JAPAN’S ECONOMY

WHY JAPAN’S ECONOMY IS AILING?

Rajaram Panda

Institute for Defence Studies and Analyses, November 22, 2010

Japan’s astounding economic growth in the 1960s and 1970s was the talking point in world capitals. This success story was possible because of coordination between the government and the private sector, in which the government encouraged competition between industries and thereby weeded out the weaker ones. From the beginning of the 1980s, this strategy has no longer worked. When the focus shifted towards knowledge-intensive industries, labour-intensive industries were transferred to nearby countries, thereby heralding the flying-geese pattern of economic development and the emergence of the Four Tigers. As wage levels increased and markets contracted, Japan started stagnating, while countries such as South Korea and Taiwan continued to reap dividends from the Japanese model of economic development. South Korea, for example, succeeded in putting in place a well balanced relationship between stable governments and the private sector.

From the 1980s, Japan has lost the way and is still struggling to come out of it. Eisuke Sakakibara, a leading Japanese economist and one of the architects of the Japanese “miracle” of the 1980s, now pleads that Japanese planners should emulate the South Koreans, whom Japan indirectly taught how to develop their economy.

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