Japan’s Postwar Economy & Policy in a Global Context

By Jun Saito —

Ticker board at the Tokyo Stock Exchange. Source: Stefan's flickr photostream, used under a creative commons license.

Ticker board at the Tokyo Stock Exchange. Source: Stefan’s flickr photostream, used under a creative commons license.

The revival of the Japanese economy after World War II has often been referred to as an “economic miracle.” Having started from the ashes of destroyed factories and infrastructure, in less than a quarter-century Japan managed to develop into one of the world’s leading advanced economies.

However, the economic miracle could not have been achieved by Japan alone. Interactions with the global economy were indispensable. If it were not for the exchange of goods and services, capital, human resources, and technology with the rest of the world, the miracle would not have taken place. Participating in and helping to further develop the global framework of liberal institutions was vital for Japan, and the United States was always the focal point for Japan’s relationship with the rest of the world.

In fact, the close ties established between Japan and the United States after the war could likewise be called a “political miracle.” In contrast to the regrettable relationship seen before and during the war, in the postwar period the economic relationship between the two countries has been close and strong.

In the 21st century, Japan is currently struggling to overcome the problems that it faces in realizing a higher growth potential. On the one hand, the current economic system — which was established in the high-growth period with easy access to an ample young labor force — has become outdated and inconsistent with demographic changes. The limitations of this system prevent the country from making a maximum contribution to growth with the limited resources it has available. On the other hand, Japan needs to tackle the negative influence an aging and declining population will exert on its economy. The impact of changing demographics on capital input and total factor productivity, as well as on labor input, will inevitably lower Japan’s growth potential even further.

Problems in the domestic economy have implications for Japan’s position in the global economy. China has overtaken Japan in terms of the size of its gross domestic product. Japan has lost confidence in its economic power, has been the most robust source of its influence in the international community.

Yet from another angle, the picture looks different. In terms of the quality of its market and society, Japan is still regarded as a world leader. There are many aspects of its economy for which Japan can be proud. In that respect, by transferring the lessons learned during the course of its own development to other countries, Japan can make a significant contribution to other economies that would like to follow its successful development path.

Real gross domestic product growth rates over time. Source: Cabinet Office, Government of Japan.

Real gross domestic product growth rates over time. Source: Cabinet Office, Government of Japan.

Japan also benefits from the expansion of Asian and other dynamic economies, which stimulate Japanese economic activity through global supply chain activities. Additionally, it could benefit from a supply of foreign capital and labor to compensate for the negative impact of its demographic changes. In this context, there are many areas in which Japan may be able to contribute to the world and the Asia-Pacific region in particular. They include integrating the achievements of free trade agreements and economic partnership agreements, facilitating international mobility of labor, and transferring experience and lessons for achieving a high-quality economy to other nations.

Unfortunately, the region lacks a forum for discussing most of these ideas in the Asia-Pacific context. Asia-Pacific Economic Cooperation’s Economic Committee has the potential to be such a forum, but currently it only focuses on promoting structural policy to remove obstacles to trade and investment and to doing business. The Pacific Economic Cooperation Council used to have a Pacific Economic Outlook project that analyzed economic forecasts and structural issues, but it ceased operations in 2014. At this moment, there is no existing forum that can analyze and discuss these critical issues.

The creation of such a forum in the Asia-Pacific context would be an important first step in securing prosperity for the region. Japan, in cooperation with the United States, should take the initiative in making such a move. After all, Japan’s own development can only benefit from the growth of the Asian and global economies. In turn, the Japanese contribution to international society will also benefit regional and other economies around the world.

Mr. Jun Saito is a project professor at Keio University’s Graduate School of Business and Commerce and Senior Research Fellow at the Japan Center for Economic Research (JCER). In 2016, he was a Visiting Scholar with the Japan Chair at the Center for Strategic and International Studies in Washington, D.C. Mr. Saito’s essay is part of CSIS’s Strategic Japan Working Paper Series featuring Japanese scholars addressing pressing issues in Japanese foreign and economic policy.

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