Pummeled by a strong currency and two decades of deflation, Japanese companies are shifting production to China and elsewhere. Japan's industrial core is eroding and threatened with being hollowed out, as happened in parts of the U.S. rust belt. Long ago, Japan ceased being anyone's economic model. Growth figures tell the tale of relative decline. From 1953 to 1973, a still rebuilding Japan grew by 9 percent annually. From 1974 to 1990 GDP growth slowed to 4.2 percent while from 1991 to present growth has barely been positive, averaging a mere .5 percent annually.
What went wrong? How did a nation with world-class companies, a highly educated work force, and a well-deserved reputation for efficiency and discipline descend into protracted decline?
The high point of the Japanese economy appears to have been 1989,
when property prices peaked and Tokyo's main stock market index reached a record high of 39,000. By 2007, the stock market had recovered to 18,000, but since then it has fallen another 50 percent to the current 9,000.
Meanwhile the exchange rate of the yen, regarded as a reflection of the nation's economic health, has steadily appreciated from the 227 yen to the dollar that prevailed in 1983 to a mere 78 yen to the dollar today. Phillip Suttle, chief economist at Washington's Institute of International Finance, believes the yen is overvalued by half and should trade in the range of 130 yen to the dollar. At any rate, the currency's rise has done little to reduce Japan's chronic balance of payments surplus. Japan remains the largest foreign holder of U.S. treasuries.
Since Japan's asset bubbles burst over 20 years ago
, policy makers have persistently fiddled with the levers of monetary and fiscal policy but their efforts have spectacularly failed. Meanwhile the brutal deflation that accompanied the bust persists. Falling prices have translated into massive wealth destruction.
Stop and go monetary and fiscal stimulus accomplished little. Consumer prices have declined for seven of the past 10 years.