Japan

Japan's economy was one that everyone wanted to emulate. Now after over 10 years of poor performance, everyone is urging Japan to change its ways radically. The economy recently recovered from its third recession in ten years on the coattails of strong exports. Recent data, however, show signs that the economy is weakening again thanks to tepid domestic demand and disappointing growth in exports.

Japan's problems stem from both political and economic structural imbalances. And these problems have made it more difficult to untangle the after effects of the stock market collapse and real estate bubbles at the end of the 1980s. When Junichiro Koizumi became prime minister in April 2001, he promised to rid Japan of its bad debts and bankrupt companies and get the country growing again. However, little appears to have been accomplished. He is mired in the same political morass as his predecessors and it has been difficult for him to persuade the politicians and those entrenched in the ministries to act.

Historically, Japanese companies have relied more on bank financing than equity and bond issuance. The economy consists of two distinct tiers: the large and powerful multinational companies and a plethora of small, often family-owned, enterprises. Manufacturing has been the mainstay of Japan's economy since the 1960s and today accounts for just over 20 percent of current-price GDP. The electronics and car industries continue to dominate Japan's manufacturing sector and are household names in international markets. But both industries have suffered in recent years from the strength of the yen, which has forced them to move manufacturing facilities to lower-cost countries in order to remain competitive.

Another feature of Japan's economy is the high rate of investment, both in the private sector and, more recently in the public sector (largely because of the endless stream of fiscal stimulus packages). In the 1960s and 1970s high levels of investment, using the large pool of domestic savings, were needed as Japan caught up with high-income countries. But from 1997 to 2001 gross fixed investment accounted for around 27 to 30 percent of current-price GDP, a considerably higher level than in Germany and the United States during the same period.