Hugh Patrick

Whither the Japanese Economy?


Despite Japan's stronger than expected cyclical recovery, capped by a surge in the first quarter of 2003, Japan continues to have major economic problems. Although the summer brought rapid improvements in output growth, a sharp rise in stock prices, and increases in employment, it is premature to say that it is finally on the path to full recovery and self-sustaining growth. Other economic indicators, including mild but persistent debilitating deflation, inadequate aggregate demand, an extraordinarily weak financial system, a slow and uneven process of corporate restructuring, unemployment and underemployment, a government debt to GDP ratio on a path to major crisis, and a weakening trade weighted dollar, threaten to prolong Japan's economic malaise and transformation.

This essay, the fourth in a series examining Japan's unprecedented economic situation, first presents overviews of Japan's recent economic performance and near-term prospects. I revisit some of the major persistent features of the Japanese economy, noting several positive changes, such as the sharp decline in the household saving rate, the rise in net corporate saving, and significant improvements in the rules for business instituted by the Japanese government. I consider deflation and labor conditions in the near term and capital markets in the longer term, and then discuss Government economic policy, focusing particular attention on aggregate-demand macroeconomic policy and the major structural problems of the banking system. Following a brief section on Japan and the world economy, I conclude that while Japan's fundamentals are strong, the transition from the current economic situation to achieving long-term potential growth will require a combination of improved performance in the private sector and more sensible economic policymaking and implementation.

Source: Working paper
Exact Citation:
Patrick, Hugh. "Whither the Japanese Economy?" Working paper, Columbia Business School, 2004.
Date: 2004