Japan - the Post Miracle Years

Japan -Post Miracle Years

Japan’s miracle growth occurred following the devastation of World War II. From 1954 to 1971 Japan saw a compound annual growth rate of 10.1% in GDP. This rapid growth ended in 1971, but continued to produce benefits for the next 20 years as evidenced by an average annual growth rate of 4.4% from 1971 to 1991. In this 20 year period the growth rate only fell below 3% four times due to economic shocks including the ending of Bretton Woods, oil embargoes, and a period of high yen or “Endaka.” During these shocks, Japan proved its ability to make economic reforms in order to stay competitive and raise the growth above 3% quickly.

The 1970’s oil shocks hurt economic growth for a short period of time. The oil embargoes caused Japan’s oil prices to nearly quadruple and led to an increase in inflation in 1974. Import prices rose 40%, which resulted in a -0.6% decrease in growth. However, the depreciation of the yen during the second oil crisis led to lower manufacturing costs and allowed for tremendous export growth. Japan remained competitive with the United States as exports of cars, car parts, steel, consumer electronics, and machine parts flooded the United State’s markets, which eventually led to US trade complaints. The G-5 nations met to discuss concerns of the dollar’s appreciation, which helped to spur the dollar’s depreciation against the yen.

As the value of the dollar began to fall in 1988, Japan entered the period of endaka, or “high yen.” As Japan’s export prices rose, their firms experienced lower ROE’s, decreasing on average from around 8% to approximately 3% in 1991. In response, Japan made improvements in cost control and production efficiency by investing in technologically advanced production plants. The Bank of Japan (BOJ) also loosened monetary policy in efforts to encourage the depreciation of the yen. Interest rates were lowered to 2.5% which caused investment to grow from 27% of GDP in 1986 to 32% of GDP in...