(1) Some Points About the Economic History of Japan

Chapter 8: Introduction to the Japanese Economy (Revised 2009)

(1) Some Points about the Economic History of Japan

This section of the course considers the economy of Japan since 1955 and what we will call Asian Capitalism. We will not devote much space to the Japanese economy prior to 1955. However, there are a few points about the economic history of Japan that are important in understanding the period since 1955. The first part of this introduction will describe these points.

First, it is important to understand that Japan was a feudal country until 1868. By contrast, in Europe feudalism ended 500 years ago. This feudal society was basically isolated from the rest of the world. It was based on a strong sense of personal obligation and personal loyalties, with the elevation of social duties above personal rights. It was a very hierarchical society, with the mass of the population docile before authority. It was a very nationalistic society, reinforced by the racial and linguistic homogeneity of the Japanese. And it was a society in which learning was highly regarded; literacy rates were high. As we will see, many of these traits have continued to this day.

Second, between 1868 and 1945, the Japanese government was very involved in the economy. Initially, the government was motivated by its desire to rid Japan of foreign domination. This later turned into Japanese imperialism. The desire to rid Japan of foreign domination and the non-acceptance of laissez faire has continued to this day. We will discuss the role of the Japanese government in the economy and the Japanese economic relations with other countries in later chapters.

Third, prior to the end of World War II, the economy was dominated by four large groups of companies (or conglomerates) called zaibatsu. The four zaibatsu groups were Mitsui, Mitsubishi, Sumitomo, and Yasuda (later to become Fuji). These had large holdings in industry, finance, international trade, and so forth. They were centered around a holding company owned by one family. We discuss the evolution of Japanese business in the next chapter.

Fourth, as is obvious, by the 1930s, Japan was certainly NOT an underdeveloped country. Between 1900 and 1940, Japan’s real national income had grown at an average annual rate of 4.5%, a rate unprecedented for the time. Japan’s investment in capital goods was high and it was a major exporter of manufactured goods. The “Japanese economic miracle” did not begin in 1955.

Fifth, while Japan had very large and modern manufacturing companies, it also had a large number of small companies. These had little capital and therefore were labor-intensive. They were quite poor. So Japan had what has been called a “dual economy”. In addition, Japan had a politically weak labor force and an absence of strong labor unions.

Sixth, from 1945 to 1953, Japan was under occupation, mainly by the United States Army (under General MacArthur). Among the economic policies undertaken by the occupation, several were especially important. One was the break-up of the zaibatsu. The stock in their companies was sold to the public and the zaibatsu leaders were prohibited from further business activity. We will see later how the groups of companies re-established themselves (although the modern groupings are in no way similar to the old zaibatsu). A second occupation policy was land reform. All the land of absentee owners and all but about 2.5 acres of land owned by landlords resident in the rural areas was bought by the government and resold to tenant farmers. This 2 virtually destroyed the landlord class. In 1946, 46% of the land was worked by tenant farmers; by 1950, only 10% of the land was worked by tenant farmers. A third occupation policy was the introduction of anti-monopoly laws similar to the Sherman Act in the United States. As we will see, these were not well enforced. A fourth occupation policy was to introduce labor laws similar to those in the United States. The proportion of workers in unions grew from 0 to 60% between 1945 and 1949. This led to a series of major strikes. The unions were defeated in these strikes. The employers responded to their victory by instituting the modern system of Japanese industrial relations. We discuss this in the next chapter. A final occupation policy was called the Dodge Plan. It involved a number of austerity measures imposed on Japan in 1949. (Austerity measures are designed to reduce total spending.) These austerity policies included a balanced budget, the abolition of government subsidies, and a devaluation of the yen to Y360 = $1. This led to deflation (falling prices) and was the cause of the workers’ strikes. Until at least the 1970s, the Japanese policy-makers were strongly attached to the idea of balanced budgets and to the exchange rate of Y360 = $1.

Seventh, because of the experience of World War II, Japan emerged with a deep commitment to economic growth and industrialization. This commitment was widely shared throughout the population until at least the early 1970s.

In 1953, Japan became an independent country, free of occupation. It was fortunate in that its economy benefited economically from the Korean War. Japan sold materials to the American military under special procurements. It also served as a base for American troops. The Cold War also ended any attempt by the United States to punish Japan for World War II. Japan was now to be aided so that it would enter into alliances with the Western countries. This meant that the United States would provide most of Japan’s defense, as Japan was prevented from having a significant military by its own constitution. With this desirable beginning, postwar Japan went on to have one of the most outstanding records of economic performance ever experienced. Let us take a brief look at that performance.

(2) Survey of Japan’s Economic Performance from 1955 to 1990.

(1) To many, the success of Japanese economic performance was a miracle. In many ways, no other country achieved what Japan achieved (although China has been exceeding this economic performance in recent years). This economic miracle is best seen in terms of economic growth rates.

The table below shows the annual growth rates in Real GDP for Japan and for the United States. Real GDP is the best measure of overall production.

Table 1. 1961-65 1966-70 1971-75 1976-82 1983 1984 1985 1986 1987 1988

Japan 12.4% 11.0% 4.3% 4.5% 3.2% 5.1% 4.7% 2.5% 4.4% 5.4% U.S.A. 4.6% 3.0% 2.2% 2.3% 3.6% 6.8% 3.4% 2.8% 3.4% 3.8%

As you can see, in the 1960s (and also in the 1950s), Japanese growth rates were truly astounding. While they fell in the 1970s and the 1980s, they were still quite good in most years. In 1955, Real GDP (production) per capita in Japan was only 21% that of the United States. By 1988, it was approximately 80% that of the United States. According to the World Bank, in 1986, Japan had a GDP per capita of $12,840, making it the sixth richest country among the 129 countries surveyed (behind only Switzerland, the United States, Norway, Canada, and Sweden). 3

(2) From 1955 on, much of Japan’s economic growth has been intensive growth. For example, writing in the mid-1970s, Edward Denison (perhaps America’s leading scholar on economic growth) found that for the period 1953-71, only 45% of Japan’s economic growth could be explained by increases in labor, capital, and land (extensive growth). The other 55% is explained by increases in production per worker (intensive growth). This means that Japan achieved large increases in productivity (production per hour worked). For example, from 1965 to 1972, productivity in Japan grew at an annual average rate of about 9%, compared to a little over 2% in the United States. And from 1973 to 1983, Japan’s productivity grew at an annual average rate of 3.5%, while American productivity was virtually stagnant. This productivity growth led to a large increase in real wages in Japan. (Real wages are wages in constant purchasing power.) Real wages rose over 350% between 1956 and 1983. In subsequent sections, we will need to understand the cause of this rapid rise in productivity.

(3) Another aspect of Japan’s economic performance also requires explanation. This is shown in the data below. Note that Japan’s official unemployment rate (on American definitions of unemployment) was very low and did not increase much during bad economic times. Also, note that, while Japan has experienced some years of high rates of inflation, generally inflation was well under control.

Table 2 UNEMPLOYMENT I NFLATION (CPI)

YEAR JAPAN U.S.A. JAPAN U.S.A. 1965 1.2% 4.5% 6.4% 1.6% 1966 1.4 3.8 5.4 2.9 1967 1.3 3.8 3.5 3.1 1968 1.2 3.6 5.6 4.2 1969 1.1 3.5 5.3 5.5 1970 1.2 4.9 7.5 5.7 1971 1.3 5.9 6.2 4.4 1972 1.4 5.6 4.9 3.2 1973 1.3 4.9 11.7 6.2 1974 1.4 5.6 23.2 11.0 1975 1.9 8.5 11.9 9.1 1976 2.0 7.7 9.2 5.8 1977 2.0 7.1 8.2 6.5 1978 2.3 6.1 4.2 7.6 1979 2.1 5.8 3.7 11.3 1980 2.0 7.1 7.8 13.5 1981 2.2 7.6 5.0 10.3 1982 2.4 9.7 2.7 6.2 1983 2.7 9.6 1.8 3.2 1984 2.8 7.5 2.3 4.3 1985 2.6 7.2 2.1 3.6 1986 2.8 7.0 .6 1.9 1987 2.9 6.2 3.6

(4) Behind the rapid economic growth and the rapid rise in productivity was a very high rate of investment spending (buying of new capital goods), financed by a high rate of savings. This is shown in table 3 (the numbers are “percent of GDP”): 4

Table 3. 1965-69 1970-74 1975-79 1980-83 Gross Investment 33.8% 37.5% 31.5% 30.5% Net Investment 20.2% 23.8% 18.5% 16.5% Household Saving 10.6% 13.5% 15.6% 13.6% Corporate Saving 5.0% 4.7% 1.2% 0.9% Government Saving 5.4% 6.5% 0.9% 2.7%

Several points about Table 3 are noteworthy. First, both gross and net investment rates were very high (gross investment is the total spending on new capital goods as a percent of GDP while net investment subtracts that spending merely to replace the capital goods that had depreciated). To compare, from 1980-83, gross investment rates in the United States averaged 15.7% and net investment rates averaged about 4% (these were recession years in the United States, but the gaps are substantial in any other period as well). Second, household saving rates were very high in comparison to most other countries, as shown in Table 4.

Table 4. Net National Saving as a Percent of National Income

1960-1973 1974-1979 1980-1989 1990-1994 Overall 1960-1994 Japan 26.3% 23.1% 21.1% 21.3% 23.6% USA 10.8 8.8 5.2 3.3 7.8 Germany 17.6 11.5 10.1 10.5 13.5 France 19.5 15.2 9.0 8.0 14.3 Italy 19.4 15.5 11.1 7.3 14.7 Britain 11.1 6.2 5.4 3.0 7.5 Canada 11.5 13.0 9.5 2.7 10.0

What is especially unique to Japan is the high savings rate among low-income and working-class households. Even the poorest 20% of Japanese households save a much higher share of their disposable income than do most American households. Since the mid-1970s, the savings in Japan actually exceeded the desire of Japanese companies to spend on business investment. These “excess savings” went mainly as loans to the American government, as loans to American businesses, and as purchases of American assets (land or companies). We consider the reasons for these high savings rates below.

(5) Another interesting feature of Japanese economic performance has been that the high rates of economic growth seem to have been accompanied by considerable equality in the distribution of income. In the mid-1970s, the Gini Index for Japan was 0.335 before taxes (0.316 after taxes) compared to 0.404 for the United States (0.381 after taxes). The Gini Index is a number between zero and one; the lower the number, the more equal is the distribution of income. Japan’s distribution of income was more equal than that of the United States. However, inequality in Japan increased in the 1980s and 1990s as it did in most countries.

(6) One final aspect of Japan’s economic performance involves international trade. Japan ran large current account surpluses, especially in the 1980s and particularly in relation to the United States. In a later chapter, we will discuss Japan’s trade policies and how they have evolved since 1955. We will also discuss the trade issues between the United States and Japan. (The current account balance is the difference between exports and imports, counting both goods and services The surplus indicated that Japan exports more than it imports..) 5

(3) Explanations of the High Savings Rates in Japan

Before continuing our survey of Japan’s economic performance, let us try to understand the reasons for the high savings rates in Japan. Many hypotheses have been suggested. Prior to World War II, Japanese savings rates were quite low. This fact forces us to reject the notion that the high Japanese savings rates are a product of Japanese culture. There have been many hypotheses to try to explain the high rates of saving in Japan.

One hypothesis is that the high rates of saving result from the high rates of economic growth. The idea here is that incomes rose faster than people expected. Therefore, they were slow to adjust their living standards as their incomes increased. The extra income then went into savings. The trouble with this hypothesis is that, when incomes fell in the early 1970s, people reduced their living standards to maintain their high rates of saving. If they would reduce their living standards when income fell, why would they not increase them when income rose?

Another hypothesis examined the age structure of the Japanese population. Until recently, Japan had a very small proportion of its population over age 60. The years after age 60 are usually years for spending one’s accumulated savings. However, unlike the United States, in Japan, people over age 60 have actually been savers—they still add to their savings. And in Japan, people under 35 are also high savers, whereas they are usually heavily in debt in the United States. Therefore, the age structure does not explain the reason for high savings in Japan.

The fact that Japanese elderly continue to save led to a recent hypothesis. This is that Japanese elderly save because they desire to leave bequests to their children. Presumably, American elderly do not have this desire. No one has explained why there should be such differences in motivation. The evidence for this hypothesis comes from the fact that Japanese elderly save more (other things equal) if they have more adult children.

Another hypothesis involves the way Japanese workers are paid. As we will see in Chapter 8, for those who work in large companies, a significant portion of income comes in the form of a semi-annual bonus. It has been argued that Japanese workers make their spending decisions based on their regular monthly income; the bonus income is then saved. Since workers know that the bonus is coming, it is hard to explain why they would behave this way. But studies do show that bonus income is more likely to be saved than regular monthly income. However, these studies find that the effect of this on the overall savings rate seems to be small.

Yet another hypothesis has to do with the large number of Japanese workers who work in family-owned businesses. The argument is that, because these people own their own businesses, their incomes are much less certain from year to year than is true for workers. They must save when income is high for the years when income will be low. There is no study of the magnitude of this effect, but it could be part of the story. Why there are so many family-owned businesses will be considered in the next chapter.

For younger people, a main reason that they would save is the high cost of housing in Japan. An average home in Japan costs about five times the average income, much higher than in the United States (although similar to California). On average, about 40% of the purchase price must be paid as a down payment (compared to 0 to 20% in the United States). Repayment periods are typically much shorter than the 30-year period commonly found in the United States. In Japan, interest payments on mortgage payments are not tax-deductible, as they are in the United States. Most Japanese who buy homes do so in their 30s or 40s. To afford this expensive purchase, they 6 must save for a considerable time. (This explanation would also hold, but to a lesser extent, for purchases of home appliances, automobiles, and so forth.)

Another reason people might save is the high cost of education in Japan. In secondary education, families often pay for private “tutoring” so that pupils can pass the entrance examinations to the major universities. While the total costs of college are about the same in Japan as in the United States, Japanese families must pay a much higher percentage of these costs. Savings in Japan are particularly high for families with high school age children. A related reason that families with children might tend to save so much is the relatively high cost of children’s weddings.

Another major reason people might save is retirement. In Japan, “retirement” from good jobs typically occurs at age 60. This is a relatively young age for “retirement” compared to Western countries, especially in a country that has one of the longest life expectancies in the world (76 for men and 83 for women). At age 60, a (male) worker receives a lump-sum payment, commonly equal to about 3 years’ income. Most of these men then take other jobs, usually at low wages. Nearly half of Japanese men over age 65 are still in the labor force (compared to fewer than 20% of American men). Men need to save during their years of working at good wages to be able to live adequately during the many years of retirement. (The three-generation household is still very common in Japan. People may be saving in order to be able to have greater independence in their old age.)

One final reason for the high savings rates in Japan has involved the inadequacies of the financial system. Stock markets, bond markets, and especially markets involving consumer lending were undeveloped in most of the postwar period (although they too have improved considerably in recent years). There was no Japanese equivalent of the American savings and loan. As a result, the mortgage market in Japan was not nearly as developed as it is in the United States. The same is true for other consumer durables; most payments for automobiles, home appliances, and so forth were made in cash. Credit cards existed in Japan but were used relatively little. And the inefficient system of retailing made the prices of consumer goods high. All of these are additional reasons for saving.

In summary, high savings rates in Japan are not the result of deliberate government policy or of Japanese culture. In part, the high savings rates in Japan are a result of the system of bonus payments (this will be discussed more fully in Chapter 8). In part, they are a result of the failure of the Japanese government to provide items that are commonly provided by governments in the West: education and an adequate retirement pension. In part, they are a result of the failure of the financial system and the private market to provide adequate housing in Japan. And finally, they are a result of the large number of small-scale family enterprises. In short, the high savings rates are neither a product of Japanese culture nor of the virtues of the Japanese system. In large part, they resulted because of the deficiencies of the system. One might argue that the high rates of saving have financed high rates of business investment spending at the expense of housing, education, adequate retirement, consumer durable goods, and so forth. It is therefore debatable whether these high rates of saving have been a blessing or a curse for the Japanese people. But they aided the Japanese economic growth.

(4) Survey of Japan’s Economic Performance Since 1990.

Until the end of the 1980s, Japanese economic performance was the envy of the world. Many books were written in the United States arguing that the Japanese economy had a competitive advantage over the American economy. Some even argued that the Japanese economy would 7 replace the American economy as the leading economy in the world. But this has not come to pass. The decade of the 1990s (and especially the period from 1995 to 2000) was a period of economic boom in the United States. On the other hand, the decade of the 1990s was one of economic gloom for the Japanese. No one today (2009) believes that the Japanese economy is a threat to the American economy. And many economists believe that the advantages once possessed by the Japanese economy have come to an end. The Japanese economy is undergoing significant reform. This story of the so-called “lost decade” actually begins in 1986 and 1987. The United States wanted the Japanese government to help reduce the American trade deficit with Japan. In particular, the United States wanted the central bank of Japan (called the Bank of Japan) to increase the Japanese money supply. It was hoped that increasing the money supply in Japan would give the Japanese people more money that they would use to buy American goods. Also, increasing the money supply in Japan would raise prices in Japan, making it more expensive for Americans to buy Japanese goods. (This was called the Plaza Accord and will be discussed in more detail in Chapter 10.) The Bank of Japan did indeed increase the Japanese money supply. But instead of buying American goods, the additional money was used mainly to buy stocks and real estate. This began what is called a “bubble economy”. In a bubble economy, people buy stocks and real estate for speculative purposes only. This means that one buys a stock or some real estate in the hope that one can resell it very soon for an even higher price. The price of the stock or the real estate greatly exceeds its true value. But the buyer does not care. The buyer only hopes the price goes even higher so the buyer can resell the stock or the real estate and make a profit. From the middle of 1985 to the middle of 1989, the value of the shares in the first tier of the Tokyo Stock Exchange increased from Y169 trillion to Y527 trillion. Eventually, the bubble bursts. In Japan, the stock market bubble burst in December of 1989 when the Bank of Japan decided to reverse its policies and tighten the money supply. (The real estate bubble burst in late 1990.) People who had bought stocks or real estate and paid more than the intrinsic worth now panicked. They sold as quickly as they could, trying to sell before the prices went down too much. The result of a large amount of selling is that prices indeed do decline. The Nekkei Stock Index (a broad average of Japanese stock prices similar to the S&P 500 Index in the United States) fell from 38,130 in December of 1989 to 23,740 in December of 1990 and then to 17,390 in December of 1992. By September of 1998, the Index was below 14,000. The situation for real estate prices was similar. (The situation in Japan then was similar to that of the United States in 2008 and 2009.) The decline in stock and real estate prices caused a decline in wealth for many Japanese people. Feeling poorer, and also becoming pessimistic about the future, these people reduced their spending on consumer goods. The decline in consumer spending sent Japan into a recession. This was a “growth recession”. A “growth recession” means that production (Real GDP) did not actually fall; instead, it just increased much less rapidly.

Table 5. Growth Rate of Real GDP Unemployment Rate 1990 5.0% 2.1% 1991 3.8% 2.1% 1992 1.0% 2.2% 1993 0.3% 2.5% 1994 0.6% 2.9% 1995 1.5% 3.2% 1996 5.1% 3.4% 1997 1.4% 3.4% 1998 -2.8% 4.1% 1999 -0.14% 3.4% 8

Table 5. Growth Rate of Real GDP Unemployment Rate 2000 0.3% 4.7% 2001 1.3% 4.7% 2002 -0.3% 5.4% 2003 -0.3% 5.4% 2004 2.7% 5.3% 2005 2.9% 4.7% 2006 2.6% 4.4% 2007 2.2% 4.1% 2008 est. 1.9% 4.0%

You can see in Table 5 that economic growth rates in Japan over the period 1992 to 1997 were very low --- actually the lowest growth rates of the 7 main industrial countries. Beginning in March of 1997, the Japanese economy went into a full recession. As you can see in Table 5, in 1998, production (Real GDP) actually fell at a very high rate. (In Japan, as we will see, the main response to bad economic times is to reduce work hours, rather than increase unemployment. In this period, work hours fell from an average of 2,100 per year to 1,900.) The labor market in Japan was chronically depressed through much of the 1990s. The Japanese economy did not begin significant economic growth until 2004. Then in 2008, the growth rate declined again. Since the middle of the 1990s, unemployment in Japan has been consistently higher than at anytime in the previous 30 years.

The 1997 recession was also a result of the so-called Asian Crisis. The Asian Crisis began in the summer of 1997 with speculative selling of the Thai Baht, the Indonesian Rupiah, the Malaysian Ringgit, and the Korean Won. This selling led to large declines in the exchange rates (depreciation) of these monies. The depreciation of these monies led several of these countries to have to default on international debts they had incurred. Indonesia and Malaysia in particular entered a severe recession. Korea and Thailand also suffered. These were major export markets for Japanese companies. The reduction in Japanese exports to these countries and the inability to collect on loans made to these countries contributed to the 1997 Japanese recession.

The period of the 1990s and early 2000s was also one of deflation. Deflation means that prices are actually falling. (See the chart at the end of this chapter.) This deflation in Japan continued until 2007. Deflation is an experience that has not been known in the United States since before World War II. Deflation lowers the value of real estate. This makes homeowners poorer and therefore decreases their consumer spending. Deflation also makes it more expensive to pay debt. If I owe you $1,000 and prices decline to half their value, the $1,000 I pay you will be worth twice as much. In a country that previously had a significant amount of debt, deflation forces many people to file for bankruptcy. Increased bankruptcies decrease the willingness of banks to lend. Decreased consumer spending and decreased bank lending cause many people to lose their jobs and many companies to go out of business.

There is another major change in the 1990s in Japan that is worthy of notice -- the aging of the Japanese population. The population of Japan is projected to decline from 127 million in 2005 to 90 million by 2055. By 1994, life expectancy in Japan became the highest in the world. As of 2004, this is 78.6 years for males and 85.6 years for females. People age 65 and over 9 rose from 5.7% of the population in 1960 to 14.1% in 1995. This increase will continue. The fertility rates in Japan are very low. In 2005, on average each woman would have 1.25 children (compared to 2.05 on the United States). The rapid aging of the population will have major effects on Japanese employment, on Japanese savings, on the Japanese retirement policies, and on other important aspects of the Japanese economic system. We will discuss this in a later chapter.

(5) Living Standards in Japan

Until the 1990s, we have seen that there were very high rates of growth of Real GDP in Japan. Japan has had very high rates of saving and of business investment spending. Even low income and working class households have high rates of saving. We also have seen that Japan’s economic growth had occurred with considerable equality in the distribution of income. There is no permanent underclass in Japan, partly because there is little immigration to provide a cheap labor force. Given such rapid economic growth and high real income, consumption seems to be lower than one would expect. One aspect of the relatively low rate of consumption concerns food. While the Japanese diet is certainly adequate, the typical person obtains 10% to 20% fewer calories per day than is found in other industrialized countries. And a substantially higher portion of household income must be allocated to the purchase of food than in the United States. Another aspect of the relatively low rate of consumption occurs with housing. As late as the late 1970s, fewer than half of Japanese homes had flush toilets and less than one-third were served by a sewer system. Most lacked central heating. The homes are small by American standards --- in the late 1970s, the average floor area was less than 850 square feet on a lot that averaged 2,000 square feet. (The newer homes are somewhat larger --- about 1,000 square feet.) The situation is better today. But it is still well below what would be expected for such a rich country. Most people do have electric washers (buy not dryers), electric refrigerators, and color television sets, as well as other electronic appliances. Ownership of automobiles per 1,000 people is less than half that found in the United States; however, public transportation is very good. Other than public transport, government provided amenities, such as roads and public parks, are inadequate.

For many people in Japan, incomes are not very secure. As we will see, only a minority of workers have “permanent employment”. That proportion is becoming smaller. While unemployment is very low, men in “good jobs” face a very high cost of quitting their jobs (due to the practice of hiring only younger men). Given the weakness of the labor unions, the fact that only 1% to 2% of the population is protected by public assistance programs, and the fact that for young workers, unemployment benefits last for only a short time, it is reasonable to argue that many Japanese workers face more insecurity than do workers in most other industrialized democracies.

Social conditions in Japan seem in many ways superior to the United States. Crime rates are low and arrest rates are high. The murder rate, the robbery rate, and the rape rate are only a small percent of the rates found in the United States. However, Japan does have major organized criminal gangs similar to those found in the United States. The rate of traffic accidents is also low; deaths from traffic accidents per 1,000 people are about half those found in the United States despite the greater traffic congestion and poorer quality roads in Japan. This results because of strict laws for licensing drivers, strict laws inspecting cars, high penalties for drunken driving, and low mileage per car. Pollution (especially air pollution) became a major problem in Japan in the 1960s. Starting in the 1970s, strict pollution laws were passed. These included significant charges for polluters. Since then, pollution has declined to quite low levels for an industrialized country. 10

The health of the population is typically measured by two summary statistics: infant mortality and life expectancy. By either measure, Japan is a very healthy society. Infant mortality rates are among the lowest in the world --- about 60% those of the United States. And life expectancy at birth is the longest in the world for both men and women. As mentioned earlier, for men, life expectancy at birth was 78.6 years in 2004. For women, life expectancy at birth was 85.6 years in 2004. Part of this success relates to life style. Part relates to the system of health provision. Like all industrial countries except the United States and South Africa, Japan has a system of national provision of health care services. One main principle of this is universal coverage. While about 15% of the American population has no access to formal health care (except emergency rooms), all Japanese people have such access. However by American standards, some of the health care would seem inadequate. Hospitals are overcrowded and often refuse to treat patients at night. Facilities for the disabled are lacking. And the most advanced treatments are often hard to obtain. Yet Japan manages to obtain outstanding health statistics for the population while spending, as a percent of GDP, only half as much as is spent in the United States.

Education in Japan is free only through the end of junior high school. Both high schools and universities charge tuition (this was one of the main reasons for the high rates of personal savings). Emphasis is on rote memory. The authority of the teacher is much greater than that found in the United States (in Japan, teachers are usually males). Entrance to the universities is strictly by merit as determined by university examinations. Many hours are spent cramming for the university examinations, as one’s entire future can depend on the results. People usually take a cram course as well as going to regular school. “Cram courses” are given by private schools and require extra fees. This period is called “examination hell”. It is associated with high rates of violence in high schools as well as high rates of suicide. In contrast, universities have required relatively little of their students. For many, this has been considered a four-year interlude between the rigor of high school and “examination hell” and the rigor of work life. In recent years, there have been some attempts to make the university curriculum more demanding. The function of the schools seems to be mostly socialization and sorting people by natural ability (including intelligence, personality traits, and so forth). Companies do not expect any specific knowledge when they hire a school graduate; they will provide all of the training themselves. (This is in contrast to the United States where much of the training is done by the schools and universities.) The Japanese system does not encourage much creativity or individuality. But it is remarkable in its ability to reach the entire population and to raise it to quite a high standard. Partly it does this by devoting more time to education --- pupils in Japan attend school 5 ½ days per week (240 days per year). Partly it does this by pushing advanced students very hard; all Japanese pupils study subjects in high school that are typically found in colleges in the United States. And partly, because education is the sole key to social mobility, parents push their children very strongly to succeed in school.

In 1983, the Economist magazine of London evaluated 23 countries on indicators of social welfare. Scores were given under the headings: Political, Cultural, Social, Health, Economic, and Climate. Of the 23 countries, Japan ranked tied for third with Australia. The United States ranked eighth. While this evaluation had no scientific accuracy, it is an indication that the overall quality of life in Japan is quite good by international standards.

In summary, Japan was able to achieve high rates of growth in the standard of living with considerable equality (although inequality is increasing at present). It was able to avoid many of the problems of rapid growth: poverty, crime, and even pollution. However, compared to other industrial democracies, Japanese consumer spending is low in relation to 11 the overall GDP. Working conditions are in many ways not very good. And provision of government goods, such as roads and education, seem inadequate, especially when one considers that Japan devotes so little of its GDP (1%) to national defense. (6) Conclusion

In the next three chapters, we will try to answer the following questions. First, what are the aspects of the Japanese economy that are different from the United States? Why did these arise? Are they a source of advantage or disadvantage for Japan? We will call this the Asian Market Capitalist Economy (in contrast to the Liberal Market Capitalist Economy of the United States and the Social Market Economy of Europe). Second, what are the explanations for the exceptional rate of economic growth in Japan until 1990? Third, what are the explanations for the relatively poor performance of the Japanese economy since 1990? And finally, what kinds of reforms might be needed in the Japanese economic system in the 21st century? How many of these reforms have already occurred? Is the Japanese economy likely to move in the direction of an American style liberal market capitalist economy? What does the Japanese experience teach us about the reasons for the evolution of economic systems? 12 13 14