Japan: one more failure of inequality model

Stagnation and deceleration of economy of Japan are extremely important to understand for all. GDP of Japan in 1955 was USD 8.369 billion and in 2000 it was USD 4.731 trillion. An increase of 565 times. An impressive performance. A miracle. Isn’t it? But after three decades of unprecedented growth and after earning title of the second largest economy of the world, economy of Japan started slowing in the 1990s. In 1995, its GDP was $5.334 trillion, in 2000 it was $4.731 trillion, with exception of 2010, 2011 and 2012 when figures crossed $5 trillion mark, it started going down again and now by 2015 figure of GDP is at $4.123 trillion. Nominal GDP of Japan is almost same as it was 20 years back. It is because of poor and dismal performance of Japanese economy during the last 20 or more years- lost 2 decades. It is said that Abenomics with its all hype and pomposity could not put the economy into high gear, and by now it needs resuscitation.

Let’s look at it from a different angle. GDP of China in 1955 was USD 35 billion, in 1977 it increased to USD 175 billion, in 1990 it was USD 394.57 billion and by 2000 it was USD 1,211 billion. Four times increase since 1990. Since 2000 economy of China has multiplied itself by figure of 10 in dollar terms and by now it is No 1 economy in PPP terms and is around 20 trillion dollars.

It is extremely important to note that the slowdown of Japan coincides with the rise of China during the same period. A very intriguing and conspicuous coincidence. Such relationship, however, could be explained, inter alia, on account of globalisation of KRID (knowledge, research, innovation and development) that unfolded fully in the 1990s. It may be mentioned that the impact of KRID can also be noted on all economies of the world. It is also pertinent to point out that globalisation of KRID by 2004-5 entered into a qualitatively higher phase, ie, Sci-Tech-human power complex and influence of that phenomenon is obvious on all economies of the world.

Japan started treading on new path of development after the Meiji revolution of 1868-1890. Japan soon became an industrial power and a military machine and fought many wars with its neighbours. Japan also was on the forefront of two world wars but after the Second World War (1939-45), which ended with first ever nuclear bomb experiment by new world superpower US on cities of Hiroshima and Nagasaki on 6th and 9th August, 1945 respectively, a devastated Japan started a new economic life with political pacifism.

Japan remained under the occupation of US and allies after defeat in war until 1952. Not only did the occupation forces start rehabilitation of Japan they also introduced widespread military, political, economic and social reforms which were later supplemented by the Marshall Plan and other pampering programmes.

Thanks to new political divisions of the world leading to emergence of new socialist bloc led by the Soviet Union and capitalist bloc led by the US and start of the Cold War, Japan was chosen by the US and allies as a new frontier and first defense line in north-east Asia to contain communism.

When a country has (I) political stability and efficient governance, (II) funds (capital), (III) technology and (IV) skill, it is bound to grow and is able to multiply its growth. Same happened with Japan. Japan invested heavily in its infrastructure and human resource and entered into golden era of growth and development from the 1960s to the 1980s. Japan produced more engineers that focused on consumer-oriented products and became famous for such products by end of the 1950s. From transistor radio and TV to computers to robots to automobile to other consumer products to shipbuilding to fine watches, Japan became a leader and even encroached the US and European markets obliging some of US allies to urge the US to reduce out of proportion incentives and space to Japanese trade. From 1953 to 1959, Japan doubled its share of US market and enjoyed trade surplus with America.

During the second half of 1950s steel industry of Japan received direct financial support from the US. Due to such regaling favours to Japan, economy of the US suffered and US experienced balance of payments issues in late 1960s.These economic favours were in line with geo-political strategy of the US in the region. The US wanted to contain not only a wave of socialism but also influence of China.

US achieved political security in the region through such policy of favours to Japan but endangered its economy in long term. The oil crisis of 1970s exposed the under-crust economic weakness of the US which was further complicated by continuous economic encroachment of Japan. Few worst victims in US were iron and steel industry of rust belt and automobile industry of Detroit. Not surprisingly, these were the heydays of Japan.

Such an imbalance ultimately led to the Plaza Accord between G7 countries in 1985.it was decided that the US currency would depreciate against a rising Japanese yen. The Plaza Accord was one main reason leading to creation of a bubble in asset (land and stock) prices in Japan which was also one cause behind the collapse of the miracle of Japan. In fact, unevenness and inequality in global economy started to demonstrate its negative impact on exclusive club of the developed world. Though economic paradigm based, among other things, on inequality and unevenness served capitalism very well it gave in when great levellers of globalisation ultimately came into play. Ironically, appreciation of yen after the Plaza accord is now one of major headaches of Japanese economy. They need a significantly depreciated yen.

Although, science-tech started demonstration of its positive impact since 1960, yet during 1980s it accelerated its speed to start a new era of globalisation which unfolded with full force in 1990s with revolutionary results in developing countries. This was also the period when the Cold War ended having impact on defense spending and collapse of the Soviet Union leading to openness in many a closed or semi-closed economy.

This period is characterised by dish antenna, satellites, fax machines, software development, increasing number of PCs, cell phones, fibre-optic lines, internet, emails and search engines etc. These all developments created a new and increasingly globalizing world which exponentially multiplied the flow of information, knowledge, research, development on one hand and increased global trade of goods, services and money manifold on the other hand.

Japan which benefited most from science and technology and emerged as great technological power in 1960s, 1970s and 1980s should normally have benefited more from such great globalisation but apparently paradoxically Japan proved to be loser and a loser in a big way.

Three arrows (monetary stimulus, fiscal flexibility and structural reforms), hawkish nationalism and bombastic tactics of Shinzo Abe like Donald Trump have failed to help Japan. Economic exoskeleton of Shinzo Abehas not been successful to add strength and stamina to enfeebled limbs of Japan like exoskeleton of Cyberdyne is expected to do for human limbs. This is the country where government borrows more because private sector is shy to borrow and spend. Individuals are also prone to save more leading to deflation. Here concept of crowding out due to excessive government borrowing is irrelevant. Factually, if government does not borrow, economy will suffer more. Here all tools of ex-president of ADB and present governor of Bank of Japan (BoJ) Haruhiko Kuroda have miserably let them down. Japan, it seems, will not be able to arrest its downward slide unless it changes its whole philosophy of economics.

Japan among other things needs to open up its borders for foreigners in a big way and to invest extremely generously in infrastructure and human resource of developing countries. Japan has to develop a model that treats all under-developed and developing countries at its own neglected economic territories and its own backyard. Japan has to invest heavily in these countries to exhaust its surplus cash to boost their economies. Growth and development of these countries can help Japan sustain its prosperity and economic viability. These two strategic changes in policy and vision can save it from further degradation and unfortunate humiliation in the future.