Economic Development of Japan Final Exam s1

ECONOMIC DEVELOPMENT OF JAPAN -- FINAL EXAM

(3:00pm–4:00pm, July 22, 2011)

Instructor: Kenichi Ohno

 PLEASE WRITE CLEARLY. Poor handwriting will be ignored and you will get no points. Any writing instrument (pen, pencil, etc) can be used as long as it is readable.  Answer ALL questions. You may answer in any order. Each question is worth 20 points.  Use only TWO official answer sheets. Use only FRONT side of each answer sheet.  No books, data, slides, documents, notebooks, or electronic devices are allowed.  You may leave the room if you finish early. At 4:05pm, model answers will be distributed.  Overall exam results will be posted in the web and your graded exam will be returned through GRIPS Academic Office (some time next week).

Q1. Describe the formation process of a nationally unified market and development of domestic commerce during the Edo period (1603-1867).

Q2. What were the policies of the Meiji government (1868-1912) for absorbing Western technology and producing Japanese engineers?

Q3. Discuss Japan’s foreign debt issuance prior to World War I (from 1897 to the early 1910s). Who issued foreign bonds and for what purpose(s)?

Q4. Discuss the characteristics of the Japanese economic system which enabled the manufacturing sector to grow rapidly in the post WW2 period (especially in the 1960s). When was this system introduced and when did it end?

Q5. Explain policy actions of the Bank of Japan to stimulate the macroeconomy in the post-bubble period (from the 1990s to present). Were they effective? Model answers

(Other answers are also possible. Long answers do not necessarily improve points. Details of years, laws, person names, etc. are not required in your answers.)

A1. Because taxes and samurai salaries were paid in rice, and also because Osaka was a commercial center and Edo was a big consumption market, an efficient national transport system of rice (and other products) was required. Transport service was provided by private coastal shippers and a network of roads which were supported and regulated by government. Osaka merchants offered commercial and financial services. The requirement that han lords commute between home and Edo every other year also stimulated the development of the transport sector. As agricultural and rural industrial production increased, regional markets outside Osaka or Edo also emerged.

A2. The Meiji government hired foreign advisors for industrial projects and as instructors of higher education. However, because their salaries were high government tried to replace them with Japanese experts. For this purpose, good students were sent abroad to study with (small) official scholarship, Kobu Daigakko (Institute of Technology) was established to provide modern engineering education combined with practical skills, and many technical high schools were created for training middle-level engineers. Through these channels, a large number of engineers were produced (about 6,000 at end Meiji) who directed policies as government officials or worked as practitioners in factories.

A3. Japan’s foreign borrowing was made easier by the adoption of the gold standard in 1897, progress in industrialization and modernization, and military victories over China and Russia. Central government issued foreign currency bonds in London and New York to finance military expenditure and refinance existing debt. Municipalities such as Tokyo, Yokohama, Nagoya, Kyoto, Osaka and Kobe issued foreign bonds to build local infrastructure such as power, water, gas, ports, tram cars, etc. Foreign debt issue allowed central government to maintain active spending (avoid fiscal austerity) despite increasingly tight balance-of-payments constraints.

A4. The two features of the “Japan model” were long-term relationship and official intervention. This included administrative guidance on industries and banks, subcontracting between large and small firms, lifetime employment and loyalty to companies, company-wide participatory productivity (kaizen) movement, keiretsu groups, mainbank system, etc. These institutions worked well to accelerate industrial catch-up after the war defeat, but are now considered (by some) obsolete and harmful for further growth. This system was installed in steps in the first half of the 20th century, especially during the war time (1937-1945) through forceful introduction. In recent years, this system has considerably weakened under market and globalization pressure, but it has not been completely replaced by a new, freer system.

A5. Expansionary monetary policy was adopted but it failed to produce a robust recovery. BOJ injected a large amount of liquidity (monetary base) to the economy through open market purchases of conventional and unconventional assets but money supply and commercial bank lending to industries remained stagnant or even declined. Liquidity was absorbed in the form of excess reserves of commercial banks. BOJ also lowered short-term interbank interest rates to practically zero but this did not stimulate enterprise demand for funds and only narrowed the policy scope of BOJ (interest rates cannot be pushed below zero). BOJ occasionally intervened in foreign exchange to stop or moderate sharp appreciations of the yen. This sometimes worked in the short run but the long-term rising trend of the yen could not be reversed.