The Rise and Fall: Japan's Journey

from Economic Powerhouse to

Stagnation
Japan, once heralded as an unstoppable economic powerhouse, has
faced significant challenges in recent decades. The country's journey
is a fascinating narrative of unprecedented growth, followed by
formidable challenges that have had a profound impact on its
economy and society. From the rapid growth of the post-war era to
the bursting of the economic bubble and the impact of an aging
population, this video delves into Japan's economic transformation
and the lessons we can learn from its journey.

Japan Pre War (Fall)

Let's look back at the Japanese economy before the blow of World War
2. The era between 1870 and 1940 reflects Japan's GDP per capita
growth and its economic success during that period. Statistics show
that Japan was steadily catching up with Britain and the United
States, two of the world's most advanced industrial economies. In
1870, Japan's GDP per capita was 23% of Britain's and 30% of
America's. Still, by the eve of the Pacific War, it had grown to 42% of
Britain's and 41% of America's. However all of this went south when
the Japanese attacked Pearl Harbor on December 7, 1941, marking
the entry of the United States into World War II. Japan formally
entered World War II on September 22, 1940, when it invaded French
Indochina and subsequently formed an alliance with Germany and
Italy. Considering that Japan was rapidly becoming one of the most
innovative and up-and-coming nations of its time, World War II
abruptly reversed this progress and sent the modern Japanese
economy back to its starting point, erasing almost all the gains it had
made since the end of the nineteenth century.
In wartime, over 1 million Japanese children were relocated from
urban areas to the comparatively safer rural areas, leading to the
separation of families. Beginning in 1940, there was widespread
rationing and food shortages throughout the country. Although
precise figures are uncertain, by 1945, after the war, an estimated 3%
of the Japanese population, which is over 2 million individuals, had
perished. Emperor Hirohito announced Japan's surrender on August
14, 1945, one week after the atomic bombings of Hiroshima and
Nagasaki, which claimed more than 200,000 lives.

Japan's Ruined Economy

The United States further retaliated due to the attack on Pearl
Harbor, creating further difficulties for Japan. Specifically, Japan's
steel industry had been reduced by 93%, over 30% of its industrial
machinery was destroyed, a quarter of its national buildings and
structures were damaged, and over 80% of its ships were lost. In
addition, the major urban areas of Japan lay in ruins, the Gross
National Product had collapsed, the Yen was virtually worthless, and
Japanese citizens were impoverished. Japan's GDP per capita in 1945,
when it surrendered in World War II, amounted to $1,346, which is
only 11% of the US equivalent for that year and just 47% of Japan's
per capita income in 1940, the year before it entered World War II.
Additionally, in 1946, Japan was close to experiencing a widespread
famine that was prevented only by American food aid. The severe
decline in the Japanese standard of living, along with the military
threat from the Soviet Union, led the United States to provide
extensive economic assistance for Japan's recovery.

Post-War Recovery (Rise) (Graph)

In the immediate aftermath of the war, efforts were directed towards
rebuilding the industrial capacity that had been lost. The period from
1945 to 1991, known as the Japanese Economic Miracle, marked a
time of rapid and sustained economic growth in Japan. In less than ten
years, Japan's economy grew at a rate comparable to the peak rate
observed in 1939, expanding twice as fast as the prewar standard
annually after 1955. Japan only achieved such high growth rates
through its economic reforms and international help. Significant
investments were allocated to electric power, coal, steel, and
chemicals. By the mid-1950s, production had returned to prewar
levels. With the military influence in governance dwindling, the
economy regained its lost momentum and exceeded the growth rates
of previous periods. From 1953 to 1965, the GDP grew by over 9%
annually, manufacturing and mining by 13%, construction by 11%,
and infrastructure by 12%.

The once-devastated Japanese economy swiftly emerged from the

aftermath of World War II. In 1956, GDP per capita had surpassed the
prewar 1940 level. During the recovery period (1945–56), GDP per
capita increased at an average annual rate of 7.1%. This recovery was
then followed by a period of rapid growth. Japan started catching up
with the West once again, and at a pace that far exceeded its progress
before the war. In 1965, these sectors employed over 41% of the labor
force, while only 26% remained in agriculture.

Japan's rapid recovery from war trauma was partly due to successful
economic reforms implemented by the government. The Ministry of
International Trade and Industry was Japan's primary government
body responsible for industrial policy. One of the significant economic
reforms was the adoption of the "Inclined Production Mode," which
focused on the production of raw materials such as steel, coal, and
cotton. Textile production accounted for over 23.9% of the total
industrial production. Additionally, the Japanese government
encouraged women to enter the labor market to stimulate growth
further.

The second reason for Japan's rapid recovery from WWII was the
outbreak of the Korean War. The conflict was fought in an area that
had been part of Chōsen, the territory which was formerly annexed by
the Empire of Japan until 1945. Since the United States was involved
in the Korean War, they turned to the Japanese economy for
equipment and supplies, as shipping these from the United States
became a logistical issue for the military.
Japan's industry quickly provided the required munitions and logistics
to the American forces in Korea, which stimulated the Japanese
economy. This led to its rapid recovery from the devastation of the
Pacific War and set the foundation for the subsequent rapid
expansion. After receiving support from the United States and
implementing domestic economic reforms, Japan's economy
experienced rapid growth from the 1950s to the 1970s. Additionally,
Japan completed its industrialization process and became the first
developed nation in East Asia.

Then, In 1968, Japan was recognized as the world's second-largest

economy, a status it maintained until it was overtaken by China in
2010. Government policies that fostered industrial growth and
technological progress played a pivotal role. Japan's focus on quality
management and ongoing improvement further enhanced its global
competitiveness. During the 1980s, Japan was at the forefront of
various sectors, including automotive and consumer electronics, and
was renowned for its substantial trade surplus and prosperity. The
economy grew at an average annual rate of 3.89% in the 1980s,
compared to 3.07% in the United States as measured by GDP.

Things could not get better for the Japanese economy. Japan's
unemployment and inflation rates steadily decreased while foreign
reserves were growing rapidly. The country has also emerged as a
global leader in technological advancement, making it a go-to source
for tech needs across the world. In addition, the standard of living in
Japan surpassed that of most other countries. People were enjoying
longer lifespans, almost non-existent infant mortality, low crime rates,
and a remarkably equitable distribution of wealth. After enjoying
many years of these incredible conditions, things started to go wrong
for Japan.

The Lost Decade

In the mid-80s, companies became stupendously wealthy, and that's
when the international buying spree began. You see, companies had
simply way too much money. The appreciation of the Yen significantly
impacted Japanese exporters in 1986 and 1987. In response, the Bank
of Japan implemented an extensive monetary easing program. This
resulted in excessive investment in real estate and led to a "bubble
economy." While some people were concerned, most enjoyed the
economic prosperity. Real estate values and the Japanese stock
market were soaring, but these were not sustainable due to unsound
economic practices. The bubble burst after reaching its peak in 1988
and 1989. By 1990, the Nikkei index had dropped to half of its 1989
peak, marking the end of Japan's economic miracle and the beginning
of Japan's economic stagnation.

More commonly referred to as the "Lost Decades," Japan experienced

a prolonged period of economic stagnation caused by the collapse of
the asset price bubble beginning in 1990. From 1991 to 2003, Japan's
GDP grew at an annual rate of only 1.14%, well below that of other
industrialized nations. The average real growth rate between 2000
and 2010 was about 1%. By the year 2000, Japan was experiencing
the challenge of a growing number of postwar baby boomer workers
retiring. At the same time, due to the stagnant population growth,
fewer young people were joining the workforce. Japan experienced a
significant economic downturn in the late 1980s, with equity values
dropping 60% from 1989 to 1992 and land values falling 70% by 2001.

The Plaza Accord

Now, a popular reason for the economic downfall is the Plaza Accord.
The Plaza Accord, signed in 1985, was an agreement among major
economies to devalue the American dollar. This resulted in a rapid
appreciation of the Yen. This historic agreement, signed at the Plaza
Hotel in New York City, involved what was then known as the G-5
nations: West Germany, France, the United States, Japan, and the
United Kingdom. Its purpose was to compel the United States to
devalue its currency due to a current account deficit, which was
estimated to be around 3% of GDP according to Paragraph Six of the
accords. This was especially crucial as European nations and Japan
faced significant current account surpluses and negative GDP growth,
which threatened external trade and GDP growth in their home
nations.
The dollar had become too strong, and the five nations believed it
would benefit everyone if it were to weaken somewhat. They
collaboratively devised a straightforward strategy. The United States
would permit the dollar to depreciate by implementing more relaxed
policies and emphasizing economic expansion. Meanwhile, export-
oriented countries such as Germany and Japan would concentrate on
stimulating domestic demand for goods and bolstering their
respective currencies. The plan was successful, especially for Japan.
Japan also became less reliant on the United States and instead began
trading with its East Asian neighbors. However, this decision would
ultimately lead to Japan's downfall.

During this time, Yen continued to appreciate, adversely affecting

Japan's export-heavy industries. A stronger currency meant that
Japanese goods became more expensive for customers abroad,
decreasing demand. The Japanese government implemented tax cuts
to address this issue and injected large amounts of money into the
economy through stimulus packages. They aimed to stimulate
domestic spending to offset the anticipated export loss due to the
strong Yen.

However, easy access to credit led to excessive spending and

speculative behavior. Corporations invested in land and large
properties, causing the real estate market to expand rapidly.
Additionally, rampant speculation in the stock market further
contributed to market inflation. The stock market doubled two years
before its peak, and Japan's economy grew at 5% annually. This rapid
growth, however, was unsustainable.

The Japanese government realized the situation too late and only
began raising interest rates in late 1989. As a result, credit became
less accessible, leading to a decline in speculation, a fall in real estate
prices, a plummeting stock market, and a significant slowdown in
corporate investment. By January 1990, the economic bubble had
burst, and Japan's economic growth had reached a standstill.
Furthermore, like the rest of the world, Japan was severely affected
by the global economic recession that commenced at the end of 2007
and took a firm hold in 2008. Between 1995 and 2023, Japan's GDP
decreased from $5.33 trillion to $4.21 trillion in nomina l terms, real
wages fell by approximately 11%, and the country experienced
stagnant or decreasing price levels, which broadly impacted the entire
Japanese economy. To put things in perspective further, Covid-19
further damaged the already decreasing Japanese economy. In early
April, Japanese Prime Minister Shinzo Abe announced a state of
emergency, giving the nation its worst economic crisis since the end
of World War II. The COVID-19 shock in early 2020 triggered a
significant recession, with real GDP projected to shrink by around
5.2% this year. The economy is gradually strengthening, although
growth remains sluggish.

Current Situation
Before we get into the last part of the video, make sure to
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Fast forward to 2023, the Japanese economy faced much more

significant challenges. After a 3.2% decline in GDP in the third
quarter, the country narrowly avoided a recession with a modest 0.4%
growth in the last quarter. Weak household and government
consumption were notable, but there was a rebound in business
investment. Despite these challenges, exports grew strongly due to a
weak exchange rate. As a result, Japan slid from being the world's
third-largest economy to the fourth, trailing the United States, China,
and now Germany, mainly due to a substantial depreciation of the
Yen. So far, the Japanese economy has shown some signs of
improvement. However, the country would have to work hard to reach
its peak as it did in the early 1980s.

Outro
Overall, Japan has experienced a remarkable journey from being an
economic powerhouse to facing stagnation. As Japan navigates
through these hurdles, it becomes increasingly apparent that
innovative solutions and strategic economic policies are necessary to
revive its economic prowess. That's all we have for today; if you liked
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