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After World War II, Japan underwent a period of restoration followed by high economic growth, eventually becoming the economy with the second largest GDP in the world in 1967.
During the 1960s, Japan's economy grew at a rapid pace of over 10 percent per annum. This rapid economic growth was supported by: (i) expansion of private investments in plant and equipment, backed by a high rate of personal savings; (ii) a large shift in the working population from primary to secondary industries, and abundant supply of high-quality labor; and (iii) an increase in productivity brought about by adopting and improving foreign technologies.
From the late 1960s until the first half of the 1970s, new social problems emerged that reflected warps left by high economic growth. As a result, steps to tackle environmental pollution, urban issues and social security problems became the central targets of administrators, and countermeasures were taken accordingly.
In the 1970s, the sharp increase of Japan's exports of industrial products to the U.S.A. and Europe began to cause international friction. In 1971, the U.S.A. announced it would end the convertibility of the dollar into gold. In December 1971, Japan revalued the yen from 360 yen against the U.S. dollar, which had been maintained for 22 years, to 308 yen. In February 1973, Japan adopted a floating exchange-rate system.
In October 1973, the fourth Middle East War led to the first oil crisis, triggering high inflation. Accordingly, Japan recorded negative economic growth in 1974 for the first time in the post-war period. Following the second oil crisis in 1978, efforts were made to change Japan's industrial structure from "energy-dependent" to "energy-saving," enabling Japan to successfully overcome inflation.
In the 1980s, the trade imbalance with advanced industrial countries expanded because of the yen's appreciation. As part of administrative and financial reforms, Japan National Railways and Nippon Telegraph and Telephone Public Corporation were privatized. As a result, domestic demand-led economic growth was achieved.
At the end of the 1980s, Japan's economy enjoyed favorable conditions, with stable wholesale prices and a low unemployment rate. Corporate profits were at their highest level in history, and corporate failures were at their lowest level, while investments in plant and equipment for manufacturing products, such as semiconductors, were very active. Stock and land prices continued to rise rapidly, and large-scale urban developments and resort facility developments in rural areas progressed at a very fast pace. However, excessive funds flowed into the stock and real estate markets, causing abnormal increases in capital asset values (forming an economic bubble).
At the end of 1980, Japan's net worth (national wealth) stood at 1,363 trillion yen, 5.6 times the GDP. It then increased, reaching 3,531 trillion yen, 8.0 times the GDP, at the end of 1990, owing to increasing land and stock prices. Since then, Japan's national wealth changed to decreasing by the collapse of the bubble economy. At the end of 2010, it was 3,036 trillion yen.
At the beginning of 1990, stock prices plummeted, followed by sharp declines in land prices. This marked the start of major economic recession (collapse of the bubble economy). Japan's financial and economic systems, which were excessively dependent on land, consequently approached collapse.
Massive bad debts were created in financial institutions' loan portfolios, as corporate borrowers suffered serious losses due to declining land prices. As a result, shareholders' equity in financial institutions shrank. In 1997, large banks began to fail. In 1998 and 1999, the government injected public money into the banking sector to stabilize the financial system.
The Japanese economy began to make a moderate recovery in April 1999. This, however, was only a temporary phenomenon, as investments in plant and equipment were weak and the economy was too dependent on foreign demand and information and communication technologies. With the global decline in IT demand from mid-2000, Japan's exports to Asia dropped, necessitating adjustments of excess inventory and production facilities. In line with this, the Japanese economy again entered into an economic downturn in 2001.
Following the simultaneous terrorist attacks in the U.S.A. in September 2001, further slowdown of the world economy became a matter of serious concern, resulting in greater uncertainty over the outlook for the Japanese economy. There were several reasons for the long-running stagnation of the Japanese economy. One major reason was that the huge bad debts of Japanese banks had yet to be cleaned up. Lengthy economic recessions aggravated bad debt conditions, which hindered Japan's economic growth. Another reason was that the economic structure of Japan made it impossible to deal flexibly with changes in the economic environment.
The Japanese economy maintained a long-lasting recovery since the beginning of 2002. However, the path has not been flat, given the two "soft patches (temporary softening in the market)" in the past and impairment in some parts of the economy.
The first soft patch was caused by slower export growth following economic slowdowns in the U.S.A. and the Asian region, both Japan's major export destinations, since late 2002. The second soft patch resulted from slower export growth owing to a surplus inventory of information-related producer goods in Japan as demand for IT-related goods declined worldwide since late 2004. During the phase of Japan's economic recovery from the beginning of 2002, there was a common trend where exports were showing signs of steady growth, reflecting a brisk recovery of the world economy, but then a soft patch set in and pushed exports down, resulting in sluggish growth in both production and personal spending. As exports picked up, the economy broke away from this slower period.
At the start of 2008, the Japanese economy was faced with a standstill in its path to recovery as private consumption and investments in plant and equipment fell flat and so did production. This occurred against the backdrop of soaring crude oil and raw material prices and repercussions from the subprime mortgage loan problems that, since mid-2007, rapidly clouded future prospects for the world economy further. Moreover, after the failure of a major American investment bank in September 2008, the situation worsened and even developed into a global financial crisis. Stock prices plummeted in Japan as well, which, combined with the sharp appreciation of the yen, further undermined business and household confidence. As the economy continued to recover with foreign demand and economic measures after April 2009, the government defined March 2009 as the trough of the economic cycle. In November 2009, the government also summed up price movements to conclude that they were "in a state of moderate deflation."
From around October 2010, the economy has been at a standstill and started to recover in 2011. However, owing to the tsunami damage, supply chain disruptions, restriction of power supply, and nuclear accidents caused by the Great East Japan Earthquake on March 11, 2011, Japan fell into an economic slump and a worsening fiscal position. As of June 2012, the economy still remains in a grave condition but is moderately recovering through the demand for the reconstruction of the earthquake.
Japan's industrial structure has undergone a major transformation over the half century since the end of World War II. The chronological changes in the industrial structure during this period by industry share of employed persons and GDP show that shares in the primary industry in particular have fallen dramatically since 1970, when Japan experienced a rapid economic growth. During the 1980s, the secondary industry's share of employed persons and GDP also began to decline gradually. On the other hand, the tertiary industry's shares of both employed persons and GDP have risen consistently.
In 1970, the primary industry accounted for 19.3 percent of employed persons, the secondary industry for 34.0 percent, and the tertiary industry for 46.6 percent. In 2010, the corresponding shares of these three sectors were 4.2 percent, 25.2 percent and 70.6 percent, respectively.
As for GDP by type of economic activity, in 1970, the primary, secondary, and tertiary industries accounted for 5.9 percent, 43.1 percent and 50.9 percent, respectively. In 2010, these figures for the primary, secondary, and tertiary industries were 1.2 percent, 25.2 percent, and 73.6 percent, respectively.
According to the 2009 Economic Census, there were 6.04 million establishments (establishments whose operation details are unknown were excluded) in Japan, at which a total of 62.86 million persons were employed. The average number of persons engaged per establishment was 10.4. The establishments with less than 10 persons accounted for 78.4 percent of the total.
The number of establishments by the major groupings of the Japan Standard Industrial Classification was the most numerous in the "wholesale and retail trade" category, numbering 1.56 million, followed by "accommodations, eating and drinking services" and "construction." In terms of the number of persons engaged, establishments in the "wholesale and retail trade" ranked first as they employed 12.70 million persons, followed by "manufacturing" and "medical, health care and welfare."
Japan's domestic manufacturing industry has continued to shrink amidst ongoing economic globalization. Imports of textiles and consumer durable goods have increased at a rapid pace in recent years, and the share of imports from China, among other sources, has risen. Furthermore, the structure has surfaced where Japanese companies manufacture products in China and other Asian countries and import these products back into Japan to push down domestic prices.
The percentage of companies in the manufacturing sector that have overseas production sites was 67.6 percent in fiscal 2010, thus remaining at the fiscal 2007 level. In terms of sales proceeds, overseas production accounted for 18.1 percent in fiscal 2010 and increased by 1.1 percentage points from the previous fiscal year. By category, the percentage of overseas production was the highest in transport equipment, which was 39.2 percent, followed by 28.4 percent in information and communication electronics equipment, and 28.3 percent in general-purpose machinery. Of total overseas production output in the manufacturing sector, exports bound for Japan constituted 21.3 percent, a decrease for the third consecutive year.
As a reason for setting up production bases overseas, many Japanese companies in the manufacturing sector cite their intention to cater to local demand for products. Other areas increasingly drawing the attention of Japanese manufacturing companies as capable operation locations are China, as well as India and Thailand. China in particular is gaining significance not only as a capable production site and export market, but also as a competitor in the global market.
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