NCPA - National Center for Policy Analysis

Sun Setting On Japan's Economic "Miracle"

December 23, 1996

Back in the 1980s one could hardly pick up a newspaper or magazine without reading some glowing story about Japan's economy. Dozens of books were written extolling the virtues of Japanese industrial policy, some by Clinton cabinet members like Labor Secretary Robert Reich, urging the U.S. to emulate it. The bureaucrats at Japan's Ministry of International Trade and Industry (MITI) were said to brilliantly guide Japanese industry, shrewdly picking winners while humanely killing off the losers.

The result was a competitive colossus that threatened American industrial might in market after market. In the 1990s much has changed. One of the most remarkable developments of recent years has been the utter collapse of the Japanese model of development. "Today no sensible person would consider Japan as a model of anything," economist Steve Hanke of Johns Hopkins recently wrote in Forbes. No one any longer writes books praising MITI; rather, they write books about what a failure it has been. (See Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Policy, 1975-1993 by Scott Callon, published last year by Stanford University Press.)

Japan's problems have been in the making for many years. Even during MITI's heyday there were signs that all was not well. For example,

  • In the early 1950s MITI sought to eliminate all Japanese auto companies other than Toyota and Nissan, believing that more than two was inefficient.
  • MITI also refused to allow Sony to import transistor technology because it was thought that the company lacked the skill to develop it.
  • More recently, MITI's efforts to develop a "fifth generation" computer and high-definition television failed completely.

What rescued the Japanese economy from bureaucratic incompetence was an excellent tax system that encouraged saving and investment, a monetary policy that maintained virtually absolute price stability, and a highly competitive domestic market. But the Japanese threw away these advantages by "reforming" their tax system, increasingly manipulating interest rates and exchange rates to temporarily boost growth, and resisting the worldwide trend toward deregulation and privatization.

The result is that the Japanese economy today is mired in debt, its cost structure is no longer internationally competitive, and Japan's political leaders have yet to come to grips with the situation. As the Economist magazine recently put it, "Among the big rich countries, Japan shares with Italy the dubious distinction of being in the worst financial state."

Japan still has vast resources and may yet find a way out of its economic morass. But it will be a long time before any new books are written praising its industrial policy.

Source: Bruce R. Bartlett (senior fellow, National Center for Policy Analysis, December 23, 1996).


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