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Japan's industrialization
- Part 2
8.0 COMPARISON OF THE ECONOMIC COLLAPSE IN JAPAN AND GREECE
Although both Greece and Japan have high levels of net debt, it is helpful to understand why Japanese debt is still sustainable while Greece was declared bankrupt.
Japan’s government debt is much higher than that of Greece, but it is sustainable because more than 90% of the Government of Japan’s debt is held by domestic investors in banks, postal savings, life insurance, and pension funds. The Japanese government issues various kinds of bonds based on demand by differing sectors, and the government bond market has been quite stable in Japan. Japanese investors continue to hold government bonds since Basel capital requirements set the risk of government bonds at zero. On the other hand, more than 70% of investors in Greece’s bond market are foreign and they have been quick to move out of the market at times of risk. The graph depicts the supply of government bonds and the demand for government debt in Japan and Greece.
The vertical line shows the supply of government bonds in the primary market since no matter what the rate of interest is, the government has to finance its budget deficits. The demand for government bonds increases when the interest rate rises. Thus the demand curve for government bonds is denoted by an upward sloping demand curve, as shown.
Both Japan and Greece have increased their sales of government bonds, meaning that the supply curve of government bonds has shifted to the right in the primary market. Demand for Japanese government bonds by banks, insurance companies, and pension funds is increasing as the sluggish economy has reduced demand for corporate loans (Figure 9). Monetary easing has increased bank deposits and these funds have often been invested in government bonds. Japanese interest rates, therefore, remain low.
The behavior of holders of Japanese and Greek debt is distinctive. Overseas investors, who hold 70% of government bonds in Greece, are very quick to sell them if they feel that risk is increasing. As demand for Greek bonds has diminished, the demand curve of the bonds has shifted to the left, (Figure 9, right-hand graph), which has progressively raised the interest rate on Greek bonds. The Greek interest rate increased to more than 20%, while the Japanese interest rate has remained at about 1% or less (Yoshino and Mizoguchi 2013). Since only 5% of the total bonds issued by the Japanese government are held by overseas investors, there is much less likelihood of capital flight, since domestic holders tend to retain their investments.
9.0 JAPANESE ECONOMY AND THE RICH WORLD - THE LATEST
When the massive Japanese financial bubble of the 1980s imploded, the Bank of Japan (BOJ) struggled to respond. In 1995 short-term interest rates fell to near zero, presenting a headache the rest of the rich world would confront 13 years later! In battling its “lost decade”, the BOJ tested many of the policies, such as QE, that would enter the toolkit of other central banks during the financial crisis. Yet Japan was seen as an example of central-bank incompetence, until smug Western central banks discovered after 2008 that getting an economy to perk up when interest rates were near zero was harder than it looked.
9.1 Shinzo Abe arrives
Since the election of Shinzo Abe in 2012, Japan has reprised its pioneering role. Mr Abe replaced the head of the central bank and promised to reflate the economy. The BOJ supercharged its asset purchases; its balance-sheet grew from about 40% of GDP in 2012 to 100% now. It bought not just government bonds but corporate debt, shares in equity exchange-traded funds and in property investment trusts. It announced a yield target of 0% on ten-year government bonds, in effect extending the rate control central banks have long exercised over short-term rates to very long maturities. Japan’s efforts offer just a sample of the unconventional tools available to governments when rate cuts and QE disappoint. When the next recession strikes, Japan-like interventions might mark only the first foray into an uncharted policy landscape.
Economists recognise the challenge that lies ahead. Since early in the recovery it has been clear that rates would probably be low, and debt loads high, when the next downturn arrives. Politicians and central bankers have been remarkably complacent in preparing to combat a recession in a low-rate world.
9.2 The fiscal costs
Proposals fall into a few different categories. Many economists say it is important to try to salvage central banks’ traditional role in stabilisation by adjusting monetary-policy targets. The problem is the zero lower bound on nominal interest rates. The economy responds to the real rate of interest, which is the nominal rate (the one observed in the market) adjusted for inflation. For example, if the nominal rate is 4% and inflation is expected to be 3%, the real rate is roughly 1%. The higher inflation is, the less likely economies are to hit the zero lower bound, because a zero nominal rate corresponds to a lower real rate.
In the 1980s and 1990s, most economists concluded that a 2% rate of inflation struck the right balance between containing prices rises and avoiding the zero lower bound. Yet from the 1980s, the real rate of interest needed to keep economies from falling into a slump fell ever lower. This “equilibrium real rate” has fallen from about 3% in America and Europe to below 1%. The cushion that 2% inflation provided between zero and the nominal rate thus proved to be too small.
9.3 Various ways to fix it
There are a number of ways to fix this problem. One would be simply to raise the rate of inflation targeted by central banks. With a higher background level of inflation, nominal interest rates would be higher on average and the zero lower bound would bind correspondingly less often. On the other hand, firms and households would have to deal with a higher rate of inflation all the time.
An alternative would be to target a trend-level of inflation rather than a rate. Should inflation fall below target during a slump, a level-targeting central bank would promise to allow faster-than-normal, “catch up” inflation in the future, in order to return the economy to trend. The expectation of that faster growth in future should boost animal spirits and help drag the economy out of a slump. The downside to a level target occurs when inflation accidentally rises too high.
Some say that inflation is the wrong target altogether. Monetary economists have long used nominal GDP (NGDP), or simply the total money value of all income or spending, as a proxy for aggregate demand. There are advantages to targeting NGDP instead of inflation. Inflation-targeting central bankers must try to guess whether an acceleration in spending will lead to an acceptable rise in real output or an unacceptable increase in inflation. A central bank targeting NGDP can remain agnostic on such questions.
9.4 What about the fiscal policy
Monetary policy need not carry the burden of recession-fighting alone. Prior to the financial crisis, mainstream macroeconomists were sceptical about the need for government borrowing to lift an economy out of slumps. It was assumed central banks could do the job, and fiscal stimulus would often come too late, too inefficiently and at too high a cost to government debt burdens.
The crisis changed this thinking. Whereas many analyses of government spending prior to the crisis concluded that $1 in government spending contributed less than $1 to GDP (or had a multiplier of less than one), estimates of the effect of fiscal stimulus and austerity during and after the crisis routinely found multipliers in excess of one: a dollar spent (or cut) had a disproportionately large effect on output. Most dramatically, an IMF analysis in 2013 by Mr Blanchard and Daniel Leigh estimated that fiscal consolidations after the crisis were associated with multipliers substantially larger than one, and thus placed a serious drag on growth.
The upshot of this work is, first, that fiscal stimulus is an important tool for fighting recessions. And, second, the fiscal costs of borrowing during slumps might be significantly less than previously thought.
How to use fiscal stimulus? Given a prolonged slump, concerns about the timeliness of government spending become less pressing. Some argued since the crisis that near-zero interest rates may represent a new normal, requiring sustained fiscal stimulus, including support for investments in infrastructure and other public goods.
There are several key lessons from the 2008 crisis. While discretionary stimulus programmes—like the large, one-off legislative packages enacted in 2009—are economically effective, political systems seem to lose their appetite for such programmes rather quickly. A more sustainable approach then, would lean more heavily on automatic stabilisers: programmes which mechanically add to spending and reduce taxes when economic trouble strikes, without the intervention of a parliament. Large social safety nets already provide some automatic support during downturns: deficits grow as tax revenues decline and payments for unemployment benefits and other emergency outlays increase. This natural stabilisation is one significant reason that the post-crisis downturn was less severe than the Depression. More such features could be added, however. Taxes on labour could be linked automatically to the level of unemployment. In more federal systems, like America’s, central-government support for constrained local governments could also rise automatically as local economic conditions deteriorate.
9.5 Don’t be so negative
There is always the possibility of greater radicalism. Milton Friedman, a Nobel-prizewinning economist, argued that printing money could never fail to boost the economy. If necessary, the central bank could simply shower fresh banknotes on the economy as (he joked) from a helicopter. While a large tax cut funded by QE would accomplish something similar, governments could authorise central banks to manage cash handouts themselves.
Central-bank accounts, and central-bank money, might also enable central bankers to cut rates deep into negative territory. Though some central banks experimented with sub-zero rates over the past decade, few ventured far into negative territory. So long as holding cash (which has a nominal yield of zero) remains an option, negative rates can only be used sparingly, lest depositors take their money and run.
Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Economists have spent the past decade thinking up ways to boost spending and escape recession when interest rates are at zero, as they almost certainly will be during the next global slump. But these proposals, while promising, are largely untested.
10.0 JAPANESE SELF DEFENCE FORCES (SDF)
The Japan Self-Defense Forces (JSDF) are the unified military forces of Japan that were established in 1954, and are controlled by the Ministry of Defense. The JSDF ranked as the world's fourth most-powerful military in conventional capabilities in a Credit Suisse report in 2015, and it has the world's eighth-largest military budget. In recent years they have been engaged in international peacekeeping operations including UN peacekeeping.
The trauma of World War II produced a strong pacifist sentiments in Japan. Under the Article 9 of the United States–written 1947 constitution, Japan forever renounced war as an instrument for settling international disputes and declared that Japan will never again maintain "land, sea, or air forces or other war potential."
So, deprived of any military capability after being defeated by the Allies in World War II and signing a surrender agreement presented by General Douglas MacArthur in 1945, Japan had only the U.S. occupation forces and a minor domestic police force on which to rely for security. But times changed soon, and rising Cold War tensions in Europe and Asia, coupled with leftist-inspired strikes and demonstrations in Japan, prompted some conservative leaders to question the unilateral renunciation of all military capabilities. In 1950, the US occupation troops began to be moved to the Korean War (1950–53) theater. This left Japan virtually defenseless, vulnerable, and very much aware of the need to enter into a mutual defense relationship with the United States to guarantee the nation's external security. Encouraged by the American occupation authorities, the Japanese government in July 1950 authorized the establishment of a National Police Reserve, consisting of 75,000 men equipped with light infantry weapons. Then in 1952, Coastal Safety Force, the waterborne counterpart of NPR, was also founded.
On 19 January 1960, the amended Treaty of Mutual Cooperation and Security between the United States and Japan corrected the unequal status of Japan in the 1951 treaty by adding mutual defense obligations.
The Prime Minister is the commander-in-chief of the Japan Self-Defense Forces. Military authority runs from the Prime Minister to the cabinet-level Minister of Defense of the Japanese Ministry of Defense. The service branches are - Japan Ground Self-Defense Force, Japan Maritime Self-Defense Force, and Japan Air Self-Defense Force.
The published military budget of Japan for 2015 was 4.98 trillion yen (approximately US$42 billion, and roughly 1% of Japanese GDP), a rise of 2.8 percent on the previous year. In 2018, SIPRI estimated Japan spent $46.6 billion on defence.
Military expenditures of major forces, 2018
10.1 Details of SDF
The Self-Defence Forces (SDF), despite the innocuous name, is one of the world’s most powerful armies, with the eighth-largest budget, a larger navy than France and Britain combined, over 1,600 aircraft and four flat-top carriers. Its 300,000 troops are superbly equipped. In addition, Japan has what is assumed to be a sophisticated system to defend against incoming missiles, should it come to war with North Korea. But some say this is not enough. Itsunori Onodera, the defence minister, is among those hawks urging the purchase of pre-emptive military capabilities, such as cruise missiles that could destroy enemy missiles before they were launched. That would mark a radical break with Japan’s pacifist constitution, which bans acts of belligerence—and even the maintenance of land, sea or air forces (notwithstanding the existence of the SDF). Shigeru Ishiba, a leading member of the ruling Liberal Democratic Party (LDP), said this month that Japan should maintain the capability to build its own nuclear weapons as a deterrent.
Japanese cruise missiles and nuclear weapons are some way off. The more pressing issue is the battle-readiness of the SDF. For decades it was deemed legitimate only so long as it maintained the minimum necessary force to protect the nation. America shouldered the burden of Japan’s defence. For most people, the SDF’s primary role was in providing disaster relief. Military experts still consider it a hollow force. How would it perform if put to the test? “No one knows,” says one such expert. “And it is not a question many people even want to ask.”
The government has taken note. In 2015 it passed bills “reinterpreting” the constitution and allowing the SDF to become a more forceful partner to America. SDF personnel now train with American forces in, for example, amphibious assault units designed to retake outlying islands—a not-so-subtle hint to China. Shinzo Abe, the prime minister, has taken another step, setting out a plan to make explicit reference to the SDF in Article 9, Japan’s iconic pacifist clause, and so end its unconstitutional status. The army’s biggest challenge may not be legal or political, however, but demographic. Japan’s population of 18-year-olds has shrunk by more than half a million over the past two decades, and military recruitment has long been a problem. That could worsen as the prospect of real combat increases. After seven decades living in peace, Japan has yet to mentally recalibrate for the prospect—however remote—of war.
10.2 A pacifist nation becomes pro-military — but still antiwar
Japan’s constitution explicitly states that “land, sea, and air forces, as well as other war potential, will never be maintained.” And for a few years after the new constitution was adopted, the country abided by that to the letter, merely keeping a highly decentralized domestic police force and nothing else.
But in 1950, the Korean War broke out when North Korean leader Kim Il Sung sent his enormous ground forces into South Korea to take control of the entire peninsula. US troops who had been stationed in Japan as part of the postwar occupation were suddenly needed in South Korea. To make sure Japan could still defend itself once those US troops were redeployed and also to help in the Korean War, the US urged Japan to create a much more robust police force — one that looked less like the police and more like a lightly armed military.
That 75,000-strong force, called the National Police Reserve, eventually went on to become the Self-Defense Force (SDF), the quasi-military force that was officially established in 1954 and persists to this day.
Yet its existence was (and remains) highly contentious within Japan. After all, the country’s US-written constitution expressly prohibits the country from maintaining any armed forces. But the SDF isn’t a traditional military; its sole mission is to protect the Japanese people, mainland, and islands from external threats. It is expressly forbidden from attacking another country unprompted.
Which is why many Japanese governments over the decades have argued that the country doesn’t have a military — it merely has trained fighters who will protect the nation if necessary, but who don’t go around the world seeking enemies. In 1959, Japan’s supreme court backed this interpretation, ruling that the SDF didn’t violate the country’s constitution because the force is defensive in nature.
10.3 Shinzo Abe
Prime Minister Abe has a certain vision for the Japanese Army. How has Abe tried to realize his vision? With a mixture of political and military reforms that slowly but surely add up to a more global, active Japanese foreign policy. Three moves in particular stand out.
1. “Collective self-defense” - Throughout 2014 and 2015, Abe pushed to amend the nation’s laws. He formed a committee to propose some changes, and one of the first they considered was to allow the SDF to participate in “collective self-defense.” Since the mid-1950s, Japan could only strike back at those who attacked it. It couldn’t retaliate if an adversary shot down, say, an American ship with Japanese citizens or troops on it — but that’s what Abe’s administration wanted to do. The proposal was highly controversial. The Diet, Japan’s parliament, debated the measure for around 200 hours, even though Abe’s party controlled the lower chamber. It also sparked some of the largest protests in Japan’s history as tens of thousands around the country rebelled against the rule change.
Critics’ core argument against the new law was that it would give Japanese forces a pathway to war against other countries. Some critics even called the law change “war legislation” and depicted Abe as Germany’s Adolf Hitler.
2. Increased defense spending - In December 2018, Japan released its 10-year defense plan — and it highlights just how significantly Abe wants to change his country’s direction. The plan calls for converting the Izumo into an aircraft carrier, giving the nation its first vessel of that kind since World War II; spending about $240 billion on the SDF over the next five years, continuing the nation’s slow but steady increase in defense expenditures; and purchasing new fighter jets to replace old ones. Those are big steps for Japan to take, as it’s hard to argue it really needs all that equipment to safeguard the mainland. But what the document makes clear is that Abe is worried about the rapidly changing security situation around his country. Three main trends likely worry him the most. First, President Donald Trump promotes a less engaged America. That’s led experts and officials I spoke to in Japan to wonder about the long-term health of the US-Japan alliance and may partly animate Tokyo’s desire to ensure it can take care of itself in the event the US doesn’t come to its defense. Second, Japan is unhappy about North Korea’s ability to attack Japan. Pyongyang hasn’t tested a missile or nuke since 2017, mainly because it doesn’t want to end diplomatic talks with the US and keep Trump happy. Still, Japan wants to ensure it can defend against an improving arsenal pointing its way. Third, and most importantly, China looms largest in the minds of Japanese officials as the long-term threat. That’s mostly due to its efforts to claim territory in disputed waters, its economic prowess, and military largesse. Having new and upgraded weaponry will help defend against and deter a possible attack. But with an eye to the future, it may also allow Japan to ably protect itself should a war with Beijing break out.
Beijing may yet be waiting to see if Japan makes its biggest move yet — actually amending its antiwar constitution for the first time.
3. Changing the constitution - Abe was reelected as the head of his Liberal Democrat Party (LDP). Abe’s party has wanted to change the constitution since at least 2012, and the proposed changes have wide-ranging implications — especially regarding Article 9. The potential new constitution still renounces war or any hostilities, but it does say Japan can have a “National Defense Force” (NDF). The prime minister would lead those troops — just like the US president does as commander in chief — and they could work toward “peace and [the] security of international society.”
That’d be a massive shift. Not only would the 1947 constitution change, but also it would codify armed forces in Japan for the first time. What’s more, the NDF would legally be allowed to work with other countries to patrol sea lanes and keep the peace abroad, not just safeguard the homeland. If passed, it would permit Japan to have a traditional military once more. But it’s unclear if Abe will get his wish.
But Only 29 percent of the Japanese public last year said they wanted to see a revised constitution; 27 percent said they didn’t, and the rest were unsure how to answer. Japan, then, is both deeply divided and perhaps somewhat ambivalent about Abe’s legacy-defining initiative. It doesn’t help that Abe’s party shares power with another one, Komeito, to stay in charge. Komeito’s base is largely pacifist, forcing politicians in that party to walk a fine line when discussing possible constitutional changes.
11.0 THE CHAEBOL STORY
Chaebols are large family control business conglomerates in Korea having strong ties with government agencies. They are also guided by the government as they make their policies towards future innovation. The chaebols have become powerful corporate groups that have been well recognized in the international business industry. Some of these multinationals are Samsung, Hyundai, and LG.
The foundation of Korea’s entrepreneurship was driven from the political economy of the 1950s. Although there were very few large corporations in Korea during the Japanese colonial period, the Japanese model of the zaibatsu system was embedded into the Korean economy by the end of the colonial period. Therefore, when the Japanese left Korea in 1945, a number of large firms were created in the late 1940s and early 1950s. These firms received special governmental aid and were closely linked to President Syngman Rhee's First Republic. During this stage the economy was dominated by agriculture.
During the 1960s President Park Chung Hee's policies induced rapid industrialization and triggered the development of new industries, markets and export production. The new government industrial policy increased cooperation between the chaebol and government leaders, with their shared goal of modernizing the economy. However, the chaebol-led industrial expansion converged into a monopolistic and oligopolistic form of capitalism and South Korea's economic activity was controlled by a small number of conglomerates.
The most significant factors which enabled this growth were foreign loans and special favors. Under the support of the South Korean government, the chaebol were able to engage in manufacturing, trading and heavy industries with sufficient funds obtained from domestic banks, and foreign loans and technology. The expansion of exports played a critical role in the innovation and development of new and diverse goods. The production of wigs and textiles dominated the business industry during the 1950s and 1960s, and by the mid-1970s and 1980s, heavy, defense, and chemical industries became the leading line. It was during the 1980s that the chaebol became financially independent and secure. By the 1990s, the chaebol advanced further through their concentration in the development of electronics and high-technology commerce. This not only improved South Korea's standard of living but also made her one of the largest NICs.
However, the Asian financial crisis of 1997 thoroughly exposed the weaknesses of the chaebols. 11 of the 30 largest chaebol collapsed within two years. The major point of downturn was evident when the Daewoo group collapsed in mid-1999 with an unpaid debt of US$80 billion.
Following the IMF crisis of 1997, President Kim Dae-Jung's administration initiated a rapid governance reform. The government concluded that the closed concentration of ownership within the chaebol family and their highly diversified business structure were the main causes of the economic crisis. Therefore, the Kim administration implemented a substantial amount of measures to reform the business practices of the chaebols by promoting the Anglo-American corporate governance system.
Although Kim's administration was somewhat successful in reforming the South Korean economy, the difficulty in determining the effectiveness of the new chaebol framework remains. Since then the Korean economy has slowly recovered with reforms brought on by the government. In recent years, there has been a growth of mid-sized corporations outside of the chaebol arrangement. Today, the top ten exporting chaebol corporations represent 43% of shipments made abroad, up from 31% in 2001. Similarly, Korea's 50 largest companies, most of who are affiliated with the chaebol, account for 38% of the country's total output. South Korea's reliance on the chaebol continues to deepen and the evidence of chaebol strength is visible in the country's growing economy.
Although the chaebol have played a pivotal role in the country's development and economic success, the chaebol's organizational form has many shortcomings which need to be rectified in the future. These are:
- Lack of business transparency
- High risks of businesses due to the CEO's autocratic decision-making
- Increase it exit costs by losing timely exit of unprofitable businesses
- Increase in management costs due to the bureaucratic organization
- Inefficient allocation of resources
- Lack of timely decision making and adaptation
- Delay of development in core capabilities
- Corruption- fraudulent accounting and bribery
To survive and prosper in the future the chaebols need to improve management, establish business transparency, and establish cooperation between labor and management. This would improve their global competitiveness and expand economic growth.
Japan's infosheet
The East Asian map
JAPAN - THE LOST DECADE
- In the early 1990s, Japan’s real estate and stock market bubble burst and the economy went into a tailspin. Since the 1990s, Japan has suffered sluggish economic growth and recessions. This phenomenon is called “Japan’s Lost Decade.
- Japan’s growth rate during this period has been among the lowest of the major developed countries of the world. During 1995–2002, for example, the annualized growth rate of Japan’s real gross domestic product (GDP) averaged only 1.2%. This was lower than the eurozone average of 2.7%, and was less than the other Group of 7 countries: Canada (3.4%), France (2.3%), Germany (1.4%), Italy (1.8%), the United Kingdom (2.7%), and the United States (US) (3.2%).
- Japan’s performance was also poor in comparison to the 2.7% average of the Organisation for Economic Co-operation and Development (OECD), and was significantly less than that of the larger OECD countries: Australia (3.8%), the Republic of Korea (5.3%), Mexico (2.6%) the Netherlands (2.9%), and Spain (3.3%) (Horioka 2006).
- The trend of Japan’s real GDP and the real GDP growth rate during 1990–2013 is seen in the graph. After Japan’s economic bubble burst in the early 1990s Japanese real GDP started to decline sharply. This long-term recession lasted almost 25 years.
- The People’s Republic of China, many countries in the eurozone, and the United States may face similar problems in future and they have been concerned by Japan’s long-term recession.
- Leading economists like Paul Krugman feel that the Japanese economy is in a liquidity trap. Some disagree, and argue that Japan’s economic stagnation stems from a vertical IS curve rather than a liquidity trap. The impact of fiscal policy has declined drastically, and the Japanese economy faces structural problems rather than a temporary downturn.
- These structural problems have many causes: (a) an aging demographic (a problem that is frequently overlooked), (b) an over-reliance by local governments on transfers from the central government, and (c) Basel capital requirements that have made Japanese banks reluctant to lend money to startup businesses and small and medium-sized enterprises.
- This latter issue has discouraged Japanese innovation and technological progress.
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