The term "Japan, Inc." has been used to refer to the cooperative relationship among Japanese industry, bureaucracy, and politicians that helped fuel the nation's economic boom. Under this system, allied banks, brokerage houses, insurance firms, manufacturers, and trading houses all took care of each other. During Japan's remarkable rise from postwar ruin, this cooperative spirit worked wonders. Economically strong members of an industrial family helped weaker ones. Japan's system of guaranteed lifetime employment offered employees great security. When economic downturns did occur, the risk was distributed, keeping the overall economy sound.
By the 1980's Japan had accumulated, through decades of selling more to foreign countries than it bought, a huge reserve of capital. Some of this excess money was used to buy foreign real estate and foreign companies. The rest was used to increase the price of stocks and real estate in Japan. However, the massive trade surplus encouraged unwise, speculative investments. During the late 1980's billions of dollars were lost by the Japanese because of imprudent investments in the United States. In the early 1990's the bottom also dropped out of Tokyo's real estate and stock markets, causing the banks to stop making new loans and to call in outstanding loans.
By 1997 many banks were perilously close to lacking enough money to pay their depositors. Without new loans to businesses, the economy ground to a halt. Under state mandate, banks had been channeling money to major industries to avoid layoffs and provide a safety net for thousands of unnecessary employees.
The system that had worked during Japan's rapid growth began to falter in an increasingly global economy. Japan's system of state-directed capitalism designed to protect jobs, maintain economic stability, and avoid major policy changes could not be maintained indefinitely. The "cooperative spirit" often led to cronyism and corruption, and "spreading the risk" meant concealing unsound business decisions to sidestep failure. The Japanese system kept unprofitable businesses solvent and needed capital away from entrepreneurs.
By the mid-1990's it became apparent that many banks had accumulated too many bad debts to continue supporting unprofitable companies. For years the United States had been urging the Japanese government to cease propping up troubled financial institutions and let the free market prevail. Japan did that in late 1997 when it allowed a giant securities firm and three other financial institutions to fail, casting 15,000 people out of work.
The Japanese were shocked when it became known that even the banking system was shaky. They began reducing unnecessary
Spending, increasing personal savings, and storing their money in safes. When the Japanese curtailed their buying, the economic engine stalled. In a domino effect, business sagged, salaries dropped, inventory remained unsold, manufacturing output decreased, and bankruptcies increased. The problems in Japan also affected its Asian neighbors, who counted on Japan to buy their goods and help alleviate their own financial doldrums. Although the economy of Japan began to improve somewhat in 1999, the recovery was slow and it virtually ceased with the global economic downturn in 2002.
World History
