Economy of Japan

Japan's industrialized, free-market economy is the world's third-largest by purchasing power parity (PPP) after the United States and the People's Republic of China, and second-largest by market exchange rates. Its economy is highly efficient and competitive in areas linked to international trade, although productivity is lower in areas such as agriculture, distribution, and services.

Government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation have helped Japan advance with extraordinary speed to become one of the largest economies in the world.

Their reservoirs of industrial leadership and technicians, well-educated and industrious work force, high savings and investment rates, and intensive promotion of industrial development and foreign trade have produced a mature industrial economy. Japan has few natural resources, and trade helps it earn the foreign exchange needed to purchase raw materials for its economy.

Distinguishing characteristics of the Japanese economy include the cooperation of manufacturers, suppliers, distributors, and banks in closely-knit groups called keiretsu; the powerful enterprise unions and shuntō; cozy relations with government bureaucrats, and the guarantee of lifetime employment (shushin koyo) in big corporations and highly unionized blue-collar factories. Recently, Japanese companies have begun to abandon some of these norms in an attempt to increase profitability.

For three decades, Japan's overall real economic growth had been spectacular: a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s.

Growth slowed markedly in the 1990s largely due to the after-effects of over-investment during the late 1980s and domestic policies intended to wring speculative excesses from the stock and real estate markets. Government efforts to revive economic growth have met with little success and were further hampered in 2000 to 2001 by the slowing of the global economy.

Sliding stock and real estate prices marked the end of the "bubble economy" of the late 1980s, and ushered in a decade of stagnant economic growth. Real GDP in Japan grew at an average of roughly 1.5% yearly between 1991-1999, compared to growth in the 1980s of about 4% per year. Growth in Japan throughout the 1990s was slower than growth in other major industrial nations, and the same as France and Germany.

Japan endured periods of recession around the turn of the millennium, exacerbated by recession in the United States, but from 2003 began to grow strongly again at 2.0% and this rate has held steady through 2004. The economy saw signs of strong recovery in 2005. GDP growth for the year was 2.8%, with an annualized fourth quarter expansion of 5.5%, surpassing the growth rate of the US and European Union during the same period. Unlike previous recovery trends, domestic consumption has been the dominant factor in leading the growth. Hence, the Japanese government predicts that recovery will continue in 2006.