Journal of Macroeconomics and Social Development, Volume: 1, Number 4, 2024, Page: 1-10

Key Directions of Japan's Economic Development (1950 –

Present)
Hamdamova Zukhra, M.Kh. Kamilova

2nd course student

1

At Tashkent State University of Oriental Studies

Of the direction "Foreign Economics and Regional Studies (Japan)

2 Scientific director: candidate of economics

*Correspondence: Hamdamova Zukhra Abstract: This article examines the impact of deflation on Japan's economy
Email: [email protected] during a specific historical period. The author analyzes the consequences of
deflation on various sectors of the economy, such as consumption,
Received: 05 Mar 2024 investments, exports, and more. Particular attention is paid to the measures
Accepted: 20 May 2024
taken by the government to overcome deflation. Throughout the article, the
Published: 22 May 2024
author highlights the significant challenges faced by the Japanese economy
under prolonged deflation and discusses possible strategies for exiting this
situation. By thoroughly analyzing Japan's history and experience, the author
Copyright: © 2024 by the authors. draws conclusions about how deflation can influence a country's economic
Submitted for open access publication development and what lessons can be learned from this experience for other
under the terms and conditions of the countries. The main idea of the article is that deflation can have serious
Creative Commons Attribution (CC BY) consequences for a country's economy and requires a comprehensive
license approach from both the government and the business community to mitigate
(http://creativecommons.org/licenses/by/
its negative effects.
4.0/).

Keywords: Deflation, Currency Depreciation, Economic Growth, Economic

Policy, Monetary Policy, Fiscal Policy, Financial Reforms

Introduction

Japan plays a significant role in the global economy, which is attributed to its status
as one of the largest economies on the planet. The country is renowned for its technological
innovations, high-quality production, and substantial export levels, particularly in sectors
such as automotive manufacturing and electronics. With a robust industrial base and
technological potential, Japan exerts influence on global financial and trade flows. Japan,
having a regulated trade balance, traditionally maintains a high positive trade balance,
indicating that the country exports more goods and services than it imports.
Despite this, the country is still plagued by ongoing deflation, despite the
government's efforts. Deflation is a situation opposite to inflation, where prices of goods
and services decline in order to boost demand in the market. Deflation is often considered
an undesirable phenomenon because it can lead to a decrease in production, an increase in
unemployment, and a reduction in investments, creating a vicious cycle of economic
downturn.

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The causes of deflation can be attributed to several factors. These include: Reduction
in the money supply: If a central bank reduces the money supply or there is a decrease in
the overall level of lending, it can lead to a decrease in demand for goods and services. This
reduction in demand can cause prices to fall, resulting in deflation; Decrease in demand: A
decrease in consumption and investments can lead to an oversupply of goods and services.
This oversupply can cause prices to drop, contributing to deflation; Inflationary
expectations: If businesses and consumers expect prices to fall, they may delay purchases
and investments, which can further reduce demand and exacerbate deflation.

Literature Review

Table 1 Nominal GDP of Japan (billions of US dollars), 1980-2022yy.

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
Billion
1127,9 1243,8 1157,6 1268,6 1345,2 1427,4 2121,3 2584,3 3134,2 3117,1
dollars
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Billion
3196,6 3657,3 3988,3 4544,8 4998,8 5545,6 4923,4 4492,4 4098,4 4636,0
dollars
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Billion
4968,4 4374,7 4182,8 4519,6 4893,1 4831,5 4601,7 4579,8 5106,7 5289,5
dollars
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Billion
5759,1 6233,1 6272,4 5212,3 4897,0 4444,9 5003,7 4930,8 5040,9 5118,0
dollars
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Billion
5048,8 5005,5 4233,5 – – – – – – –
dollars
Reference:https://svspb.net/danmark/vvp.php?l=japonija

As seen from the table, the nominal GDP growth of Japan occurs until the 1990s,
reaching its peak in 1995 with a result of $5,545.6 billion. Despite a noticeable decline in
1996-1998 for certain reasons, the country's economy starts showing improvement again,
with gradually increasing nominal GDP figures clearly indicating high values of $4,636.0 -
$6,272.4 billion during the period of 2006-2012. The government cannot sustain a high rating
for a long time. Consequently, one can observe a slow economic downturn in the country
from 2015 to 2022, but ultimately manages to maintain an average level of its previous
indicators ($4,233.5 billion). All these findings can be seen in the graph below, which is
drawn in proportion to the table.

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Billion dollars
7000

6000

5000

4000

3000 Billion dollars

2000

1000

0
1984

2002

2006
1980
1982

1986
1988
1990
1992
1994
1996
1998
2000

2004

2008
2010
2012
2014
2016
2018
2020
2022
During the post-war decades, at least until 1973, Japan experienced high economic
growth rates, averaging around 10% annually from 1955 to 1973. Subsequently, due to a
sharp increase in oil prices, the average annual production growth rate decreased to
approximately 4.3%. From 1977 to 1987, it stood at 4.2%. Until 1990, it was rightfully
assumed that Japan would become the world's leading economy. The structure of the
national income in the country underwent radical changes. In 1955, agriculture, fishing, and
forestry contributed 23% to the total national income, which decreased to 11% by 1965 and
plummeted to just 2.1% by 1995. On the other hand, the share of mining, manufacturing,
and construction increased from 29% in 1955 to approximately 40.7% in 1995. The service
sector, including transportation, trade, finance, and administrative activities, saw its share
rise from 48% in 1955 to 58% in 1995. In 1996, the labor force was estimated at 67.11 million
people, with 32.7% employed in industry, 26.5% in trade and banking, 24.6% in services,
and 5.5% in agriculture and fishing. The practice of lifetime employment for workers and
employees is widespread, involving around 25% of the workforce in manufacturing.

Research Method

During the 1980s, giant monopolies (such as Mitsubishi, Mitsui, Sumitomo, Fuji, and
Sanwa) dominated almost all sectors of the economy. A distinctive feature of the Japanese
economy is the combination of large corporations with a large number of small enterprises.
As part of the industrial restructuring aimed at reducing dependence on imported raw
materials and fuel, energy-intensive and material-intensive industries were phased out in
Japan. For a long time, the country operated under a "lifetime employment" system, where
employees could not switch from one company to another, and if they dared to do so, they
were considered traitors and despised. The state is one of the largest investors abroad,
investing significant funds in various economies around the world. As one of the developed
countries actively investing in innovation development and renowned for its achievements
in scientific research and technology development, Japan contributes to global technological
progress. Consequently, as one of the leading financial powers, Japan has significant

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influence on global financial markets and investment decisions. Japan engages in

international cooperation by actively participating in international economic forums and
organizations, including the G7, the World Bank, and the International Monetary Fund.
Japan's economic growth in the 1980s was characterized by a shift from dependence
on exports to reliance on domestic demand. This development involved fundamental
economic restructuring, moving from an export-oriented economy to one driven by
domestic consumption. 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, indicating a significant shift
in the economy's growth drivers.

Result and Discussion

The post-WWII Japanese economic development was a process of catch-up to the other
industrialized economies. Economic policies and corporate strategies were geared towards
this goal, with a focus on strengthening international competitiveness among tradable-
goods-producing industries. Although the domestic markets were heavily protected in the
early stages of Japan's post-war development, the potential threat of global competition
provided sufficient incentives for productivity growth as Japanese industries looked for
export markets. However, investments in non-tradable sectors were not sufficiently funded,
leading to a lag in their development.
Japan's economy is one of the largest and most developed in the world, with a well-
educated, industrious workforce and a large, affluent population making it one of the
world's biggest consumer markets.
The country's services sector, including financial services, plays a far more prominent
role in the economy, accounting for about 75 per cent of GDP. The Tokyo Stock Exchange is
one of the world's foremost centers of finance. International trade contributes significantly
to the Japanese economy, with exports equivalent to approximately 16 per cent of GDP.
Japan has few natural resources and its agricultural sector remains heavily protected. Recent
economic reforms and trade liberalization, aimed at making the economy more open and
flexible, will be important in helping Japan cope with its challenges.
Despite its economic prowess, Japan faces challenges such as a rapidly aging
population, which is set to reduce the size of the workforce and tax revenues, while placing
increasing demands on health and welfare expenditure. Labour-market reforms to increase
participation are among the measures being used to counter this trend. Japan's close ties to
Asia, the world's fastest-growing economic region, and its strong balance sheets among
large corporations, as well as a steady current account surplus, position it well to meet the
needs of a growing middle class in the region. Innovation has remained an important driver
of growth, with comparatively high spending on research and development.
Japan's economic policy, both monetary and fiscal, has had a significant impact on
global economic trends and currency exchange rates. The country's prolonged period of

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deflation, primarily caused by government intervention to regulate the decline of the

national currency in the market, is a prime example of this influence. Japan followed the
example of the United States, which decided to lower the value of the dollar to strengthen
its leadership in the global market. As a result, the dominance of Japanese companies in the
market led to low prices and intense competition, which hindered inflation. The
government's efforts to stimulate the economy, such as lowering interest rates and
extending credit terms, proved ineffective. The money supply did not grow quickly enough
to maintain inflation, resulting in persistent deflation.
The Lost Decade typically refers to the 1990s in Japan, although some definitions
extend this period to 1991-2011 or even 1991-2021. This period is characterized by prolonged
economic stagnation, which has become one of the most protracted economic crises in
history. The zaibatsu, large family-controlled vertical monopolies that dominated the
Japanese economy from the Meiji period to World War II, were dissolved by the Allied
occupation forces after the war and succeeded by the keiretsu, groups of banks,
manufacturers, suppliers, and distributors. Japan's economic policy has also influenced
developing countries through bilateral aid programs and international organizations. The
country's prosperous economy and diverse industries, with a GDP of $4 trillion, make it an
important player in the global economy.
The concept of the "Lost Decade" was first used to describe Japan's decade-long
economic crisis in the 1990s. Japan's economy experienced rapid growth in the decades
following World War II, peaking in the 1980s with the world's highest capital per capita
gross national product (GNP). Japan's export-based economic growth during this period
attracted capital and contributed to a trade surplus with the US. To mitigate global trade
imbalances, Japan joined other major world economies in the 1985 Plaza Agreement.
According to this agreement, Japan embarked on a period of loose monetary policy in
the late 1980s. This loose monetary policy led to increased speculation and a surge in stock
market and real estate prices. In the early 1990s, as it became evident that a bubble was
forming, the Japanese Ministry of Finance raised interest rates, ultimately causing the stock
market to crash, triggering a debt crisis, halting economic growth, and resulting in what is
now known as the Lost Decade.
During the 1990s, Japan's GDP averaged 1.3% annually, significantly lower compared
to other G7 countries. Household savings increased, yet this growth did not lead to
increased demand, resulting in deflation for the economy. In the following decade, Japan's
GDP growth was merely 0.5% per year, as sustained slow growth persisted until the global
financial crisis and the Great Recession. As a result, many refer to the period between 1991
and 2010 as the "Lost 20 Years", characterized by prolonged economic stagnation and
minimal GDP expansion.
Japan's economic growth, measured by its Gross Domestic Product (GDP), has been
sluggish, averaging less than 1.0% annual growth from 2011 to 2019. The Covid-19
pandemic led to a global recession in 2020, as governments implemented fiscal policies to
restrict economic activity. A study by the Federal Reserve Bank of St. Louis suggests that, at
current growth rates, Japan's GDP will take 80 years to double, a significant slowdown from

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its previous doubling every 14 years. The causes of Japan's prolonged economic stagnation,
known as the Lost Decade, are still a subject of debate among economists. The bursting of
the economic bubble and the subsequent recessionary period are seen as triggers, but
underlying demographic factors, such as Japan's aging population, and geopolitical shifts,
including the rise of China and other East Asian economies, may be contributing to the
country's economic challenges.

Discussion
Japan's economy has been experiencing a prolonged period of stagnation, and
researchers have identified several factors contributing to this phenomenon. From a
Keynesian perspective, the stagnation can be attributed to a lack of aggregate demand,
which is the total amount of goods and services that all buyers in an economy are willing
and able to purchase during a given period. Paul Krugman's liquidity trap theory suggests
that consumers were hesitant to spend due to uncertainty about the economy's future,
leading to a decrease in aggregate demand and subsequently, economic stagnation. The
concept of a liquidity trap is closely related to the idea of a bear market, where investors are
pessimistic about the market's prospects, leading to a decrease in investment and
consumption. The Lost Decade of Japan, a book published in 2017, points to the "vertical
investment-savings curve" as a key factor in Japan's economic woes. This curve represents
the relationship between investment and savings in an economy, and a vertical curve would
indicate that savings are not being translated into investments, thereby hindering economic
growth.
Monetarists, on the other hand, point to Japan's monetary policy before and during
the Lost Decade as too tight and insufficiently adaptive to resume growth. Milton Friedman,
regarding Japan, wrote that "the most reliable path to a healthy economic recovery is to
increase the pace of monetary growth to move from a tight monetary policy to an easier one,
to rates of monetary growth close to those that prevailed in the 1980s. This will facilitate the
necessary financial and economic reforms." Despite various attempts, Keynesians and
monetarists argue that the prolonged economic inactivity of Japan has been largely
insufficient, with the Japanese government implementing repeated massive fiscal spending
(a Keynesian solution to economic depression) and expansionary monetary policy (a
monetarist prescription) without noticeable success. This suggests that Keynesian and
monetarist explanations or solutions (or both) are likely not entirely wrong.
Austrian economists, on the other hand, argue that the period of prolonged economic
stagnation is not inconsistent with Japan's economic policies during this period, which acted
to support existing firms and financial institutions, not allowing them to fail and allowing
entrepreneurs to reorganize them into new firms and industries. They point to the repeated
economic and financial measures as the cause (rather than the solution) of Japan's Lost
Decade(s).

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Conclusion

The "Lost Decade" refers to the prolonged period of slow to negative economic growth
in Japan's economy during the 1990s and early 2000s. This decade-long stagnation was
primarily attributed to the government's misguided policies following the bursting of the
real estate bubble. The "Lost Decade" resulted in significant economic losses, both direct and
indirect. Direct economic losses included the destruction of physical assets, such as homes,
businesses, and infrastructure. Indirect economic losses manifested through declines in
economic value added, revenue losses due to business interruptions, and negative impacts
on the stock market and GDP. The sunk costs associated with the government's failed
policies and the real estate bubble contributed to the prolonged economic stagnation. Sunk
costs are expenditures that have already been incurred and cannot be recovered, yet they
often influence future decision-making. The desire to avoid appearing wasteful and the
psychological factors underlying the sunk cost effect, such as loss aversion and personal
responsibility, may have led policymakers to persist with ineffective strategies. The
opportunity cost of the "Lost Decade" was the potential economic growth and prosperity
that Japan forfeited during this period. The real cost included lost time, resources, and the
benefits that could have been realized had alternative, more effective policies been
implemented.
In summary, the "Lost Decade" in Japan's economy was a prolonged period of
economic stagnation characterized by significant direct and indirect economic losses, sunk
costs associated with failed policies, and the opportunity cost of foregone economic growth
and prosperity.

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