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Japan - The Economy


THE JAPANESE ECONOMY entered the 1990s in excellent shape. Japan had the world's second largest gross national product (GNP), after the United States, throughout the 1970s and ranked first among major industrial nations in 1990 in per capita GNP at US$23,801, up sharply from US$9,068 in 1980. After a mild economic slump in the mid-1980s, Japan's economy began a period of expansion in 1986 that continued until it again entered a recessionary period in 1992. Economic growth averaging 5 percent between 1987 and 1989 revived industries, such as steel and construction, which had been relatively dormant in the mid-1980s, and brought record salaries and employment. In 1992, however, Japan's real GNP growth slowed to 1.7 percent. Even industries such as automobiles and electronics that had experienced phenomenal growth in the 1980s entered a recessionary period in 1992. The domestic market for Japanese automobiles shrank at the same time that Japan's share of the United States market declined. Foreign and domestic demand for Japanese electronics also declined, and Japan seemed on the way to losing its leadership in the world semiconductor market to the United States.

Unlike the economic booms of the 1960s and 1970s, when increasing exports played the key role in economic expansion, domestic demand propelled the Japanese economy in the late 1980s. This development involved fundamental economic restructuring, moving from dependence on exports to reliance on domestic demand. The boom that started in 1986 was generated by the decisions of companies to increase private plant and equipment spending and of consumers to go on a buying spree. Japan's imports grew at a faster rate than exports. Japanese postwar technological research was carried out for the sake of economic growth rather than military development. The growth in high-technology industries in the 1980s resulted from heightened domestic demand for high-technology products and for higher living, housing, and environmental standards; better health, medical, and welfare opportunities; better leisure-time facilities; and improved ways to accommodate a rapidly aging society. This reliance on domestic consumption also became a handicap as consumption grew by only 2.2 percent in 1991 and at the same rate again in 1992.

During the 1980s, the Japanese economy shifted its emphasis away from primary and secondary activities (notably agriculture, manufacturing, and mining) to processing, with telecommunications and computers becoming increasingly vital. Information became an important resource and product, central to wealth and power. The rise of an information-based economy was led by major research in highly sophisticated technology, such as advanced computers. The selling and use of information became very beneficial to the economy. Tokyo became a major financial center, home of some of the world's major banks, financial firms, insurance companies, and the world's largest stock exchange, the Tokyo Securities and Stock Exchange. Even here, however, the recession took its toll. The Nikkei stock average began 1992 at 23,000 and fell to 14,000 in mid-August before leveling off at 17,000 by the end of 1992.




Revolutionary Change

Since the mid-nineteenth century, when the Tokugawa government first opened the country to Western commerce and influence, Japan has gone through two periods of economic development. The first began in earnest in 1868 and extended through World War II; the second began in 1945 and continued into mid-1990s. In both periods, the Japanese opened themselves to Western ideas and influence; experienced revolutionary social, political, and economic changes; and became a world power with carefully developed spheres of influence. During both periods, the Japanese government encouraged economic change by fostering a national revolution from above and by planning and advising in every aspect of society. The national goal each time was to make Japan so powerful and wealthy that its independence would never again be threatened.

In the Meiji period (1868-1912), leaders inaugurated a new Western-based education system for all young people, sent thousands of students to the United States and Europe, and hired more than 3,000 Westerners to teach modern science, mathematics, technology, and foreign languages in Japan. The government also built railroads, improved roads, and inaugurated a land reform program to prepare the country for further development.

To promote industrialization, the government decided that, while it should help private business to allocate resources and to plan, the private sector was best equipped to stimulate economic growth. The greatest role of government was to help provide the economic conditions in which business could flourish. In short, government was to be the guide and business the producer. In the early Meiji period, the government built factories and shipyards that were sold to entrepreneurs at a fraction of their value. Many of these businesses grew rapidly into the larger conglomerates that still dominates much of the business world. Government emerged as chief promoter of private enterprise, enacting a series of probusiness policies, including low corporate taxes.

Before World War II, Japan built an extensive empire that included Taiwan, Korea, Manchuria, and parts of northern China. The Japanese regarded this sphere of influence as a political and economic necessity, preventing foreign states from strangling Japan by blocking its access to raw materials and crucial sea-lanes. Japan's large military force was regarded as essential to the empire's defense. Japan's colonies were lost as a result of World War II, but since then the Japanese have extended their economic influence throughout Asia and beyond. Japan's Constitution, promulgated in 1947, forbids an offensive military force, but Japan still maintained its formidable Self-Defense Forces and ranked third in the world in military spending behind the United States and the Soviet Union in the late 1980s.

Rapid growth and structural change characterized Japan's two periods of economic development since 1868. In the first period, the economy grew only moderately at first and relied heavily on traditional agriculture to finance modern industrial infrastructure. By the time the Russo-Japanese War (1904-5) began, 65 percent of employment and 38 percent of the gross domestic product (GDP) was still based on agriculture, but modern industry had begun to expand substantially. By the late 1920s, manufacturing and mining contributed 23 percent of GDP, compared with 21 percent for all of agriculture. Transportation and communications had developed to sustain heavy industrial development.

In the 1930s, the Japanese economy suffered less from the Great Depression than most of the other industrialized nations, expanding at the rapid rate of 5 percent of GDP per year. Manufacturing and mining came to account for more than 30 percent of GDP, more than twice the value for the agricultural sector. Most industrial growth, however, was geared toward expanding the nation's military power.

World War II wiped out many of the gains Japan had made since 1868. About 40 percent of the nation's industrial plants and infrastructure were destroyed, and production reverted to levels of about fifteen years earlier. The people were shocked by the devastation and swung into action. New factories were equipped with the best modern machines, giving Japan an initial competitive advantage over the victor states, who now had older factories. As Japan's second period of economic development began, millions of former soldiers joined a well-disciplined and highly educated work force to rebuild Japan.

Japan's highly acclaimed postwar education system contributed strongly to the modernizing process. The world's highest literacy rate and high education standards were major reasons for Japan's success in achieving a technologically advanced economy. Japanese schools also encouraged discipline, another benefit in forming an effective work force.

The early postwar years were devoted to rebuilding lost industrial capacity: major investments were made in electric power, coal, iron and steel, and chemical fertilizers. By the mid-1950s, production matched prewar levels. Released from the demands of military-dominated government, the economy not only recovered its lost momentum but also surpassed the growth rates of earlier periods. Between 1953 and 1965, GDP expanded by more than 9 percent per year, manufacturing and mining by 13 percent, construction by 11 percent, and infrastructure by 12 percent. In 1965 these sectors employed more than 41 percent of the labor force, whereas only 26 percent remained in agriculture.

The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufactures. Whereas textiles and light manufactures maintained their profitability internationally, other products, such as automobiles, ships, and machine tools, assumed new importance. The value added to manufacturing and mining grew at the rate of 17 percent per year between 1965 and 1970. Growth rates moderated to about 8 percent and evened out between the industrial and service sectors between 1970 and 1973, as retail trade, finance, real estate, information, and other service industries streamlined their operations.

Japan faced a severe economic challenge in the mid-1970s. The world oil crisis in 1973 shocked an economy that had become virtually dependent on foreign petroleum. Japan experienced its first postwar decline in industrial production, together with severe price inflation. The recovery that followed the first oil crisis revived the optimism of most business leaders, but the maintenance of industrial growth in the face of high energy costs required shifts in the industrial structure.

Changing price conditions favored conservation and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s and enhanced their productivity. Advances in microcircuitry and semiconductors in the late 1970s and 1980s also led to new growth industries in consumer electronics and computers and to higher productivity in already established industries. The net result of these adjustments was to increase the energy efficiency of manufacturing and to expand so-called knowledge-intensive industry. The service industries expanded in an increasingly postindustrial economy.

Structural economic changes, however, were unable to check the slowing of economic growth as the economy matured in the late 1970s and 1980s, attaining annual growth rates no better than 4 to 6 percent. But these rates were remarkable in a world of expensive petroleum and in a nation of few domestic resources. Japan's average growth rate of 5 percent in the late 1980s, for example, was far higher than the 3.8 percent growth rate of the United States.

Despite more petroleum price increases in 1979, the strength of the Japanese economy was apparent. It expanded without the double- digit inflation that afflicted other industrial nations and that had bothered Japan itself after the first oil crisis in 1973. Japan experienced slower growth in the mid-1980s, but its demand- sustained economic boom of the late 1980s revived many troubled industries.

Complex economic and institutional factors affected Japan's postwar growth. First, the nation's prewar experience provided several important legacies. The Tokugawa period (1600-1867) bequeathed a vital commercial sector in burgeoning urban centers, a relatively well-educated elite (although one with limited knowledge of European science), a sophisticated government bureaucracy, productive agriculture, a closely unified nation with highly developed financial and marketing systems, and a national infrastructure of roads. The buildup of industry during the Meiji period to the point where Japan could vie for world power was an important prelude to postwar growth and provided a pool of experienced labor following World War II.

Second, and more important, was the level and quality of investment that persisted through the 1980s. Investment in capital equipment, which averaged more than 11 percent of GNP during the prewar period, rose to some 20 percent of GNP during the 1950s and to more than 30 percent in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still kept to around 20 percent. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization, Japan was able to avoid some of the trial and error earlier needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through technology licensing, patent purchases, and imitation and improvement of foreign inventions. In the 1980s, industry stepped up its research and development, and many firms became famous for their innovations and creativity.

Japan's labor force contributed significantly to economic growth, not only because of its availability and literacy but also because of its reasonable wage demands. Before and immediately after World War II, the transfer of numerous agricultural workers to modern industry resulted in rising productivity and only moderate wage increases. As population growth slowed and the nation became increasingly industrialized in the mid-1960s, wages rose significantly. But labor union cooperation generally kept salary increases within the range of gains in productivity.

High productivity growth played a key role in postwar economic growth. The highly skilled and educated labor force, extraordinary savings rates and accompanying levels of investment, and the low growth of Japan's labor force were major factors in the high rate of productivity growth.

The nation has also benefited from economies of scale. Although medium-sized and small enterprises generated much of the nation's employment, large facilities were the most productive. Many industrial enterprises consolidated to form larger, more efficient units. Before World War II, large holding companies formed wealth groups, or zaibatsu, which dominated most industry. The zaibatsu were dissolved after the war, but keiretsu--large, modern industrial enterprise groupings-- emerged. The coordination of activities within these groupings and the integration of smaller subcontractors into the groups enhanced industrial efficiency.

Japanese corporations developed strategies that contributed to their immense growth. Growth-oriented corporations that took chances competed successfully. Product diversification became an essential ingredient of the growth patterns of many keiretsu. Japanese companies added plant and human capacity ahead of demand. Seeking market share rather than quick profit was another powerful strategy.

Finally, circumstances beyond Japan's direct control contributed to its success. International conflicts tended to stimulate the Japanese economy until the devastation at the end of World War II. The Russo-Japanese War (1904-5), World War I (1914- 18), the Korean War (1950-53), and the Second Indochina War (1954- 75) brought economic booms to Japan. In addition, benign treatment from the United States after World War II facilitated the nation's reconstruction and growth.

The United States occupation of Japan (1945-52) resulted in the rebuilding of the nation and the creation of a democratic state. United States assistance totaled about US$1.9 billion during the occupation, or about 15 percent of the nation's imports and 4 percent of GNP in that period. About 59 percent of this aid was in the form of food, 15 percent in industrial materials, and 12 percent in transportation equipment. United States grant assistance, however, tapered off quickly in the mid-1950s. United States military procurement from Japan peaked at a level equivalent to 7 percent of Japan's GNP in 1953 and fell below 1 percent after 1960. A variety of United States-sponsored measures during the occupation, such as land reform, contributed to the economy's later performance by increasing competition. In particular, the postwar purge of industrial leaders allowed new talent to rise in the management of the nation's rebuilt industries. Finally, the economy benefited from foreign trade because it was able to expand exports rapidly enough to pay for imports of equipment and technology without falling into debt, as had a number of developing nations in the 1980s.

The consequences of Japan's economic growth were not always positive. Large advanced corporations existed side-by-side with the smaller and technologically less-developed firms, creating a kind of economic dualism in the late twentieth century. Often the smaller firms, which employed more than two-thirds of Japan's workers, worked as subcontractors directly for larger firms, supplying a narrow range of parts and temporary workers. Excellent working conditions, salaries, and benefits, such as permanent employment, were provided by most large firms, but not by the smaller firms. Temporary workers, mostly women, received much smaller salaries and had less job security than permanent workers. Thus, despite the high living standards of many workers in larger firms, Japan in 1990 remained in general a low-wage country whose economic growth was fueled by highly skilled and educated workers who accepted poor salaries, often unsafe working conditions, and poor living standards.

Additionally, Japan's preoccupation with boosting the rate of industrial growth during the 1950s and 1960s led to the relative neglect of consumer services and also to the worsening of industrial pollution. Housing and urban services, such as water and sewage systems, lagged behind the development of industry. Social security benefits, despite considerable improvement in the 1970s and 1980s, still lagged well behind other industrialized nations at the end of the 1980s. Agricultural subsidies and a complex and outmoded distribution system also kept the prices of some essential consumer goods very high by world standards. Industrial growth came at the expense of the environment. Foul air, heavily polluted water, and waste disposal became critical political issues in the 1970s and again in the late 1980s.

The Evolving Occupational Structure

As late as 1955, some 40 percent of the labor force still worked in agriculture, but this figure had declined to 17 percent by 1970 and to 7.2 percent by 1990. The government estimated in the late 1980s that this figure would decline to 4.9 percent by 2000, as Japan imported more and more of its food and small family farms disappeared.

Japan's economic growth in the 1960s and 1970s was based on the rapid expansion of heavy manufacturing in such areas as automobiles, steel, shipbuilding, chemicals, and electronics. The secondary sector (manufacturing, construction, and mining) expanded to 35.6 percent of the work force by 1970. By the late 1970s, however, the Japanese economy began to move away from heavy manufacturing toward a more service-oriented (tertiary sector) base. During the 1980s, jobs in wholesaling, retailing, finance and insurance, real estate, transportation, communications, and government grew rapidly, while secondary-sector employment remained stable. The tertiary sector grew from 47 percent of the work force in 1970 to 59.2 percent in 1990 and was expected to grow to 62 percent by 2000, when the secondary sector will probably employ about one-third of Japan's workers.




Although Japan's economic development is primarily the product of private entrepreneurship, the government has directly contributed to the nation's prosperity. Its actions have helped initiate new industries, cushion the effects of economic depression, create a sound economic infrastructure, and protect the living standards of the citizenry. Indeed, so pervasive has government influence in the economy seemed that many foreign observers have popularized the term "Japan Inc." to describe its alliance of business and government interests. Whether Japan in the mid-1990s actually fit this picture seems questionable, but there is little doubt that government agencies continue to influence the economy through a variety of policies.

Japanese attitudes towards government have historically been shaped by Confucianism. Japan often has been defined as a Confucian country, but one in which loyalty is more important than benevolence. Leadership stemmed from the government and authority in general, and business looked to government for guidance. These attitudes, coupled with the view of the nation as a family, allowed government to influence business, and businesses worked hard not only for their own profits but also for national well-being. There was a national consensus that Japan must be an economic power and that the duty of all Japanese was to sacrifice themselves for this national goal. Thus, the relationship between government and business was as collaborators rather than as mutually suspicious adversaries.

Government-business relations are conducted in many ways and through numerous channels. The most important conduits in the postwar period are the economic ministries: the Ministry of Finance and the Ministry of International Trade and Industry, known as MITI. The Ministry of Finance has operational responsibilities for all fiscal affairs, including the preparation of the national budget. It initiates fiscal policies and, through its indirect control over the Bank of Japan, the central bank, is responsible for monetary policy as well. The Ministry of Finance allocates public investment, formulates tax policies, collectes taxes, and regulates foreign exchange.

The Ministry of Finance establishes low interest rates and, by thus reducing the cost of investment funds to corporations, promotes industrial expansion. MITI is responsible for the regulation of production and the distribution of goods and services. It is the "steward" of the Japanese economy, developing plans concerning the structure of Japanese industry. MITI has several special functions: controlling Japan's foreign trade and supervising international commerce; ensuring the smooth flow of goods in the national economy; promoting the development of manufacturing, mining, and distribution industries; and supervising the procurement of a reliable supply of raw materials and energy resources.

The Ministry of Transportation is responsible for oversight of all land, sea, and air transport. The Ministry of Construction is charged with supervising all construction in Japan and Japanesesupported construction abroad. Its responsibilities also include land acquisition for public use and environmental protection as it related to construction. The Ministry of Health and Welfare is responsible for supervising and coordinating all health and welfare services, and the Ministry of Posts and Telecommunications is responsible for the postal service and electronic communications.

Industrial Policy

After World War II and especially in the 1950s and 1960s, the Japanese government devised a complicated system of policies to promote industrial development, and it cooperated closely for this purpose with private firms. The objective of industrial policy was to shift resources to specific industries in order to gain international competitive advantage for Japan. These policies and methods were used primarily to increase the productivity of inputs and to influence, directly or indirectly, industrial investment.

Administrative guidance (gyosei shido) is a principal instrument of enforcement used extensively throughout the Japanese government to support a wide range of policies. Influence, prestige, advice, and persuasion are used to encourage both corporations and individuals to work in directions judged desirable. The persuasion is exerted and the advice is given by public officials, who often have the power to provide or to withhold loans, grants, subsidies, licenses, tax concessions, government contracts, import permits, foreign exchange, and approval of cartel arrangements. The Japanese use administrative guidance to buffer market swings, anticipate market developments, and enhance market competition.

Mechanisms used by the Japanese government to affect the economy typically relate to trade, labor markets, competition, and tax incentives. They include a broad range of trade protection measures, subsidies, de jure and de facto exemptions from antitrust statutes, labor market adjustments, and industry-specific assistance to enhance the use of new technology. Rather than producing a broad range of goods, the Japanese selecte a few areas in which they can develop high-quality goods that they can produce in vast quantities at competitive prices. A good example is the camera industry, which since the 1960s has been dominated by Japan.

Historically, there have been three main elements in Japanese industrial development. The first was the development of a highly competitive manufacturing sector. The second was the deliberate restructuring of industry toward higher value-added, highproductivity industries. In the late 1980s, these were mainly knowledge-intensive tertiary industries. The third element was aggressive domestic and international business strategies.

Japan has few natural resources and depends on massive imports of raw materials. It must export to pay for its imports, and manufacturing and the sales of its services, such as banking and finance, were its principal means of doing so. For these reasons, the careful development of the producing sector has been a key concern of both government and industry throughout most of the twentieth century. Government and business leaders generally agree that the composition of Japan's output must continually shift if living standards are to rise. Government plays an active role in making these shifts, often anticipating economic developments rather than reacting to them.

After World War II, the initial industries that policy makers and the general public felt Japan should have were iron and steel, shipbuilding, the merchant marine, machine industries in general, heavy electrical equipment, and chemicals. Later they added the automobile industry, petrochemicals, and nuclear power and, in the 1980s, such industries as computers and semiconductors. Since the late 1970s, the government has strongly encouraged the development of knowledge-intensive industries. Government support for research and development grew rapidly in the 1980s, and large joint government-industry development projects in computers and robotics were started. At the same time, government promoted the managed decline of competitively troubled industries, including textiles, shipbuilding, and chemical fertilizers through such measures as tax breaks for corporations that retrained workers to work at other tasks.

Although industrial policy remained important in Japan in the 1970s and 1980s, thinking began to change. Government seemed to intervene less and become more respectful of price mechanisms in guiding future development. During this period, trade and direct foreign investment were liberalized, tariff and nontariff trade barriers were lowered, and the economies of the advanced nations became more integrated, as the result of the growth of international trade and international corporations. In the late 1980s, knowledge-intensive and high-technology industries became prominent. The government showed little inclination to promote such booming parts of the economy as fashion design, advertising, and management consulting. The question at the end of the 1980s was whether the government would become involved in such new developments or whether it would let them progress on their own.

Monetary and Fiscal Policy

Monetary policy pertains to the regulation, availability, and cost of credit, while fiscal policy deals with government expenditures, taxes, and debt. Through management of these areas, the Ministry of Finance regulated the allocation of resources in the economy, affected the distribution of income and wealth among the citizenry, stabilized the level of economic activities, and promoted economic growth and welfare.

The Ministry of Finance played an important role in Japan's postwar economic growth. It advocated a "growth first" approach, with a high proportion of government spending going to capital accumulation, and minimum government spending overall, which kept both taxes and deficit spending down, making more money available for private investment. Most Japanese put money into savings accounts.

In the postwar period, the government's fiscal policy centers on the formulation of the national budget, which is the responsibility of the Ministry of Finance. The ministry's Budget Bureau prepares expenditure budgets for each fiscal year (FY) based on the requests from government ministries and affiliated agencies. The ministry's Tax Bureau is responsible for adjusting the tax schedules and estimating revenues. The ministry also issues government bonds, controls government borrowing, and administers the Fiscal Investment and Loan Program, which is sometimes referred to as the "second budget."

Three types of budgets are prepared for review by the National Diet each year. The general account budget includes most of the basic expenditures for current government operations. Special account budgets, of which there are about forty, are designed for special government programs or institutions where close accounting of revenues and expenditures is essential: for public enterprises, state pension funds, and public works projects financed from special taxes. Finally, there are the budgets for the major affiliated agencies, including public service corporations, loan and finance institutions, and the special public banks. Although these budgets are usually approved before the start of each fiscal year, they are usually revised with supplemental budgets in the fall. Local jurisdiction budgets depend heavily on transfers from the central government.

Government fixed investments in infrastructure and loans to public and private enterprises are about 15 percent of GNP. Loans from the Fiscal Investment and Loan Program, which are outside the general budget and funded primarily from postal savings, represent more than 20 percent of the general account budget, but their total effect on economic investment is not completely accounted for in the national income statistics. Government spending, representing about 15 percent of GNP in 1991, was low compared with that in other developed economies. Taxes provided 84.7 percent of revenues in 1993. Income taxes are graduated and progressive. The principal structural feature of the tax system is the tremendous elasticity of the individual income tax. Because inheritance and property taxes are low, there is a slowly increasing concentration of wealth in the upper tax brackets. In 1989 the government introduced a major tax reform, including a 3 percent consumer tax.




In the mid-1980s, while the United States was becoming a debtor nation, Japan became the world's largest creditor and <"http://worldfacts.us/Japan-Tokyo.htm"> Tokyo a major international financial center. Four of the biggest banks in the world were Japanese at that time, and Japan had the world's largest insurance company, advertising firm, and stock market. In the remainder of the 1980s, Japan's financial and banking industries grew at unprecedented rates.

The main elements of Japan's financial system were much the same as those of other major industrialized nations: a commercial banking system, which accepted deposits, extended loans to businesses, and dealt in foreign exchange; specialized governmentowned financial institutions, which funded various sectors of the domestic economy; securities companies, which provided brokerage services, underwrote corporate and government securities, and dealt in securities markets; capital markets, which offered the means to finance public and private debt and to sell residual corporate ownership; and money markets, which offered banks a source of liquidity and provided the Bank of Japan with a tool to implement monetary policy.

Japan's traditional banking system was segmented into clearly defined components in the late 1980s: commercial banks (thirteen major and sixty-four smaller regional banks), long-term credit banks (seven), trust banks (seven), mutual loan and savings banks (sixty-nine), and various specialized financial institutions. During the 1980s, a rapidly growing group of nonbank operations-- such as consumer loan, credit card, leasing, and real estate organizations--began performing some of the traditional functions of banks, such as the issuing of loans.

In the early postwar financial system, city banks provided short-term loans to major domestic corporations while regional banks took deposits and extended loans to medium-sized and small businesses. Neither engaged much in international business. In the 1950s and 1960s, a specialized bank, the Bank of Tokyo, took care of most of the government's foreign-exchange needs and functioned as the nation's foreign-banking representative. Long-term credit banks were intended to complement rather than to compete with the commercial banks. Authorized to issue debentures rather than take ordinary deposits, they specialized in long-term lending to major kaisha, or corporations. Trust banks were authorized to conduct retail and trust banking and often combined the work of commercial and long-term credit banks. Trust banks not only managed portfolios but also raised funds through the sale of negotiable loan trust certificates. Mutual loan and savings banks, credit associations, credit cooperatives, and labor credit associations collected individual deposits from general depositors. These deposits were then loaned to cooperative members and to the liquidity-starved city banks via the interbank money markets or were sent to central cooperative banks, which in turn loaned the funds to small businesses and corporations. More than 8,000 agricultural, forestry, and fishery cooperatives performed many of the same functions for the cooperatives. Many of their funds were transmitted to their central bank, the Norinchukin Bank, which was the world's largest bank in terms of domestic deposits.

A group of government financial institutions paralleled the private banking sector. The Japan Export-Import Bank, the Japan Development Bank, and a number of finance corporations, such as the Housing Loan Corporation, promoted the growth of specialized sectors of the domestic economy. These institutions derived their funding from deposits collected by the postal savings system and deposited with the Trust Fund Bureau. The postal savings system, through the 24,000 post offices, accepted funds in various forms, including savings, annuities, and insurance. The post offices offered the highest interest rates for regular savings accounts (8 percent for time deposits in 1990) and tax-free savings until 1988, thereby collecting more deposits and accounts than any other institution in the world.

Japan's securities markets increased their volume of dealings rapidly during the late 1980s, led by Japan's rapidly expanding securities firms. There were three categories of securities companies in Japan, the first consisting of the "Big Four" securities houses (among the six largest such firms in the world): Nomura, Daiwa, Nikko, and Yamaichi. The Big Four played a key role in international financial transactions and were members of the New York Stock Exchange. Nomura was the world's largest single securities firm; its net capital, in excess of US$10 billion in 1986, exceeded that of Merrill Lynch, Salomon Brothers, and Shearson Lehman combined. In 1986 Nomura became the first Japanese member of the London Stock Exchange. Nomura and Daiwa were primary dealers in the United States Treasury bond market. The second tier of securities firms contained ten medium-sized firms. The third tier consisted of all the smaller securities firms registered in Japan. Many of these smaller firms were affiliates of the Big Four, while some were affiliated with banks. In 1986 eighty-three of the smaller firms were members of the Tokyo Securities and Stock Exchange. Japan's securities firms derived most of their income from brokerage fees, equity and bond trading, underwriting, and dealing. Other services included the administration of trusts. In the late 1980s, a number of foreign securities firms, including Salomon Brothers and Merrill Lynch, became players in Japan's financial world.

Japanese insurance companies became important leaders in international finance in the late 1980s. More than 90 percent of the population owned life insurance and the amount held per person was at least 50 percent greater than in the United States. Many Japanese used insurance companies as savings vehicles. Insurance companies' assets grew at a rate of more than 20 percent per year in the late 1980s, reaching nearly US$694 billion in 1988. These assets permitted the companies to become major players in international money markets. Nippon Life Insurance Company, the world's largest insurance firm, was reportedly the biggest single holder of United States Treasury securities in 1989.

The Tokyo Securities and Stock Exchange became the largest in the world in 1988, in terms of the combined market value of outstanding shares and capitalization, while the Osaka Stock Exchange ranked third after those of Tokyo and New York. Although there are eight stock exchanges in Japan, the Tokyo Securities and Stock Exchange represented 83 percent of the nation's total equity in 1988. Of the 1,848 publicly traded domestic companies in Japan at the end of 1986, about 80 percent were listed on the Tokyo Securities and Stock Exchange.

Two developments in the late 1980s helped in the rapid expansion of the Tokyo Securities and Stock Exchange. The first was a change in the financing of company operations. Traditionally large firms obtained funding through bank loans rather than capital markets, but in the late 1980s they began to rely more on direct financing. The second development came in 1986 when the Tokyo exchange permitted non-Japanese brokerage firms to become members for the first time. By 1988 the exchange had sixteen foreign members. The Tokyo Securities and Stock Exchange had 124 member companies in 1990.

Japan's stock market dealings exploded in the 1980s, with increased trading volume and rapidly rising stock prices. The trading recorded by the Nikkei stock average, compiled by the Nihon Keizai Shimbun (Japan Economic Daily), grew from 6,850 in October 1982 to nearly 39,000 in early 1990. During one sixmonth period in 1986, total trade volume on the Tokyo exchange increased by 250 percent with wild swings in the Nikkei. After the plunge of the New York Stock Exchange in October 1987, the Tokyo average dropped by 15 percent, but there was a sharp recovery by early 1988. In 1990 five types of securities were traded on the Tokyo exchange: stocks, bonds, investment trusts, rights, and warrants alone.




Although the Japanese economy is largely based on private enterprise, it does have a number of government-owned (public) corporations, which are more extensive and, in some cases, different in function from what exists in the United States. In 1988 there were ninety-seven public corporations, reduced from 111 in the early 1980s as a result of administrative reforms. Public companies at the national level were normally affiliated with one of the economic ministries, although the extent of direct management and supervision varied. The government divided the national-level corporations into several categories. The first included the main public service and monopoly corporations: Nippon Telegraph and Telephone Corporation, Japanese National Railways, and Japan Tobacco and Salt Corporation. However, Nippon Telegraph and Telephone Corporation was privatized in 1985, and the Japanese National Railways in 1987, and Japan Tobacco and Salt Corporation in 1988. The second category included the major development corporations devoted to housing, agriculture, highways, water resources, ports, energy resources, and urban development projects. Other categories of corporations included those charged with special government projects, loans and finance, and special types of banking. Local public corporations were involved with utilities.

Public corporations benefited the economy in several ways. Some, like Nippon Telegraph and Telephone Corporation before privatization, were important sources of technology development funds or centers around which private industry could cluster. Others provided vital public services that private industry would find impossible to finance. The development banks, particularly the Japan Development Bank, were sources of long-term investment funds and instrumental in shaping the pattern of industry, especially in the early postwar period. Because public corporations also added revenue to the national budget and were, theoretically, selffinancing , they required little from the government in the way of financial support. They also provided employment for retired bureaucrats. The reemployment of retired bureaucrats as advisers to these corporations as well as to many private-sector firms was rather common, especially in the late 1960s and early 1970s, under the title amakudari (descent from heaven). The practice was most prevalent in the highly regulated banking, steel, and transportation industries but was also found throughout the Japanese economy.

Public corporations also have a negative side. Their operations are apt to be less efficient than those of the private sector, and in some corporations, close government supervision impedes corporate responsibility. Conflicts between corporate heads, who are retired from competing ministries, and envy among career employees, who see their advancement blocked by the influx of retired officials, also creates frequent management problems. Labor relations are also less harmonious in the public sector than in the private sector. Some of Japan's most debilitating strikes and work slowdowns have been launched by public transportation workers.




The engine of Japanese economic growth has been private initiative and enterprise, together with strong support and guidance from the government and from labor. The most numerous enterprises were single proprietorships, of which there were more than 4 million in the late 1980s. The dominant form of organization, however, is the corporation: in 1988 some 2 million corporations employed more than 30 million workers, or nearly half of the total labor force of 60.1 million people. Corporations range from large to small, but the favored type of organization is the joint-stock company, with directors, auditors, and yearly stockholders' meetings.

Japan's postwar business system dates back to the dissolution of the zaibatsu during the Allied occupation. Central holding companies were dissolved and families and other owners were compensated with non-negotiable government bonds. Individual operating firms were then freed to act independently. At the same time, the government instituted antimonopoly legislation and formed the Fair Trade Commission. Together with agricultural land reform and the start of the labor movement, these measures helped introduce a degree of competition into markets that had not previously existed.

It was not long, however, before the spirit and the letter of these reform laws were neglected. During the 1950s, government guidance of industry often sidestepped the provisions of the law. While market forces determined the course of the vast majority of enterprise activities, adjustments in the allocation of bank credit and the formation of cartels favored the reemergence of conglomerate groupings. These groups competed vigorously with one another for market share both within and outside Japan, but they dominated lesser industry.

In contrast to the dualism of the prewar era--featuring a giant gap between modern, large enterprises and the smaller, traditional firms--the postwar system is more graduated. Interlocking production and sales arrangements between greater and smaller enterprises characterized corporate relations in most markets. The average Japanese business executive is well aware of the firms that lead production and sales in each industry and is sensitive to minute differentiations of rank among the many corporations.

At the top of the corporate system are three general types of corporate groupings. The first includes the corporate heirs of the zaibatsu (including many of the same firms). The second consists of corporations that formed around major commercial banks. The nation's six largest groupings are in these two categories. Mitsui, Mitsubishi, and Sumitomo are former zaibatsu, while other groupings were formed around the Fuji-Sankei, Sanwa, and DaiIchi Kangyo banking giants. A third type of corporate grouping developed around large industrial producers.

The relations among the members of the first two types of groups are flexible, informal, and quite different from the holding company pattern of the prewar days. Coordination takes place at periodic gatherings of corporation presidents and chief executive officers. The purpose of these meetings is to exchange information and ideas rather than to command group operations in a formal way. The general trading firms associated with each group can also be used to coordinate group finance, production, and marketing policies, although none of these relationships is entirely exclusive. The practice of crossholding shares of group stock further cements these groups, and such holdings usually make up about 30 percent of the total group equity. Member corporations typically, although not exclusively, borrow from group banks.

Similar relationships characterize the third type of corporate group, which was established around a major industrial producer. Members of this group are often subsidiaries or affiliates of the parent firm or are regular subcontractors. Subsidiaries and contracting corporations normally build components for the parent firm and, because of their smaller size, afford several benefits to the parent. The larger firm can concentrate on final assembly and high value-added processes, while the smaller firm can perform specialized and labor-intensive tasks. Cash payments to the subcontractors are supplemented by commercial bills whose maturity can be postponed when the need arose. In the late 1980s, subcontracting firms accounted for more than 60 percent of Japan's 6 million small and medium-sized enterprises (those having fewer than 300 employees).

This characterization of the economy as consisting of neat, hierarchical corporate groupings is somewhat simplistic. In the 1970s and 1980s, a number of independent middle-sized firms-- especially in the services and retail trade--were busy catering to increasingly diversified and specialized markets. Unaffiliated with the nation's large conglomerates, these corporations dueled each other in a highly competitive market. Bankruptcies among such companies and the smaller firms were much more common than among the large enterprises. Small business was the main provider of employment for the Japanese--two-thirds of Japanese workers were employed by small firms throughout the 1980s--and thereby the source of consumer demand; small business engaged in almost half of business investment as well.

The issue of who controlled the enterprise system is complex. While theoretically corporations are owned by stockholders, individual stock-ownership fell throughout the 1970s and 1980s, and in 1990 it was less than 30 percent. Financial corporations accounted for the remainder. Relative to capital, almost all large corporations carry enormous debt, a phenomenon known as overborrowing. Such an unbalanced capital structure results from the easy availability of credit from the main group bank and the network of corporate relations, which reduces the need to resort to capital markets. Corporate shareholder meetings are often only window dressing. Thugs sometimes terrorize stockholders, demanding payments to vote for management or refrain from exposing scandals. The auditing system also is not well developed. Until the late 1980s, few companies engaged outside auditors, and accounting practices gave corporations room to mislead both the public and the shareholders. The law was changed in 1981 to control this kind of excess, to enhance the power of auditors, and to reduce the number of stockholders in the employ of management. But in general, it seems that business management holds the reins of corporate control, often with little public accountability. The corporate system maintains itself by smoothing relations with the government bureaucracy, expanding benefits to workers and consumers, and inceasingly engaging in public relations and philanthropy.




The culture of Japanese management so famous in the West is generally limited to Japan's large corporations. These flagships of the Japanese economy provide their workers with excellent salaries and working conditions and secure employment. These companies and their employees are the business elite of Japan. A career with such a company was the dream of many young people in Japan, but only a select few attain these jobs. Qualification for employment is limited to the men and the few women who graduate from the top thirty colleges and universities in Japan.

Placement and advancement of Japanese workers is heavily based on educational background. Students who do not gain admission to the most highly rated colleges only rarely have the chance to work for a large company. Instead, they have to seek positions in small and medium-sized firms that can not offer comparable benefits and prestige. The quality of one's education and, more important, the college attended, play decisive roles in a person's career.

Few Japanese attend graduate school, and graduate training in business per se is rare. There are only a few business school programs in Japan. Companies provide their own training and show a strong preference for young men who can be trained in the company way. Interest in a person whose attitudes and work habits are shaped outside the company is low. When young men are preparing to graduate from college, they begin the search for a suitable employer. This process has been very difficult: there are only a few positions in the best government ministries, and quite often entry into a good firm is determined by competitive examination. The situation is becoming less competitive, with a gradual decrease in the number of candidates. New workers enter their companies as a group on April 1 each year.

One of the prominent features of Japanese management is the practice of permanent employment (shushin koyo). Permanent employment covers the minority of the work force that work for the major companies. Management trainees, traditionally nearly all of whom were men, are recruited directly from colleges when they graduate in the late winter and, if they survive a six-month probationary period with the company, are expected to stay with the companies for their entire working careers. Employees are not dismissed thereafter on any grounds, except for serious breaches of ethics.

Permanent employees are hired as generalists, not as specialists for specific positions. A new worker is not hired because of any special skill or experience; rather, the individual's intelligence, educational background, and personal attitudes and attributes are closely examined. On entering a Japanese corporation, the new employee will train from six to twelve months in each of the firm's major offices or divisions. Thus, within a few years a young employee will know every facet of company operations, knowledge which allows companies to be more productive.

Another unique aspect of Japanese management is the system of promotion and reward. An important criterion is seniority. Seniority is determined by the year an employee's class enters the company. Career progression is highly predictable, regulated, and automatic. Compensation for young workers is quite low, but they accept low pay with the understanding that their pay will increase in regular increments and be quite high by retirement. Compensation consists of a wide range of tangible and intangible benefits, including housing assistance, inexpensive vacations, good recreational facilities, and, most important, the availability of low-cost loans for such expenses as housing and a new automobile. Regular pay is often augmented by generous semiannual bonuses. Members of the same graduating class usually start with similar salaries, and salary increases and promotions each year are generally uniform. The purpose is to maintain harmony and avoid stress and jealousy within the group.

Individual evaluation, however, does occur. Early in workers' careers, by age thirty, distinctions are made in pay and job assignments. During the latter part of workers' careers, another weeding takes place, as only the best workers are selected for accelerated advancement into upper management. Those employees who fail to advance are forced to retire from the company in their midto -late fifties. Retirement does not necessarily mean a life of leisure. Poor pension benefits and modest social security means that many people have to continue working after retiring from a career. Many management retirees work for the smaller subsidiaries of the large companies, with another company, or with the large company itself at substantially lower salaries.

A few major corporations in the late 1980s were experimenting with variations of permanent employment and automatic promotion. Some rewarded harder work and higher production with higher raises and more rapid promotions, but most retained the more traditional forms of hiring and advancement. A few companies that experienced serious reverses laid off workers, but such instances were rare.

Another aspect of Japanese management is the company union, which most regular company employees are obliged to join. The worker do not have a separate skill identification outside of the company. Despite federations of unions at the national level, the union does not exist as an entity separate from, or with an adversarial relationship to, the company. The linking of the company with the worker puts severe limits on independent union action, and the worker does not wish to harm the economic wellbeing of the company. Strikes are rare and usually brief.

Japanese managerial style and decision making in large companies emphasizes the flow of information and initiative from the bottom up, making top management a facilitator rather than the source of authority, while middle management is both the impetus for and the shaper of policy. Consensus is stressed as a way of arriving at decisions, and close attention is paid to workers' well-being. Rather than serve as an important decision maker, the ranking officer of a company has the responsibility of maintaining harmony so that employees can work together. A Japanese chief executive officer is a consensus builder.




Rising labor productivity, particularly in the manufacturing industries, contribute significantly to the nation's economic development. Labor productivity was unusually high in the late 1970s, when Japan's wages first become competitive with other industrialized nations. But productivity rose at an annual average rate of only 2.6 percent between 1978 and 1987. At the same time, Japan was able to keep its unemployment rate between 2.8 and 2.2 percent from 1987 to 1992. The structure of the nation's employment system and relatively harmonious labor-management relations were two of the reasons for this enviable performance.

Employment, Wages, and Working Conditions

Japan's work force grew by less than 1 percent per year in the 1970s and 1980s. In 1991 it stood at 62.4 percent of the total population over fifteen years of age, a level little changed since 1970. Labor force participation differed within age and gender groupings and was similar to that in other industrialized nations in its relative distribution among primary, secondary, and tertiary industries. The percentage of people employed in the primary sector (agriculture, forestry, and fishing) dropped from 17.4 in 1970 to 7.2 in 1990 and was projected to fall to 4.9 by 2000. The percentage of the Japanese labor force employed in heavy industry was 33.7 in 1970; it dropped to 33.1 in 1987 and was expected to be 27.7 in 2000. Light industry employed 47 percent of the work force in 1970 and 58 percent in 1987. The sector was expected to employ 62 percent by 2000. Throughout the 1970s and 1980s, well over 95 percent of all men between the ages of twenty-five and fifty-four were in the work force, but the proportion dropped sharply after the usual retirement age of fifty-five (by 1990 the retirement age for most men had risen to sixty). Women participated most actively in the job market in their early twenties and between the ages of thirtyfive and fifty-four. The unemployment rate (2.2 percent in 1992) was considerably lower than in the other industrialized nations.

Wages vary by industry and type of employment. Those earning the highest wages are permanent workers in firms having more than thirty employees and those workers in finance, real estate, public service, petroleum, publishing, and emerging high-technology industries earned the highest wages. The lowest paid are those in textiles, apparel, furniture, and leather products industries. The average farmer fares even worse.

During the period of strong economic growth from 1960 to 1973, wage levels rose rapidly. Nominal wages increased an average of 13 percent per year while real wages rose 7 percent each year. Wage levels then stagnated as economic growth slowed. Between 1973 and 1987 annual nominal and real wage increases dropped to 8 percent and 2 percent, respectively. Wages began rising in 1987 as the value of the yen sharply appreciated. In 1989 salaried workers receiving the highest average pay hikes over the previous year were newspaper employees (6.7 percent), followed by retail and wholesale workers (6 percent) and hotel employees (5.7 percent). Workers in the steel (2.5 percent) and shipbuilding (4.2 percent) industries fared worse. The salaries of administrative and technical workers were about 20 percent higher than those of production workers. In the late 1980s, with wages in manufacturing firms having 500 or more workers indexed at 100, enterprises with 100 to 499 employees were indexed at 79, those with thirty to ninety-nine employees at 64, and those with five to twenty-nine employees at 56.6. The gap between wages paid to secondary school and college graduates was slight but widened as the employees grew older; wages peaked at the age of fifty-five, when the former received only 60 to 80 percent of the wages of the latter.

Workers received two fairly large bonuses as well as their regular salary, one mid-year and the other at year's end. In 1988 workers in large companies received bonuses equivalent to their pay for 1.9 months while workers in the smallest firms gained bonuses equal to 1.2 months' pay. In addition to bonuses, Japanese workers received a number of fringe benefits, such as living allowances, incentive payments, remuneration for special job conditions, allowances for good attendance, and cost-of-living allowances.

Working conditions varied from firm to firm. On average, employees worked a forty-six-hour week in 1987; employees of most large corporations worked a modified five-day week with two Saturdays a month, while those in most small firms worked as much as six days each week. In the face of mounting international criticism of excessive working hours in Japan, in January 1989 public agencies began closing two Saturdays a month. Labor unions made reduced working hours an important part of their demands, and many larger firms responded in a positive manner. In 1986 the average employee in manufacturing and production industries worked 2,150 hours in Japan, compared with 1,924 hours in the United States and 1,643 in France. The average Japanese worker is entitled to fifteen days of paid vacation a year but actually took only seven days.

The Structure of Japan's Labor Market

The structure of Japan's labor market was experiencing gradual change in the late 1980s and was expected to continue this trend throughout the 1990s. The structure of the labor market is affected by the aging of the working population, increasing numbers of women in the labor force, and workers' rising education level. There is the prospect of increasing numbers of foreign nationals in the labor force. And, finally, the labor market faces possible changes owing to younger workers who sought to break away from traditional career paths to those that stressed greater individuality and creativity.

Working Women

Japanese women are joining the labor force in unprecedented numbers. In 1987 there were 24.3 million working women (40 percent of the labor force), and they accounted for 59 percent of the increase in employment from 1975 to 1987. The participation rate for women in the labor force (the ratio of those working to all women aged fifteen and older) rose from 45.7 percent in 1975 to 50.6 percent in 1991 and was expected to reach 50 percent by 2000.

The growing participation of women reflected both supply and demand factors. Industries such as wholesaling, retailing, banking, and insurance have expanded, in large part because of the effective use of women as part-time employees.

Foreign Workers

Traditionally, Japan has had strict laws regarding the employment of foreigners, although exceptions were made for certain occupational categories. Excepted categories have included executives and managers engaged in commercial activities, full-time scholars associated with research and education institutions, professional entertainers, engineers and others specializing in advanced technology, foreign-language teachers, and others with special skills unavailable among Japanese nationals.

The problems of foreign workers in the labor force were expected to continue throughout the 1990s. Despite the long-term upward trend in the unemployment rate, many unpopular jobs go unfilled and the domestic labor market is sluggish. Imported labor is seen as a solution to this situation by some employers, who hire low-paid foreign workers, who are, in turn, enticed by comparatively high Japanese wages. The strict immigration laws are expected to remain on the books, however, although the influx of illegal aliens from nearby Asian countries to participate in the labor market is likely to increase.

Workers' Changing Attitudes

The success of corporations in Japan is attributable to the remarkable motivation of its workers. Also behind this corporate prosperity is the workers' strong sense of loyalty to and identification with their employers. While many theories have evolved to explain the extraordinary attitude of Japanese workers, perhaps the most noteworthy is that of personnel management. This view holds that loyalty to the company has developed as a result of job security and a wage system in which those with the greatest seniority reap the highest rewards. Such corporate structure presumably fostered not only a determined interest in the company but also a low percentage of workers who changed jobs.

During the postwar economic reconstruction, the backbone of the labor force was, of course, made up of people born before World War II. These people grew up in a Japan that was still largely an agriculturally based economy and had little material wealth. Moreover, they had suffered the hardships of war and had accepted hard work as a part of their lives. In the late twentieth century, these people were being replaced by generations born after the war, and there were indications that the newcomers had different attitudes toward work. Postwar generations were accustomed to prosperity and were also better educated than their elders.

As might be expected, these socioeconomic changes have affected workers' attitudes. Prior to World War II, surveys indicated that the aspect of life regarded as most worthwhile was work. During the 1980s, the percentage of people who felt this way was declining. Workers' identification with their employers was weakening as well. A survey by the Management and Coordination Agency revealed that a record 2.7 million workers changed jobs in the one-year period beginning October 1, 1986, and the ratio of those who switched jobs to the total labor force matched the previous high recorded in 1974. This survey also showed that the percentage of workers indicating an interest in changing jobs increased from 4.5 percent in 1971 to 9.9 percent in 1987.

Another indication of changing worker attitudes is the number of people meeting with corporate scouts to discuss the possibility of switching jobs. Corporations' treatment of older workers also affects attitudes: there are fewer positions for older workers, and many find themselves without the rewards that their predecessors had enjoyed.

Aging and Retirement of the Labor Force

Japan's population is aging. During the 1950s, the percentage of the population in the sixty-five-and-over group remained steady at around 5 percent. Throughout subsequent decades, however, that age-group expanded, and by 1989 it had grown to 11.6 percent of the population. It was expected to reach 16.9 percent by 2000 and almost 25.2 percent by 2020. Perhaps the most outstanding feature of this trend was the speed with which it was occurring in comparison to trends in other industrialized nations. In the United States, expansion of the sixty-five-and-over age-group from 7 percent to 14 percent took seventy-five years; in Britain and the Federal Republic of Germany (West Germany), this expansion took forty-five years. The same expansion in Japan was expected to take only twenty-six years.

As Japan's population aged, so did its work force. In 1990 about 20 percent of the work force was made up of workers aged fifty-five and over. The Ministry of Labor predicted that by 2000 about 24 percent of the working population (almost one in four workers) would be in this age-group. This demographic shift was expected to bring about both macroeconomic and microeconomic problems. At the national level, Japan may have trouble financing the pension system. At the corporate level, problems will include growing personnel costs and the shortage of senior positions. If such problems become severe, government will be forced to develop countermeasures.

In most Japanese companies, salaries rise with worker age. Because younger workers are paid less, they are more attractive to employers, and the difficulty in finding employment increases with age. This pattern is evidenced by the unemployment rates for different age-groups and by the number of applicants per job vacancy for each age-group in openings handled by public employment offices. As the Japanese population ages, such trends may grow.

Most Japanese companies require that employees retire upon reaching a specified age. During most of the postwar period, that age was fifty-five. Because government social security payments normally begins at age sixty, workers are forced to find reemployment to fill the five-year gap. However, in 1986 the Diet passed the Law Concerning the Stabilization of Employment for Elderly People to provide various incentives for firms to raise their retirement age to sixty. Many Japanese companies raised the retirement age they had set, partly in response to this legislation. And despite mandatory retirement policies, many Japanese companies allow their employees to continue working beyond the age of sixty--although generally at reduced wages. People over sixty continue to work varied: to supplement inadequate pension incomes, to give meaning to their lives, or to keep in touch with society.

As Japan's population ages, the financial health of the public pension plan deteriorates. To avoid massive increases in premiums, the government reformed the system in 1986 by cutting benefit levels and raising the plan's specified age at which benefits began from sixty to sixty-five. Under the revised system, contributions paid in equal share by employer and employee were expected to be equivalent to about 30 percent of wages, as opposed to 40 percent of wages under the old system. However, problems now arose in securing employment opportunities for the sixty-to-sixty-five agegroup .

In 1990 some 90 percent of companies paid retirement benefits to their employees in the form of lump-sum payments and pensions. Some companies based the payment amount on the employee's base pay, while others used formulas independent of base pay. Because the system was designed to reward long service, payment rose progressively with the number of years worked.

Social Insurance and Minimum Wage Systems

Companies in Japan are responsible for enrolling their employees in various social insurance systems, including health insurance, employee pension insurance, employment insurance, and workers' accident compensation insurance. The employer covers all costs for workers' accident compensation insurance, but payments to the other systems are shared by both employer and employee.

The Minimum Wage Law, introduced in 1947 but not enacted until 1959, was designed to protect low-income workers. Minimum wage levels have been determined, according to both region and industry, by special councils composed of government, labor, and employment representatives.

Labor Unions

Japan's 74,500 trade unions were represented by four main labor federations in the mid-1980s: the General Council of Trade Unions of Japan (Nihon Rodo Kumiai Sohyogikai, commonly known as Sohyo), with 4.4 million members--a substantial percentage representing public sector employees; the Japan Confederation of Labor (Zen Nihon Rodo Sodomei, commonly known as Domei), with 2.2 million members; the Federation of Independent Labor Unions (Churitsu Roren), with 1.6 million members; and the National Federation of Industrial Organizations (Shinsanbetsu), with only 61,000 members. In 1987 Domei and Churitsu Roren were dissolved and amalgamated into the newly established National Federation of Private Sector Unions (Rengo); and in 1990 Sohyo affiliates merged with Rengo . Local labor unions and work unit unions, rather than the federations, conducted the major bargaining. Unit unions often banded together for wage negotiations, but federations did not control their policies or actions. Federations also engaged in political and public relations activities.

The rate of labor union membership, which was 35.4 percent in 1970, had declined considerably by the end of the 1980s. The continuing long-term reduction in union membership was caused by several factors, including the restructuring of Japanese industry away from heavy industries. Many people entering the work force in the 1980s joined smaller companies in the tertiary sector, where there was a general disinclination toward joining labor organizations.

The relationship between the typical labor union and the company is unusually close. Both white- and blue-collar workers join the union automatically in most major companies. Temporary and subcontracting workers are excluded, and managers with the rank of section manager and above are considered part of management. In most corporations, however, many of the managerial staff are former union members. In general, Japanese unions are sensitive to the economic health of the company, and company management usually brief the union membership on the state of corporate affairs.

Any regular employee below the rank of section chief is eligible to become a union officer. Management, however, often pressures the workers to select favored employees. Officers usually maintain their seniority and tenure while working exclusively on union activities and while being paid from the union's accounts, and union offices are often located at the factory site. Many union officers go on to higher positions within the corporation if they are particularly effective (or troublesome), but few become active in organized labor activities at the national level.

During prosperous times, the spring labor offensives are highly ritualized affairs, with banners, sloganeering, and dances aimed more at being a show of force than a crippling job action. Meanwhile, serious discussions take place between the union officers and corporate managers to determine pay and benefit adjustments. If the economy turns sour, or if management tries to reduce the number of permanent employees, however, disruptive strikes often occur. The number of working days lost to labor disputes peaked in the economic turmoil of 1974 and 1975 at around 9 million workdays in the two-year period. In 1979, however, there were fewer than 1 million days lost. Since 1981 the average number of days lost per worker each year to disputes was just over 9 percent of the number lost in the United States. After 1975, when the economy entered a period of slower growth, annual wage increases moderated and labor relations were conciliatory. During the 1980s, workers received pay hikes that on average closely reflected the real growth of GNP for the preceding year. In 1989, for example, workers received an average 5.1 percent pay hike, while GNP growth had averaged 5 percent between 1987 and 1989. The moderate trend continued in the early 1990s as the country's national labor federations were reorganizing themselves.




A mountainous, island nation, Japan has inadequate natural resources to support its growing economy and large population. Although many kinds of minerals were extracted throughout the country, most mineral resources had to be imported in the postwar era. Local deposits of metal-bearing ores were difficult to process because they were low grade. The nation's large and varied forest resources, which covered 70 percent of the country in the late 1980s, were not utilized extensively. Because of the precipitous terrain, underdeveloped road network, and high percentage of young trees, domestic sources were only able to supply between 25 and 30 percent of the nation's timber needs. Agriculture and fishing were the best developed resources, but only through years of painstaking investment and toil. The nation therefore built up the manufacturing and processing industries to convert raw materials imported from abroad. This strategy of economic development necessitated the establishment of a strong economic infrastructure to provide the needed energy, transportation, communications, and technological know-how.


The mainstay of infrastructure development is the construction industry, which employed 9.4 percent of the labor force in 1990 and contributed some 8.5 percent of GDP. After the two oil crises in the 1970s, construction investment turned sluggish, and the share of construction investment in GNP decreased gradually. In 1987, however, business expanded through investor confidence, continued increase in corporate earnings, improvement of personal income, and rapid rise in land prices. The share of construction investment in GNP rose sharply, especially for more sophisticated and higher value-added private housing and private nonhousing structures.

Construction starts in FY 1990 covered a total area of about 283 million square meters, with about 134 square meters exclusively for housing. Total construction costs were estimated in excess of 49 billion.

Although demand for new private housing is expected to grow in the 1990s, even greater growth is expected for new urban office buildings. A number of large projects are underway, suggesting that the construction industry would experience continued growth throughout the 1990s. These include projects for Tokyo's waterfront and other urban redevelopment, highway construction, and new or expanded airports.

Japan's construction technology, which includes advanced earthquake-resistant designs, is among the most developed in the world. Major firms compete to improve quality control over all phases of design, management, and execution. Research and development focuses especially on energyrelated facilities, such as nuclear power plants and liquid natural gas (LNG) storage tanks. The largest firms are also improving their underwater construction methods.


Mining was a rapidly declining industry in the 1980s. Domestic coal production shrank from a peak of 55 million tons in 1960 to slightly more than 16 million tons in 1985, while coal imports grew to nearly 91 million tons in 1987. Domestic coal mining companies faced cheap coal imports and high production costs, which caused them chronic deficits in the 1980s. In the late 1980s, Japan's approximately 1 million tons of coal reserves were mostly hard coal used for coking. Most of the coal Japan consumed is used to produce electric power.

Japanese coal is found at the extreme ends of the country, in Hokkaido and Kyushu, which have, respectively, 45 and 40 percent of the country's coal deposits. Kyushu's coal is generally of poor quality and hard to extract, but the proximity of the Kyushu mines to ports facilitates transportation. In Hokkaido, the coal seams are wider and can be worked mechanically, and the quality of the coal is good. Unfortunately, these mines are located well inland, making transportation difficult. In most Japanese coal mines, inclined galleries, which extended in some places to 9.7 kilometers underground, were used instead of pits. This arrangement is costly, despite the installation of moving platforms. The result is that a miner's daily output is far less than in Western Europe and the United States and domestic coal costs far more than imported coal.


Japan lacks significant domestic sources of energy except coal and must import substantial amounts of crude oil, natural gas, and other energy resources, including uranium. In 1990 the country's dependence on imports for primary energy stood at more than 84 percent. Its rapid industrial growth since the end of World War II had doubled energy consumption every five years. The use of power had also changed qualitatively. In 1950 coal supplied half of Japan's energy needs, hydroelectricity one-third, and oil the rest. In 1988 oil provided Japan with 57.3 percent of energy needs, coal 18.1 percent, natural gas 10.1 percent, nuclear power 9.0 percent, hydroelectic power 4.6 percent, geothermal power 0.1 percent, and 1.3 percent came from other sources. During the 1960-72 period of accelerated growth, energy consumption grew much faster than GNP, doubling Japan's consumption of world energy. By 1976, with only 3 percent of the world's population, Japan was consuming 6 percent of global energy supplies.

After the two oil crises of the 1970s, the pattern of energy consumption in Japan changed from heavy dependence on oil to some diversification to other forms of energy resources. Japan's domestic oil consumption dropped slightly, from around 5.1 million barrels of oil per day in the late 1970s to 4.9 million barrels per day in 1990. While the country's use of oil is declining, its consumption of nuclear power and LNG has risen substantially. Because domestic natural gas production is minimal, rising demand is met by greater imports. Japan's main LNG suppliers in 1987 were Indonesia (51.3 percent), Malaysia (20.4 percent), Brunei (17.8 percent), Abu Dhabi (7.3 percent), and the United States (3.2 percent). Several Japanese industries, including electric power companies and steelmakers, switched from petroleum to coal, most of which is imported.

In 1990, the latest year for which complete statistics were available, Japan's total energy requirements were tabulated at 428.2 million tons of petroleum equivalent. Of this total, 84 percent was imported. Consumption totaled 298 million tons: 46.7 percent of which was used by industry; 23.3 percent by the transportation sector; 26.6 percent for agricultural, residential, services, and other uses; and 3.3 percent for non-energy uses, such as lubricating oil or asphalt.

In 1989 Japan was the world's third largest producer of electricity. Most of the more than 3,300 power plants were thermoelectric. About 75 percent of the available power was controlled by the ten major regional power utilities, of which Tokyo Electric Power Company was the world's largest. Electricity rates in Japan were among the world's highest.

The Japanese were working to increase the availability of nuclear power in 1985. Although Japan was a late starter in this field, it finally imported technology from the United States and obtained uranium from Canada, France, South Africa, and Australia. By 1991 the country had forty-two nuclear reactors in operation, with a total generating capacity of approximately 33 million kilowatts. The ratio of nuclear power generation to total electricity production increased from 2 percent in 1973 to 23.6 percent in 1990.

During the 1980s, Japan's nuclear power program was strongly opposed by environmental groups, particularly after the Three Mile Island accident in the United States. Other problems for the program were the rising costs of nuclear reactors and fuel, the huge investments necessary for fuel enrichment and reprocessing plants, reactor failures, and nuclear waste disposal. Nevertheless, Japan continued to build nuclear power plants. Of alternative energy sources, Japan has effectively exploited only geothermal energy. The country had six geothermal power stations with a combined capacity of 133,000 kilowatts per hour in 1989.

Research and Development

As its economy matured in the 1970s and 1980s, Japan gradually shifted away from dependence on foreign research. Japan's ability to conduct independent research and development became a decisive factor in boosting the nation's competitiveness. As early as 1980, the Science and Technology Agency, a component of the Office of the Prime Minister, announced the commencement of "the era of Japan's technological independence."

By 1986 Japan had come to devote a higher proportion of its GNP to research and development than the United States. In 1989 nearly 700,000 Japanese were engaged in research and development, more than the number of French, British, and West Germans combined. At the same time, Japan was producing more engineers than any country except the Soviet Union and the United States. Similar trends were seen in the use of capital resources. Japan spent US$39.1 billion on government and private research and development in 1987, equivalent to 2.9 percent of its national income (the highest ratio in the world). Although the United States spent around US$108.2 billion on research and development in 1987, only 2.6 percent of its income was devoted to that purpose, ranking it third behind Japan and West Germany.

The Japanese reputation for originality also increased. Of the 1.2 million patents registered worldwide in 1985, 40 percent were Japanese, and Japanese citizens took out 19 percent of the 120,000 patent applications made in the United States. In 1987 around 33 percent of computer-related patents in the United States were Japanese, as were 30 percent of aviation-related patents and 26 percent of communications patents.

Despite its advances in technological research and development and its major commitment to applied research, however, Japan significantly trailed other industrialized nations in basic scientific research. In 1989 about 13 percent of Japanese research and development funds were devoted to basic research. The proportion of basic research expenses borne by government is also much lower in Japan than in the United States, as is Japan's ratio of basic research expenses to GNP. In the late 1980s, the Japanese government attempted to rectify national deficiencies in basic research by waging a broad "originality" campaign in schools, by generously funding research, and by encouraging private cooperation in various fields.

Most research and development is private, although government support to universities and laboratories aid industry greatly. In 1986 private industry provided 76 percent of the funding for research and development, which was especially strong in the late 1980s in electrical machinery (with a ratio of research costs to total sales of 5.5 percent in 1986), precision instruments (4.6 percent), chemicals (4.3 percent), and transportation equipment (3.2 percent).

As for government research and development, the national commitment to greater defense spending in the 1980s translated into increased defense-related research and development. Meanwhile, government moved away from supporting large-scale industrial technology, such as shipbuilding and steel. Research emphases in the 1980s were in alternative energy, information processing, life sciences, and modern industrial materials.




The nation's industrial activities (including mining, manufacturing, and power, gas, and water utilities) contributed 46.6 of total domestic industrial production in 1989, up slightly from 45.8 percent in 1975. This steady performance of the industrial sector in the 1970s and 1980s was a result of the growth of high-technology industries. During this period, some of the older heavy industries, such as steel and shipbuilding, either declined or simply held stable. Together with the construction industry, those older heavy industries employed 34.9 of the work force in 1989 (relatively unchanged from 34.8 percent in 1980). The service industry sector grew the fastest in the 1980s in terms of GNP, while the greatest losses occurred in agriculture, forestry, mining, and transportation. Most industry catered to the domestic market, but exports were important for several key commodities. In general, industries relatively geared toward exports over imports in 1988 were transportation equipment (with a 24.8 percent ratio of exports over imports), motor vehicles (54 percent), electrical machinery (23.4 percent), general machinery (21.2 percent), and metal and metal products (8.2 percent).

Industry is concentrated in several regions, in the following order of importance: the Kanto region surrounding Tokyo, especially the prefectures of Chiba, Kanagawa, Saitama and Tokyo (the Keihin industrial region); the Nagoya metropolitan area, including Aichi, Gifu, Mie, and Shizuoka prefectures (the Chukyo-Tokai industrial region); Kinki (the Keihanshin industrial region); the southwestern part of Honshu and northern Shikoku around the Inland Sea (the Setouchi industrial region); and the northern part of Kyushu (Kitakyushu). In addition, a long narrow belt of industrial centers is found between Tokyo and Hiroshima, established by particular industries, that havw developed as mill towns. These include Toyota City, near Nagoya, the home of the automobile manufacturer.

The fields in which Japan enjoys relatively high technological development include semiconductor manufacturing, optical fibers, optoelectronics, video discs and videotex, facsimile and copy machines, industrial robots, and fermentation processes. Japan lags slightly in such fields as satellites, rockets, and large aircraft, where advanced engineering capabilities are required, and in such fields as computer-aided design and computer-aided manufacturing (CAD/CAM), databases, and natural resources exploitation, where basic software capabilities are required.

Basic Manufactures

Japan's major export industries includes automobiles, consumer electronics, computers, semiconductors, and iron and steel. Additionally, key industries in Japan's economy are mining, nonferrous metals, petrochemicals, pharmaceuticals, bioindustry, shipbuilding, aerospace, textiles, and processed foods.

As the coal-mining industry declined, so did the general importance of domestic mining in the whole economy. Only 0.2 percent of the labor force was engaged in mining operations in 1988, and the value added from mining was about 0.3 percent of the total for all mining and manufacturing. Domestic production contributed most to the supply of such nonmetals as silica sand, pyrophyllite clay, dolomite, and limestone. Domestic mines were contributing declining shares of the requirements for the metals zinc, copper, and gold. Almost all of the ores used in the nation's sophisticated processing industries are imported.

The nonferrous metals industry fared very well in the late 1980s, as domestic demand for these metals reached record levels. Japan's consumption of the main nonferrous metals, such as copper, lead, zinc, and aluminum, was the second highest in the noncommunist world after the United States. In 1989 sales of copper products exceeded 1.5 million tons for the first time. Production of electric wire and cable, which accounted for 70 percent of Japan's copper demand, and brass mills, which used the other 30 percent, experienced sharp growth, as did the demand for aluminum.

The petrochemical industry experienced moderate growth in the late 1980s because of steady economic expansion. The highest growth came in the production of plastics, polystyrene, and polypropylene. Prices for petrochemicals remained high because of increased demand in the newly developing economies of Asia, but the construction of factory complexes to make ethylene-based products in the Republic of Korea (South Korea) and Thailand by 1990 was expected to increase supplies and reduce prices. In the long term, the Japanese petrochemical industry is likely to face intensifying competition as a result of the integration of domestic and international markets and the efforts made by other Asian countries to catch up with Japan.

The pharmaceutical industry and bioindustry experienced strong growth in the late 1980s. Pharmaceuticals production grew an estimated 8 percent in 1989 because of increased expenditures by Japan's rapidly aging population. Leading producers actively developed new drugs, such as those for degenerative and geriatric diseases, and also internationaled operations. Pharmaceutical companies were establishing tripolar networks connecting Japan, the United States, and Western Europe to coordinate product development. They also increased merger and acquisition activity overseas. Biotechnology research and development was progressing steadily, including the launching of marine biotechnology projects, with full-scale commercialization expected to take place in the 1990s. Biotechnology research covered a wide variety of fields: agriculture, animal husbandry, pharmaceuticals, chemicals, food processing, and fermentation. Human hormones and proteins for pharmaceutical products were sought through genetic recombination using bacteria.

Biotechnology also is used to enhance bacterial enzyme properties to further improve amino-acid fermentation technology, a field in which Japan is the world leader. The government cautions Japanese producers, however, against overoptimism regarding biotechnology and bioindustry. The research race both in Japan and abroad intensified in the 1980s, leading to patent disputes and forcing some companies to abandon research. Also, researchers began to realize that such drug development continually showed new complexities, requiring more technical breakthroughs than first imagined. Yet despite these problems, research and development, especially in leading companies, was still expected to be successful and to end in product commercialization in the mid-term.

Japan dominated world shipbuilding in the late 1980s, filling more than half of all orders worldwide. Its closest competitors were South Korea and Spain, with 9 percent and 5.2 percent of the market, respectively. Japan's shipyards replaced their West European competitors as world leaders in production through advanced design, fast delivery, and low production costs. The Japanese shipbuilding industry was hit by a lengthy recession from the late 1970s through most of the 1980s, which resulted in a drastic cutback in the use of facilities and in the work force, but there was a sharp revival in 1989. The industry was helped by a sudden rise in demand from other countries that needed to replace their aging fleets and from a sudden decline in the South Korean shipping industry. In 1988 Japanese shipbuilding firms received orders for 4.8 million gross tons of ships, but this figure grew to 7.1 million gross tons in 1989.

The aerospace industry received a major boost in 1969 with the establishment of the National Space Development Agency, which was charged with the development of satellites and launch vehicles. Japan's aircraft industry was only one-twentieth the size of that of the United States and one-twelfth that of Western Europe, and its technological level lagged as well. However, in the late 1980s Japan began to participate in new international aircraft development projects as its technical capabilities developed. The Asuka fanjet-powered short takeoff and landing (STOL) aircraft made a successful test flight in 1985. In 1988 Japan signed an accord with the United States to cooperate in building Japan's next-generation fighter aircraft, the FSX.

The textile industry showed a strong revival in the late 1980s because of increased domestic demand from the construction, automobile, housing, and civil engineering industries for various synthetic fibers. The clothing industry also fared well in the late 1980s, thanks to the expansion of consumer demand, especially in the area of women's apparel. Production of high value-added fashionable clothes became the mainstay of this industry.

The production value of the food industry ranked third among manufacturing industries after electric and transport machinery. It produced a great variety of products, ranging from traditional Japanese items, such as soybean paste (miso) and soy sauce, to beer and meat. The industry as a whole experienced mild growth in the 1980s, primarily from the development of such new products as "dry beer" and precooked food, which was increasingly used because of the tendency of family members to dine separately, the trend toward smaller families, and convenience. A common feature of all sectors of the food industry was their internationalization. As domestic raw materials lost their price competitiveness following the liberalization of imports, food makers more often produced foodstuffs overseas, promoted tie-ups with overseas firms, and purchased overseas firms.

Domestic Trade and Services

The nation's service industries are the major contributor to GNP, generating about 59 percent of the national totals in 1991. Moreover, services were the fastest growing sector, outperforming manufacturing in the 1980s. The service sector covers many, diverse activities. Wholesale and retail trade was dominant, but advertising, data processing, publishing, tourism, leisure industries, entertainment, and other industries grew rapidly in the 1980s. Most service industries were small and labor intensive but became more technologically sophisticated as computer and electronic products were incorporated by management.

The operation of wholesale and retail trades has often been denigrated by other nations as a barrier to foreign participation in the Japanese market, as well as being called antiquated and inefficient. Small retailers and "mom-and-pop" stores predominated- -in 1985 there were 1.6 million retail outlets in Japan, slightly more than the total number of retail outlets in the United States (1.5 million in 1982), even though Japan has only half the population of the United States and is smaller in size than California.

There were several changes in wholesaling and retailing in the 1980s. Japan's distribution system was becoming more efficient. Retail outlets and wholesale establishments both peaked in number in 1982 and then went down 5.4 percent and 3.7 percent, respectively, in 1985. The main casualties were sole proprietorships, especially mom-and-pop stores and wholesale locations with fewer than ten employees. Almost 96,000 of the 1,036,000 mom-and-pop stores in operation in 1982 were out of business three years later. Government estimates for the late 1980s show additional consolidation in both wholesale and retail sectors including a continued sharp decline in mom-and-pop store operations. A further decline in mom-and-pop stores is expected as a result of the Large-Scale Retail Store Law of 1990, which greatly reduced the power of small retailers to block the establishment of large retail stores. Soaring land prices are a major cause of the decline of mom-and-pop stores, but an even more important reason is the growth of convenience and discount stores. Discount stores are not much bigger than the traditional small shops, but their distribution networks gives them a big pricing edge.

In the 1980s, Japanese consumers were discovering the advantages of catalog shopping, which offered not only convenience but also greater selection and lower prices. According to a Nikkei survey, the mail-order business expanded 13 percent between April 1987 and March 1988 to more than US$8.9 billion in annual sales. Specialty chains, particularly those handling men's and women's clothing, shoes, and consumer electronics, were also doing better than the overall industry. Department stores, supermarkets, and superstores (hybrid supermarket-discount stores) and other big retail operations were gaining business at the expense of small retailers, although their progress was quite slow. Between 1980 and 1988, department stores increased their share of total retail sales by only 1 percentage point to 8.4 percent. Supermarkets and superstores increased in market share from 6.5 to 7.3 percent. Between 1980 and 1988, the number of department stores grew from 325 to just 371, and other big self-service stores only increased in number by 62 units between 1984 and 1988.

Among service industries, the restaurant, advertising, real estate, hotel and leisure business, and data-processing industries grew rapidly in the 1980s. The fast-food industry has been profitable for both foreign and domestic companies. By 1989 family restaurants and fast-food chains had grown into a US$138 billion business per year. Overall growth declined in the late 1980s because of the sharp rise of rents and a proliferation of restaurants in many areas. The number of hotel and guest rooms grew from 189,654 in 1981 to 342,695 in 1988.

Because much of the sales competition in Japan is of the nonprice variety, advertising is extremely important. Consumers have to see the suitability of products and services for their lifestyles. The intense competition for the domestic market spurs the growth of the world's largest advertising agency, Dentsu, as well as other advertisers.




Agriculture, forestry, and fishing dominated the Japanese economy through the 1940s, but thereafter declined in relative importance. In the late nineteenth century, these sectors had accounted for more than 80 percent of employment. Employment in agriculture declined in the prewar period, but the sector was still the largest employer (about 50 percent of the work force) by the end of World War II. It further declined to 23.5 percent in 1965, 11.9 percent in 1977, and to 7.2 percent in 1988. The importance of agriculture in the national economy later continued its rapid decline, with the share of net agricultural production in GNP finally reduced between 1975 and 1989 from 4.1 to 3 percent. In the late 1980s, 85.5 percent of Japan's farmers were also engaged in occupations outside of farming, and most of these part-time farmers earned most of their income from nonfarming activities.

Japan's economic boom that began in the 1950s left farmers far behind in both income and agricultural technology. Farmers were determined to close this income gap as quickly as possible. They were attracted to the government's food control policy under which high rice prices were guaranteed and farmers were encouraged to increase the output of any crops of their own choice. Farmers became mass producers of rice, even turning their own vegetable gardens into rice fields. Their output swelled to over 14 million tons in the late 1960s, a direct result of greater cultivated acreage and increased yield per unit area, owing to improved cultivation techniques.

Three types of farm households developed: those engaging exclusively in agriculture (14.5 percent of the 4.2 million farm households in 1988, down from 21.5 percent in 1965); those deriving more than half their income from the farm (14.2 percent, down from 36.7 percent in 1965); and those mainly engaged in jobs other than farming (71.3 percent, up from 41.8 percent in 1965). As more and more farm families turned to nonfarming activities, the farm population declined (down from 4.9 million in 1975 to 4.8 million in 1988). The rate of decrease slowed in the late 1970s and 1980s, but the average age of farmers rose to fifty-one years by 1980, twelve years older than the average industrial employee.

The most striking feature of Japanese agriculture is the shortage of farmland. The 4.9 million hectares under cultivation constituted just 13.2 percent of the total land area in 1988. However, the land is intensively cultivated. Rice paddies occupy most of the countryside, whether on the alluvial plains, the terraced slopes, or the swampland and coastal bays. Nonrice farmland share the terraces and lower slopes and are planted with wheat and barley in the autumn and with sweet potatoes, vegetables, and dry rice in the summer. Intercropping is common: such crops are alternated with beans and peas.

Japanese agriculture has been characterized as a "sick" sector because it must contend with a variety of constraints, such as the rapidly diminishing availability of arable land and falling agricultural incomes. Nevertheless, the Japanese manage to keep production at high levels. Agriculture is maintained through the use of technically advanced fertilizers and farm machinery and through a vast array of price supports. The nation's many agricultural cooperatives are in charge of purchasing grain according to prices indexed to the average wage rates in the nonagricultural sector. As a result, rice, wheat, and barley prices follow productivity trends in industry rather than in agriculture. This type of support system, enacted in 1960 along with the Basic Agricultural Law, resulted in large government rice stockpiles and high agricultural prices. Excessive rice production had an adverse effect on other crop production. Japan's self-sufficiency ratio for grains other than rice fell below 10 percent in the 1970s but rose to 14 percent in the mid- to late 1980s. The problem of surplus rice was further aggravated by extensive changes in the diets of many Japanese in the 1970s and 1980s. Even a major rice crop failure did not reduce the accumulated stocks by more than 25 percent of the reserve. In 1990 Japan was 67 percent selfsufficient in agricultural products but only provided about 30 percent of its cereals and fodder needs.

Livestock raising is a minor activity. Demand for beef rose in the 1980s, and farmers often shifted from dairy farming to production of high-quality (and high-cost) beef. Throughout the 1980s, domestic beef production met over 60 percent of demand. In 1991, as a result of heavy pressure from the United States, Japan ended import quotas on beef as well as citrus fruit. Milk cows are numerous in Hokkaido, where 25 percent of farmers ran dairies, but milk cows are also raised in Iwate, in Tohoku, and near Tokyo and Kobe. Beef cattle are mostly concentrated in western Honshu, and on Kyushu. Hogs, the oldest domesticated animals raised for food, are found everywhere. Pork is the most popular meat.

The nation's forest resources, although abundant, have not been well developed to sustain a large lumber industry. Of the 24.5 million hectares of forests, 19.8 million are classified as active forests. Most often forestry is a part-time activity for farmers or small companies. About a third of all forests are owned by the government. Production is highest in Hokkaido and in Aomori, Iwate, Akita, Fukushima, Gifu, Miyazaki, and Kagoshima prefectures. Nearly 33.5 million cubic meters of roundwood were produced in 1986, of which 98 percent was destined for industrial uses.

Japan ranked second in the world behind China in tonnage of fish caught--11.9 million tons in 1989, down slightly from 11.1 million tons in 1980. After the 1973 energy crisis, deep-sea fishing in Japan declined, with the annual catch in the 1980s averaging 2 million tons. Offshore fisheries accounted for an average of 50 percent of the nation's total fish catches in the late 1980s although they experienced repeated ups and downs during that period. Coastal fisheries had smaller catches than northern sea fisheries in 1986 and 1987. As a whole, Japan's fish catches registered a slower growth in the late 1980s. By contrast, Japan's import of marine products increased greatly in the 1980s, and was nearly 2 million tons in 1989. Japan also introduced the "culture and breed" fishing system, or sea farming. In this system, artificial insemination and hatching techniques are used to breed fish and shellfish, which are then released into rivers or seas. These fish and shellfish are caught after they grow bigger. Salmon is raised this way.

Japan is also one of the world's few whaling nations. As a member of the International Whaling Commission, the government pledged that its fleets would restrict their catch to international quotas, but it attracted international opprobrium for its failure to sign an agreement placing a moratorium on catching sperm whales. Japan has more than 2,000 fishing ports, including Nagasaki, in southwest Kyushu; Otaru, Kushiro, and Abashiri in Hokkaido; and Yaezu and Misaki on the east coast of Honshu.


Japan - International Economic Relations


JAPAN IS BOTH a major trading nation and one of the largest international investors in the world. In many respects, international trade is the lifeblood of Japan's economy, and it is the window through which many people in the United States view Japan. Imports and exports totaling the equivalent of nearly US$522 billion in 1990 meant that Japan was the world's third largest trading nation after the United States and the Federal Republic of Germany (West Germany). Trade was once the primary form of Japan's international economic relationships, but in the 1980s its rapidly rising foreign investments added a new and increasingly important dimension, broadening the horizons of Japanese businesses and giving Japan new world prominence.

Japan's international economic relations in the first three decades after World War II were shaped largely by two factors: a relative lack of domestic raw materials and a determination to catch up with the industrial nations of the West. Because of Japan's lack of raw materials, its exports have consisted almost exclusively of manufactured goods, and raw materials have represented a large share of its imports. The country's sense of dependency and vulnerability has also been strong because of its lack of raw materials. Japan's determination to catch up with the West encouraged policies to move away from simple labor-intensive exports toward more sophisticated export products (from textiles in the 1950s to automobiles and consumer electronics in the 1980s) and to pursue protectionist policies to limit foreign competition for domestic industries.

The sense of dependence on imported raw materials was especially strong in Japan during the 1970s, when crude petroleum and other material prices rose and supply was uncertain. Throughout much of the postwar period, in fact, Japanese government policy has aimed at generating sufficient exports to pay for raw material imports. During the 1980s, however, raw material prices fell and the feeling of vulnerability lessened. The 1980s also brought rapidly rising trade surpluses, so that Japan could export far more than was needed to balance its imports. With these developments, some of the resistance to manufactured imports, long considered luxuries in the relative absence of raw materials, began to dissipate.

By the 1980s, Japan had caught up. Now an advanced industrial nation, it faced new changes in its economy, on both domestic and international fronts, including demands to supply more foreign aid and to open its markets for imports. It had become a leader in the international economic system through its success in certain export markets, its leading technologies, and its growth as a major investor around the world. These were epochal changes for Japan, after a century in which the main national motivation was to catch up with the West. These dramatic changes also fed domestic developments that were lessening the society's insularity and parochialism.

The processes through which Japan is becoming a key member of the international economic community continues in the 1990s. Productivity continued to grow at a healthy pace, the country's international leadership in a number of industries remained unquestioned, and investments abroad continued to expand. Pressures were likely to lead to further openness to imports, increased aid to foreign countries, and involvement in the running of major international institutions, such as the International Monetary Fund. As Japan achieved a more prominent international position during the 1980s, it also generated considerable tension with its trade partners, especially with the United States. These tensions will likely remain, but they should be manageable as both sides continue to see economic benefits from the relationship.


CITATION: Federal Research Division of the Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.

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