Since the end of the Second World War, the Japanese economy has sustained a high rate of economic growth, and by 1990 its per capita income surpassed that of the USA. Factors that contributed to the success of the Japanese economy - especially the role of the government, the role of business groups, and the relationship between management and labour - have been the focus of many articles and books.

The period before the first oil crisis of 1973 is commonly known as the period of high-speed economic growth. During this period Japan maintained a high investment/gross domestic product ratio, while domestic saving levels were also sufficient for high investment to be made possible without the accumulation of foreign debts. Improvement in human capital, developed through a solid education and on-the-job training, was also an important factor for growth.

Industrial policy, in common terminology, is a wide-ranging combination of policies that influence the level and composition of industrial investment and production. In Japan it is generally interpreted as the nurturing of specific industries through subsidized (policy) loans from the development bank: for example, in the 1950s and 1960s, the coal, steel, shipbuilding and petrochemicals industries. Imports were strictly controlled until the early 1960s, and raw materials and intermediate goods, as opposed to consumption goods, were favoured.

Japanese monetary and fiscal policy was flexible but prudent enough to produce high growth without excessive inflation (except in 1974-6). During the 1950s and 1960s, monetary policy maintained a fixed exchange rate. However, in 1974, in order to control inflation, tight monetary policy was introduced. Inflation was quickly reduced, at the cost of a sharp decline in output. After 1975, monetary policy focused on keeping the inflation rate low.

Fiscal policy was fairly conservative in the 1950s and 1960s. The budget was essentially balanced every year until 1965, when government construction bonds (for infrastructure projects) were issued. Pure deficit-financing bonds have been issued as of 1975. Government deficits grew rapidly in the second half of the 1970s, but fiscal austerity during the 1980s reduced the issue of deficit-financing bonds to zero by 1990. However, the slump in the first half of the 1990s, forced the government to issue new deficit-financing bonds.

Economic institutions and structural configuration are important in evaluating performance. Some critics argue that Japanese institutions and business practices are unique among the industrial countries, although close examination has revealed similarities with the USA and Europe. Various forms of loose relationships between corporations (keiretsu) have been of particular interest to researchers.

The yen has appreciated with respect to the US dollar since 1971. In mid-1994, the yen became 100 to one dollar, and then in the spring of 1995, the value reached 80 yen per dollar. In less than a quarter of a century, the value of the yen against the dollar more than quadrupled (less than one quarter of 360 yen now purchases one dollar). Even with this appreciation of the yen, Japan has maintained large external surpluses throughout the 1980s and 1990s, except for brief periods immediately after the two oil crises.

The Japanese economy in the second half of the 1980s was known as the bubble period - sharp increases in asset prices, such as stock prices and land prices. In many places land prices tripled or quadrupled over a few years. However, asset prices declined in the first half of the 1990s, and by 1995, price levels had returned to pre-bubble levels. This had various consequences, including the appearance of a large number of non-performing loans among the commercial banks.

Takatoshi Ito