Lessons From Japan’s Economic Recovery



Few countries were hit as hard by the global financial crisis as Japan.

On November 18, 2008, Time Magazine reported that Japan declared itself to be in its first recession since 2001. GDP had contracted at a rate of 0.4% from June through August, and “abysmally low consumer confidence” contributed to the closing of several thousand small to medium-sized businesses in the last two quarters of 2008 alone.

Japan’s Nikkei stock market index (roughly equivalent to America’s Dow Jones index) plunged to 26-year lows.

Between plummeting demand for Japanese exports and a rise in the value of the yen, it’s no surprise that analysts hearkened back to the 1980’s, when the bursting of property and banking bubbles produced Japan’s “Lost Decade.” The fallout was intense enough to oust Japan’s Liberal Democratic Party (which had ruled for the previous 55 years) from power.

But despite its troubles, Japan has recovered faster from the financial crisis than most other nations — including the US

Government Stimulus

Japan’s massive economic stimulus package is believed to have been a driving force behind their recovery. An August 2009 BBC article noted that the $260 billion stimulus (announced in October 2008) contributed more than anything else to Japan’s 0.9% growth from April through June – Japan’s first quarter of growth after four straight quarters of contraction. (Germany and France, by comparison, grew just 0.3% during the same time frame.) The bulk of the stimulus involved infusing roughly $550 into each Japanese household of four. Subsidies for buying new energy-efficient cars and appliances were also included. Still, not everyone was convinced in mid-2009 that the worst had truly passed.

The BBC warned that it was unclear whether Japan’s economic growth would continue when the stimulus program ended and the economy was left to sink or swim on its own merits. Even at the height of the stimulus, domestic consumption had risen only modestly, by 0.8%. Mizuho Financial director Seijiro Takeshita lamented that “we know this time it was good, but that was due to a lot of government stimulus spending.”

Rising Demand For Exports

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Lucky for Japan, the true key to its lasting prosperity – demand for its exports – soon began to resurface. By August 2009, exports had risen 6.3% during the most recent quarter. Rising demand from China and other major trading partners was chiefly behind the increase. By April 2010, The Economist reported that demand for Japanese exports were up across several product categories, including:

  • Plastic materials, up 105% (year on year, in January and February 2010)
  • Non-metallic mineral goods, up 113%
  • Construction machines, up 152%
  • Textile machines, up 171%
  • Vehicle parts, up 144%
  • Scientific instruments, up 133%

In all, The Street reported that Japanese exports as a whole rose 45% over the last year.

Once other countries began restocking their inventories of products made with these materials, The Economist writes, it was only a matter of time before Japanese exporters cashed in. The cumulative effect of this resurgent demand was profound. In all, JP Morgan determined that Japan’s “export revival” equated to 3.1% annual growth – more than the United States and the Euro Zone. Corporate profits, depressed as they were, saw a record surge. Unemployment remains below 5% (compared with 9.7% in the US) and monthly wages surpassed previous-year levels for the first time in over a year and a half.

Consumer Demand


The Japanese government has also informed the world that domestic consumer demand is back on the rise. Japan’s Ministry of Economy was reporting increases in consumer demand and spending, according to the Street. Automobiles, energy and machinery, specifically, were said to have seen elevated retail sales in February – the second consecutive such month. Japanese auto giants Toyota and Nissan posted year-over-year production increases of 83% and 72%, respectively. Honda’s production was up 49%.

Overall, nationwide retail sales rose 4.2% in February, the highest increase since 1997. Furthermore, 1997’s retail sales rise (by 12.4%) was an anticipated event preceding Japan raising its consumption tax from 3% to 5%. Consumer confidence, too, has risen during each month of 2010, inc, including a climb to 40.9% in March, its highest level since the pre-recession days of 2007. That month, the Nikkei stock index rose 9% on hopes of the recovery sustaining itself into the future.

The Future

There is no denying that Japan’s economy has recovered since it bottomed out from January through March of 2009. Unemployment is down, corporate profits are up, demand for exports has surged, retail sales are impressive, and consumer confidence appears to have returned. But Japan is not completely out of the woods just yet.

The Economist named several fundamental problems that could reduce the Japanese recovery to an aberration. Deflation is one, with consumer prices expected to continue falling until March 2012. High public debts, a rapidly aging population and sluggish policymaking are also blamed for potential economic problems in Japan’s future. It remains to be seen whether these problems will materialize.


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