Japan “the land of the rising sun”

Japanese Capitalism 1800’s – years of self-imposed isolation from the outside world. 250 years of self-imposed isolation from the outside world US warships arrived and demanded the opening of trade US warships arrived and demanded the opening of trade. Modern capitalistic production started in the late 19 th century in the cotton and textile industry. Modern capitalistic production started in the late 19 th century in the cotton and textile industry. Japanese production was more efficient than US, Russia & UK. Japanese production was more efficient than US, Russia & UK. Japan was 1 st Asian country to master western manufacturing techniques. Japan was 1 st Asian country to master western manufacturing techniques.

Early Stages of Capitalism It was attributed to private entrepreneurs and NOT through government protection. It was attributed to private entrepreneurs and NOT through government protection. Government lacked power to impose tariffs. Government lacked power to impose tariffs. Govt. promoted growth through publicly subsidized firms. Govt. promoted growth through publicly subsidized firms. These Govt. policies created large deficits. These Govt. policies created large deficits. Private business became the dominant mode of economic policy. Private business became the dominant mode of economic policy.

Japan ( ) cont.. Until 1930’s Govt. intervention in the economy was limited Until 1930’s Govt. intervention in the economy was limited Banking was almost unregulated. Banking was almost unregulated. Govt. had little role in financing industrial development Govt. had little role in financing industrial development Shares were purchased by wealthy investors. Shares were purchased by wealthy investors. Formation of Zaibatsu This created basis for business expansion. This created basis for business expansion.

Japan (1800’s – 1950) cont… In the 1930’s isolationism and the great depression caused problems for the Japanese govt. In the 1930’s isolationism and the great depression caused problems for the Japanese govt. Military took control of the government. Military took control of the government. Meiji Dynasty Meiji Dynasty Private business were forced to merge and become govt. controlled. Private business were forced to merge and become govt. controlled. Dec 7 th,1941 Japan military regime attacked Pearl harbor. Dec 7 th,1941 Japan military regime attacked Pearl harbor. This war could not be won, because of Japan’s need for imports. This war could not be won, because of Japan’s need for imports.

Japan Miracle Years

Japan – 1945 – 1990’s After its defeat, Japan became a truly democratic country under civilian rule. After its defeat, Japan became a truly democratic country under civilian rule. Article 9 of the new constitution prohibited Japan from establishing an offensive military capability and eliminated any political power of the military. Article 9 of the new constitution prohibited Japan from establishing an offensive military capability and eliminated any political power of the military. Japanese economy was finally on the road to economical recovery. Japanese economy was finally on the road to economical recovery.

Japan – 1945 – 1990’s 1953 to 1971, Japan enjoyed a 9.6% growth in GDP to 1971, Japan enjoyed a 9.6% growth in GDP. Growth was driven by Japan’s lack of military budget. Growth was driven by Japan’s lack of military budget. Japan relied on fewer imports. Japan relied on fewer imports. Falling of trade barriers allowed for Japanese exports. Falling of trade barriers allowed for Japanese exports. During this period, Japan had a high surplus of educated workers for industrialization. During this period, Japan had a high surplus of educated workers for industrialization. Surplus funds for investment which came from private savings. Surplus funds for investment which came from private savings.

Japan – 1945 – 1990’s cont… Japan had industrial trade unions instead of craft employment. Japan had industrial trade unions instead of craft employment. Lifetime employment. Lifetime employment. Growth and Little Competition Growth and Little Competition Stable political environment. Stable political environment. Japanese manufacturing techniques & quality control was superior to rest of the world. Japanese manufacturing techniques & quality control was superior to rest of the world. Japan began to dominate the automobile and electronic industries. Japan began to dominate the automobile and electronic industries.

Iron Triangle Ministries Ministries Ministry of International Trade Ministry of International Trade Ministry of Finance Ministry of Finance Keiretsu Keiretsu Major Conglomerates Major Conglomerates Government Government Liberal Democratic Party Liberal Democratic Party

Keiretsu Diversified Industrial groups held together by interlocking shareholding rather than being held by a single parent. Diversified Industrial groups held together by interlocking shareholding rather than being held by a single parent. Major shareholding in other companies Major shareholding in other companies Cross-sharing of holdings Cross-sharing of holdings Cross-sharing of board members Cross-sharing of board members Cross-sharing of Ideas and Views Cross-sharing of Ideas and Views Research and Develop to get better view of the world views. Research and Develop to get better view of the world views. Prevent hostile take over Prevent hostile take over Prevent foreign investors Prevent foreign investors

Keiretsu’s Conglomerates Conglomerates Mitsui Group Mitsui Group History back to 1568 History back to 1568 Mitsubishi Mitsubishi Fuji Fuji Vertical Vertical Toyota – making own parts Toyota – making own parts Just-In Time Inventory Just-In Time Inventory Keiretsu Exclusive Retail Stores Keiretsu Exclusive Retail Stores

Japan, Inc. Sony – A Japanese miracle. Sony – A Japanese miracle. In 1945, Sony started with 190,000 yens (approx $2000). In 1996 its worth approx $15 billion. In 1945, Sony started with 190,000 yens (approx $2000). In 1996 its worth approx $15 billion. Honda achieved similar success in the automotive industry. Honda achieved similar success in the automotive industry.

GDP GDP 1 World $ 51,480,000,000, est. 1 World $ 51,480,000,000, est.World 2 United States $ 10.9 Billion 2003 est. 2 United States $ 10.9 Billion 2003 est.United StatesUnited States 3 China $ 6.4 Billion 2003 est. 3 China $ 6.4 Billion 2003 est.China 4 Japan $ 3.6 Billion 2003 est. 4 Japan $ 3.6 Billion 2003 est.Japan 5 India $ 3.0 Billion 2003 est. 5 India $ 3.0 Billion 2003 est.India 6 Germany $ 2.3 Billion 2003 est. 6 Germany $ 2.3 Billion 2003 est.Germany 7 United Kingdom $ 1.7 Billion 2003 est. 7 United Kingdom $ 1.7 Billion 2003 est.United KingdomUnited Kingdom

Depression Bubble Burst

Market Failure Purchase from Keiretsu members only Purchase from Keiretsu members only Causing non-competitive markets Causing non-competitive markets Life-time Employment Life-time Employment Inability to react to market Inability to react to market Workers protected from Workers protected from Seniority Wages Seniority Wages Based on time with company not based on qualifications Based on time with company not based on qualifications Middle Management Stagnation Middle Management Stagnation

Market Failure – cont. Stock Market Inefficiency Stock Market Inefficiency 1989 – 38,916 yen 1989 – 38,916 yen 2002 – 8,579 (78% decrease) 2002 – 8,579 (78% decrease) Unemployment Unemployment Life-time employment only applies to 55. Life-time employment only applies to 55. Some Keiretsu force employment of retirement people. Some Keiretsu force employment of retirement people. Globalization Globalization Increase competition from transitional countries Increase competition from transitional countries Address Foreign Competition Address Foreign Competition China and other countries are new competitors for same foreign market place. China and other countries are new competitors for same foreign market place.

Human Capital Highest percentage citizens over 65 in a developed country. Highest percentage citizens over 65 in a developed country. Burden working age population Burden working age population Low consumer confidence Low consumer confidence Limited Investment Returns Limited Investment Returns Low infant birth rate Low infant birth rate Limited work force in the years ahead Limited work force in the years ahead Networking with Keiretsu Networking with Keiretsu Banking – non performing loans Banking – non performing loans Government fiscal policy Government fiscal policy Not conducive to growth Not conducive to growth Supports Keiretsu and status quo Supports Keiretsu and status quo

Government Policy Restructure Social Security Restructure Social Security Upcoming working class will have to support aging society Upcoming working class will have to support aging society Protect of Agriculture Protect of Agriculture Government shielding of agricultural sector Government shielding of agricultural sector High Tariffs on Agricultural Imports High Tariffs on Agricultural Imports

Protectionism Overextending loans non-performing companies Overextending loans non-performing companies Household Savings yield low rate of return Household Savings yield low rate of return Investment into low yield funds Investment into low yield funds Consolidation of Banks Consolidation of Banks Non-profit maximizing Keiretsu Non-profit maximizing Keiretsu City Banks funding of MITI projects City Banks funding of MITI projects

Status quo Inflation rate (consumer prices): -0.3% (2003 est.) Inflation rate (consumer prices): -0.3% (2003 est.) Labor force: million (2003) Labor force: million (2003) Population growth rate: 0.08% (2004 est.) Population growth rate: 0.08% (2004 est.) Birth rate: 9.56 births/1,000 population (2004 est.) Birth rate: 9.56 births/1,000 population (2004 est.) Unemployment rate: 5.3% (2003) Unemployment rate: 5.3% (2003) Imports: $346.6 billion (2003 est.) Imports: $346.6 billion (2003 est.) Exports: $447 billion Exports: $447 billion

Recharge Restructure fiscal policy and tax structure Restructure fiscal policy and tax structure 2050 – pension payments will double 2050 – pension payments will double Increase own production of domestic energy Increase own production of domestic energy Revamp banking system Revamp banking system More responsive to external actions More responsive to external actions Slow on decision making process Slow on decision making process

Financial Sector - Future Dismantling of Keiretsu Dismantling of Keiretsu Creation of Competitive Markets Creation of Competitive Markets Creation of profit maximization and cost minimization Creation of profit maximization and cost minimization Restructure Banking system Restructure Banking system Profit-maximizing investments Profit-maximizing investments Loosen Restrictions on Market Loosen Restrictions on Market Liquidate non-performing debt Liquidate non-performing debt Abandon Abandon Lifetime employment Lifetime employment Seniority Wages Seniority Wages