Japan’s Great Stagnation
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Japan’s Great Stagnation

Forging Ahead, Falling Behind

W. R. Garside

This timely book presents a critical examination of the developmental premises of Japan’s high-growth success and its subsequent drift into recession, stagnation and piecemeal reform. The country, which within a few decades of wartime defeat mounted a serious challenge to American hegemony, appeared incapable of fully adjusting to shifting economic circumstance once the impulses of catch-up growth and the good fortune of an accommodating international environment faded.
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Chapter 4: Economic and Financial Policy in a Changing International Environment: The Origins and Course of the Bubble Economy

W. R. Garside


JOBNAME: Garside PAGE: 1 SESS: 10 OUTPUT: Wed Jun 27 12:09:56 2012 4. Economic and financial policy in a changing international environment: the origins and course of the bubble economy Given the remarkable and relatively swift transformation in Japan’s competitive and trading position within the industrialized world from the 1960s and the underlying rationale of its post-war political economy, to which we have just drawn attention, it is understandable that the country’s elite remained wedded to forms of economic management and relational ties that had spurred and sustained catch-up growth. Japan’s experience in the early 1970s indicates that the country was capable of adapting to changing international circumstance without undermining its particular comparative advantages. However, experience from the 1980s onwards severly tested that capacity. To appreciate fully the drastic turnaround in Japan’s economic and especially financial condition – from heady speculative fever during the mid-to-late 1980s to prolonged deflationary recession and stagnation during the ensuing decade – it is necessary to trace the country’s policy responses to two major facets of ongoing globalization, one stemming from adjustments to the exchange rate and the other from the effects of financial deregulation. Trade Surpluses and the Yen During the high-growth period, as we have noted, Japan had ruthlessly and deliberately fostered competitive manufacturing for export and restricted imports. In this it was driven by interlocking monetary and industrial policies. The banking system, under pressure to lend, had financed productive capacity beyond immediate concerns of profitability; export vitality was therefore vital...

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