Economy

Japan's industrialised, free-market economy is the world's third-largest purchasing power parity (PPP) after the United States and the People's Republic of China. It is the second-largest by market exchange rates. Its economy is highly efficient and competitive in areas linked to international trade although productivity is lower in areas such as agriculture, distribution and services.

Government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defence allocation have helped Japan advance with extraordinary speed to become one of the largest economies in the world. Its reservoir of industrial leadership and technicians, well-educated and industrious work force, high savings and investment rates, and intensive promotion of industrial development and foreign trade have produced a mature industrial economy. Japan has few natural resources, and trade helps it earn the foreign exchange needed to purchase raw materials for its economy.

Distinguishing characteristics of the Japanese economy include the cooperation of manufacturers, suppliers, distributors, and banks in closely-knit groups called keiretsu; the powerful enterprise unions and shunto; cosy relations with government bureaucrats, and the guarantee of lifetime employment (shushin koyo) in big corporations and highly unionised blue-collar factories. Recently, Japanese companies have begun to gradually move away from some of these norms in an attempt to increase their global competitiveness and profitability (the latter due mostly to their increased reliance on equity rather than debt financing).

For three decades, Japan's overall real economic growth had been spectacular: a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s.

Growth slowed markedly in the 1990s largely due to the after-effects of over-investment during the late 1980s and domestic policies intended to wring speculative excesses from the stock and real estate markets. Government efforts to revive economic growth have met with little success and were further hampered in 2000 to 2001 by the slowing of the global economy.

Sliding stock and real estate prices marked the end of the 'bubble economy' of the late 1980s, and ushered in a decade of stagnant economic growth. Real GDP in Japan grew at an average of roughly 1.5% yearly between 1991-1999, compared to growth in the 1980s of about 4% per year. Growth in Japan throughout the 1990s was slower than growth in other major industrial nations, and the same as France and Germany. Japan endured periods of recession around the turn of the millennium, exacerbated by recession in the United States, but from 2003 began to grow strongly again at 2.0% and this rate has held steady through 2004. The economy saw signs of strong recovery in 2005. GDP growth for the year was 2.8%, with an annualized fourth quarter expansion of 5.5%, surpassing the growth rate of the US and European Union during the same period. Unlike previous recovery trends, domestic consumption has been the dominant factor in leading the growth.

Natural Resources

A mountainous, island country, Japan has inadequate natural resources to support its growing economy and big 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 utilised extensively. Because of the 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.

Given its heavy dependence on imported energy, Japan has aimed to diversify its sources. Since the oil shocks of the 1970s, Japan has reduced dependence on petroleum as a source of energy from more than 75% in 1973 to about 57% at present. Other important energy sources are coal, liquefied natural gas, nuclear power and hydropower. Demand for oil is also dampened by higher government taxes on automobile engines over 2000 cc, as well as on gasoline itself, currently 54 yen per litter sold retail. Kerosene is also used extensively for home heating in portable heaters, especially farther north. Many taxi companies run their fleets on liquefied gas with tanks in the boot of the car. A recent success towards greater fuel economy was the introduction of mass-produced Hybrid vehicles.

Deposits of gold, magnesium, and silver meet current industrial demands, but Japan is dependent on foreign sources for many of the minerals essential to modern industry. Iron ore, coke, copper and bauxite must be imported, as must many forest products.

Agriculture

Only 15% of Japan's land is suitable for cultivation. Due to this lack of arable land, a system of terraces is used to farm in small areas. This results in one of the world's highest levels of crop yields per unit area, with an overall agricultural self-sufficiency rate of about 50% on fewer than 56,000 sq km (14 million acres) cultivated.

Japan's small agricultural sector, however, is also highly subsidised and protected, with government regulations that favour small-scale cultivation instead of large-scale agriculture.

Imported rice, the most protected crop, is subject to tariffs of 490% and was restricted to a quota of only 7.2% of average rice consumption from 1968 to 1988. Imports beyond the quota are unrestricted in legal terms, but subject to a 341 yen per kilogram tariff. This tariff is now estimated at 490%, but the rate will soar to a massive 778% under new calculation rules to be introduced as part of the Doha Round.

Although Japan is usually self-sufficient in rice (except for its use in making rice crackers and processed foods) and wheat, the country must import about 50% of its requirements of other grain and fodder crops and relies on imports for most of its supply of meat. Japan imports large quantities of wheat, sorghum and soybeans, primarily from the United States. Japan is the largest market for EU agricultural exports. Apples, pears and oranges are also grown, mostly in Hokkaido, as well as in Nagasaki, where they were first introduced by Dutch traders in the late 18th century.

Fishery

Japan ranked second in the world (behind the People's Republic of 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 % of the nation's total fish catches in the late 1980s although they experienced repeated ups and downs during that period.

Coastal fishing by small boats, set nets, or breeding techniques accounts for about one third of the industry's total production, while offshore fishing by medium-sized boats makes up for more than half the total production. Deep-sea fishing from larger vessels makes up the rest. Among the many fish species caught are sardines, skipjack tuna, crab, shrimp, salmon, pollock, squid, clams, mackerel, sea bream, saury, tuna and Japanese amberjack.

Japan maintains one of the world's largest fishing fleets and accounts for nearly 15% of the global catch, prompting some claims that Japan's fishing is leading to depletion in fish stocks such as tuna. Japan has also sparked controversy by supporting quasi-commercial whaling.

Industry

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 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 Tokai region, including Aichi, Gifu, Mie, and Shizuoka prefectures (the Chukyo-Tokai industrial region)
• Kinki (Kansai), including Osaka, Kyoto, Kobe, ( the Hanshin industrial region)
• the southwestern part of Honshu and northern Shikoku around the Inland Sea (the Setouchi industrial region)
• the northern part of Kyushu (Kitakyushu)

In addition, a long narrow belt of industrial centres is found between Tokyo and Fukuoka, established by particular industries that have developed as mill towns.

The fields in which Japan enjoys relatively high technological development include semiconductor manufacturing, optical fibres, optoelectronics, optical media, facsimile and copy machines, industrial robots and fermentation processes in food and biochemistry. Japan lags slightly in such fields as satellites, rockets, and large aircraft, where advanced engineering capabilities are required but they made headway through their aerospace exploration agency, JAXA with possible manned independent mission to moon, and in such fields as computer-aided design and computer-aided manufacturing (CAD/CAM), and databases, where basic software capabilities are required, and natural resources exploitation, due to the lack of them.

Services

Japan's service sector accounts for about three-quarters of its total economic output. Banking, insurance, real estate, retailing, transportation, and telecommunications are all major industries such as Mitsubishi UFJ Financial Group, Inc., Toyota Financial Group, Inc., Nomura Group, Inc., Mizuho Financial Group, Inc., Japan Post,All Nippon Airways Co.,Ltd., Nippon Tel & Tel (NTT DoCoMo) counting as one of the largest companies in the world. The Koizumi government is attempting to privatise Japan Post, The Tokyo Electric Power Company, one of the country's largest providers of savings and insurance services by 2007. The six major keiretsus are the Mitsubishi, Sumitomo, Fuyo, Mitsui, Dai-Ichi Kangyo and Sanwa Groups. Japan is home to 326 companies from the Forbes Global 2000 or 16.3% (as of 2006).

Labour Force

Japan's labour force consists of some 64 million workers, 40% of whom are women. Labour union membership is about 12 million. The unemployment rate is currently (2006) 4.1%. In 1989, the predominantly public sector union confederation, SOHYO (General Council of Trade Unions of Japan), merged with RENGO (Japanese Private Sector Trade Union Confederation) to form the Japanese Trade Union Confederation.

One major long-term concern for the Japanese labour force is a low birthrate. In the first half of 2005, the number of deaths in Japan exceeded the number of births, indicating that the decline in population, initially predicted to start in 2007, had already started. While one countermeasure for a declining birthrate would be to remove barriers to immigration, the Japanese government has been reluctant to do so.

Current Economic Issues

The Koizumi administration, which held office until 2006, enacted or attempted to pass (sometimes with failure) major privatisation and foreign-investment laws intended to help stimulate Japan's dormant economy. Although the effectiveness of these laws is still ambiguous, the economy has begun to respond, but Japan's aging population is expected to place further strain on growth in the near future.

Heterodox economists tend to claim that Japan is far stronger economically than is usually appreciated. Some mainstream economists acknowledge that Japan, which unlike most Western countries has maintained its industrial base, and has vast capital reserves, currently has a strong economic outlook.

The privatisation of Japan Post, the Japanese postal system that also runs insurance and deposit-taking businesses, is a major issue. A political battle over privatisation caused a political stalemate in August, 2005, and ultimately led to the dissolution of the Japanese House of Representatives. The Postal Savings deposits, which have until now been used to fund public works projects, many of which have had questionable economic value, stands in excess of 1.9 trillion US dollars, and could be a major force in energizing the private sector.

The decline in the Japanese population as a result of a low birthrate threatens the long-term economic vitality of Japan. A higher percentage of elderly in the population will put pressures on the pension system, and will ultimately force a higher burden on the current generation of labourers.

The Japanese monetary authorities' continued desire to depress the price of yen relative to other key specific currencies to protect domestic business from imports may no longer be feasible. The most recent record intervention in 2003 amounted to over 17 trillion yen, more than one third of one trillion US dollars at the time and nearly 3% of Japan's 2003 GDP, being sold in favour of other non-yen denominated assets.

Post-War Economic Miracle

From the 1960s to the 1980s, overall real economic growth has been called a 'miracle': a 10% average in the 1960s, a 5% average in the 1970s and a 4% average in the 1980s. Growth slowed markedly in the 1990s, largely due to the after-effects of over-investment during the late 1980s and domestic policies intended to wring speculative excesses from the stock and real estate markets. Government efforts to revive economic growth met with little success and were further hampered in 2000 to 2001 by the deceleration of the global economy. However, the economy showed strong signs of recovery after 2005. GDP growth for that year was 2.8%, with an annualized fourth quarter expansion of 5.5%, surpassing the growth rates of the US and European Union during the same period. Unlike previous recovery trends, domestic consumption has been the dominant factor of growth.