips with the fact that Japan has become the leading industrial nation in the world. The Japanese have the longest lifespan. The have the highest employment, the highest literacy, the smallest gap between rich and poor. Their manufacturing products have the highest quality….Slide7

As late as 1995

A book by a journalist—Blindside: Why Japan Is Still on Track to Overtake the US by the Year 2000 by

Eamonn

FingletonSlide8

Starting in the 70s – 90s

Japanese companies loomed large

Japanese

firms were earning really high

profits

Japanese investors that making big investments in the

USSlide9

Business Schools

They suggested that other countries were sure to follow the Japanese path, including Europe, and the US was past its zenith

The business schools offered doom if we did not follow that

pathSlide10

What Was Japan’s Unique

and Special Path

Greater government direction of the economy worked better than unfettered free market forces

Government-directed business firms

Managed trade

Patient capitalSlide11

Directing Businesses

Japan,

IncorporatedSlide12

The Visible Hand of Government Can Outperform the Invisible Hand of Markets

MITI

became a symbol of how government can direct an economySlide13

Managed Trade

A mix of blocking imports from other countries and offering subsidies to exporting firms, with the result being large trade surplusesSlide14

Patient CapitalSlide15

Ownership of Firms

Ownership of firms was not stock market based like in the US

Keiretsu—combinations of firms acting

togetherSlide16

Econ Rocketed From 60s – Early 90sSlide17

1960s

The growth rate in the 1960 was 10 to 11%Slide18

1970s & 1980s

The 70s was a slow period of growth for the whole world, but Japan still averaged 4.5 to 5 percent growth

1980s

saw growth slow a bit to 4 percent per year, but even that was better than the USSlide19

Japan’s Growth

On a per capita GDP basis, Japan was growing about 5% a year on average from 1960 to 1985

The US economy was growing less than 2 percent a year during the same periodSlide20

Japan’s Growth

In 1960, Japan’s economy was about 10% the size of the US economy

By the early 1970s, Japan had surpassed Germany to become the second-largest economy

By the early 1990s, Japan’s economy was about two-thirds the size of the US economy

On a per capita basis, it was about 85% of the US economySlide21

Some Measures

In 1950, half of the students leaving high school and middle school wen into agriculture

By 1965, only 5% of those leaving high school and middle school went into agricultureSlide22

All Went Wrong in the Early 1990s

Collapse of asset prices

Real estate prices fell about 80 percent

Massive numbers of corporate and personal bankruptcy

Unemployment surged

Economic growth in the 1990s and into the 21

st

century averaged 1 percent a year or less Slide23

How to Fix the Economy

Tried huge budget deficits to increase AD

Central Bank cut interest rates to near zero

Japan’s economy is aging

The workers are getting older and older

They have a demographic nightmare that is even worse than the USSlide24

Remember the Automatic Wealth Machine

Leading industrial nation in the world

Overtake the US in just a few years

All that hype from every B-school in America and then nothing

Is

it

possible that the fundamental analysis of why Japan grew so fast was misguidedSlide25

???

The statements about Japan’s special economic model, about managed trade, and government intervention are true

The statements that Japan grew very rapidly are true

There must be a basic logical problemSlide26

All in the Interpretation

Imagine that I said in the US, the Defense Advanced Research Projects Agency (

DARPA

) helped to start the Internet.

Therefore the entire high tech economy

w

as created by the government

And based on government oversight of the US

economySlide27

Boring, But Economic Story

This Japanese profit making machine story was exciting, but it ignored the fundamentals

Growth is all about

Human capital

Investment

Free marketsSlide28

How Japan Got the Economic Fundamentals Right

Human Capital

Japan was an early strong investor in

educationSlide29

More Human CapitalSlide30

Savings

National savings in the US typically has been 15% - 18% of GDP

In Japan, national savings has been 30% - 35% of GDP

Why does Japan save so much?

The big difference is that households save much more than the USSlide31

Why Japan Has Such High Savings

Lower proportion of elderly

Wages

paid with a big chunk in end-of-year bonuses

Rapid

growth makes it easier to

saveSlide32

Why Japan Has Such High Savings

Coming out of WWII

Special

tax breaks for savings accounts

Underdeveloped

Social Security requires individuals to save moreSlide33

Japan’s Technology

Since back in the 19

th

century Japan has worked hard to get new techno in businesses

Current

R&D spending is similar to US levelsSlide34

Participated in World Free Markets

We know that companies like Toyota, Sony, Honda, Panasonic to be strong competitors in international market

These and others

were

responsible for

innovations

and new international business practices

Just-in-time

inventorySlide35

Philosophy of continuous product improvement (kaizen)

Quality circles—groups that focus on quality in the plantSlide36

They Are All Together or Are They

In the high growth period between the 50s and the 80s, Japan had more strikes than Germany or Sweden

Not managed by consensus as some thinkSlide37

Why Growth

Not

what

I learned in college

Just boring fundamentals

Education

Investment

Technological

Free international markets

InnovationSlide38

Did Japan Take Unfair Advantage?

Back to industrial policy and managed trade

After the war Japan’s government offered subsidies—often in the form of cheaper loans—to favored industries

Ship-building

Electric power

Synthetic fibers

Chemical fertilizers

Petrochemicals

Machine tools

Steel

Coal

electronicsSlide39

How Did This Policy Work Overall?

Steel and electronics flourished others did not do as well

Economic studies show that high growth sectors: electrical machinery, general machinery, transportation equipment received lower subsidies than

Low-growth sectors: textiles, mining, processed foodSlide40

There Are Always Two Questions You Can Ask About Government Industrial Policy

Is it possible to pick the future winners consistently?

If yes, can you pick the winners and not be politically favored to give money to the losers instead?Slide41

In Japan?

In Japan it seems very unlikely that the government bureaucrats picked the winners

An

example of a misstep. HDTV they were sure that HD was the future.

But their focus was analog not digital and

gov

helped this doomed ideaSlide42

Another example

Fifth generation computer project

No idea what one through four were

But we were scared about that 5

th

one

What happened?

I do not know

Everyone talk about how it would take over

And how Japanese investment would take it to the top

It just faded awaySlide43

Just Remember That There Is Strength In Market

No markets are not perfect but

Competition has a basic advantage

Many firms are trying different

things from

different angles—trying to get profit without the help of the government

This process improves the overall chance of success

If there is a bad idea, drop itSlide44

Japan’s Barriers to Trade

Japan had 5% of world exports in 1965 and 9% of world exports in 1990

Japan’s

imports have been about 7% of GDP and its exports about 9% in recent years

In the US imports and exports are 12-13% of GDP

Many industrialized counties are closer to 25%Slide45

Not Sure What This Proves

Clearly it states that small European nations trade more than larger and more isolated countries

Still it is interesting that it is such a small part of their Economy

Over time US imports and exports have been about 2% of our economySlide46

Why Do We Think Japan Is Dependent On Trade?

The fact that we believe this may be an indication of our own short-sightedness

We see Japanese products in high profile products like cars and electronics

Then we assume that because we see these products, they must be a big part of their economy

After all, I see it in America so it must be important in Japan

That logic does not workSlide47

Trade Surpluses

Trade surplus does not indicate anything about the fairness of trade

There is no question that Japan has very large trade surpluses

A common misperception is that surplus always mean a country is unfair

Remember that trade deficits can because by many reasons

One reason is high saving—like Japan

The same apply to the US in reverseSlide48

Beyond the Stories

Japan does not have a great amount of explicit protectionism

It does not have high tariffs

Does not have many quotas

If they are not explicit they must come through some bureaucratic path

It is true that Japan is full of

gov

regulations

Has powerful trade associations

They do try to shut out import occasionally Slide49

70-80 & 90-00

We heard these stories in the 70s and 80s when all was well

But we still hear them and all is bad

It is possible that they had plain strong growth and all of these policies that we

thought

caused the growth were not needed and may have even been wasteful Slide50

High Rates of Saving

While the Japanese wanted to save more—I should note that the government actively restricted how they could save

Japanese government controlled the banking and financial sector for decades after WWII

Consumers were encouraged to put their money in banks and that was basically the only place to invest

Consumer loans were discouraged through tax incentivesSlide51

High Rate of Saving

This high saving rate translated into banks flush with money

Most of that financial

capitalwas

directed

to Japanese corporations

Would this work in US—I doubt it. They restricted consumer loans. Even after the housing market crash, we still love loansSlide52

Is This High Saving Unfair

It has had an effect

But it is probably not a clever plan by MIDI and Japanese bureaucrats to advance the country—ultimately they select whether to save or not

Back to the boring. Not a new model of money creation. Just good fundamentals: good education,

r&d

, investment, competing

in world markets