This archipelago, nestled serenely in the Pacific Ocean towards the Far-East, has a history, culture, and an economy that belies its diminutive footprint. Emerging from the embers of World War II, and levitating to the enviable position of the second-largest economy in the world after the U.S., Japan is the archetypal economic miracle of contemporary times. Barely the size of California, Japan ranks tenth globally according to headcount, with a population density over ten times that of the U.S. Housing 10% of the world’s active volcanoes, and frequently tormented by earthquakes, this legendary nation has a legacy of war, destruction, and crusades in its annals. Its capital, Tokyo, is the largest metropolitan area in the world with over 30 million residents. True to its national name Nippon, which means “the land of the rising sun”, Japan has overcome a host of chinks in its armor to ascend to a gloriously incandescent yet arduous stature in the modern-day global vista.

History

An imperial legacy laced with conflict

Since times immemorial, the sun has been the all pervasive symbol of power, inspiration, sincerity and passion in this oriental country. Ancient legend believes the emperors of Japan to have descended from the sun goddess. Even the Japanese flag, known as Hinomaru, or sun disc, sports a center red disc epitomizing “the circle of the sun”. Recorded history in Japan can be traced back to over 1600 years, when disparate clans and gentry families vied for power in the country for several centuries. During this time, some celebrated warrior clans, popularly known as Samurai, gained recognition, and successive Shoguns or military dictators from these clans ruled in Japan up until the middle of the 19th century.

The feudal regime of the Shoguns was brought to an end when the Meiji era commenced in Japan in 1867. The Meiji era, which means “enlightened rule”, lasted for the next 45 years and proved to be a catalyst in catapulting Japan from its primeval status to a modernized world power. While the Meiji emperor was the symbolic leader of the Meiji restoration, during his regime, power was wielded by the Genro- an oligarchy comprised of the most influential people of Japan from the military, political, and economic spheres. Within a generation, the country came into its own and was acknowledged as a global power to reckon with.

During the first half of the 20th century, Japan embarked upon an ambitious strategy of aggressive militarization and an expansion of its empire. The country was engaged in military conflicts with China, Russia, and also consolidated its territorial holdings by gaining control over Taiwan and Korea. The suffering and distress caused by these acts of aggression in Japanese occupied territories received widespread condemnation from around the world. This also prompted the U.S. to impose an oil embargo on Japan. The subsequent Japanese bombing of the U.S. naval base at Pearl Harbor in December 1941 brought the U.S. into World War II. Japan’s imperial pursuits culminated with the cessation of the world war and the U.S. bombing of the Japanese cities of Hiroshima and Nagasaki in August 1945.

Ultimately, Japan’s absolute monarchy system was replaced by a liberal democratic set-up and the country transitioned to a constitutional monarchy with a parliamentary form of government. The Emperor of Japan today is a symbolic head of state with limited powers restricted to diplomatic occasions. Power is primarily held by the Prime Minister and other elected members. The Liberal Democratic Party has been in power since 1955, except for a brief spell of a coalition government in 1993. Emperor Akihito is the reigning emperor of Japan, and Prime Minister Yasuo Fukuda is the current head of the government.

Culture

Multi-hued culture

Japan boasts of a rich cultural heritage which finds expression in a spectrum of art, crafts, cuisine and traditions. It has evolved considerably from the original Jomon culture (14,000 BC -400 BC) to the contemporary mélange which incorporates influences from Asia, Europe, and North America, and yet retains a distinct flavor of its own. Whether it is craft forms like ikebana, origami, and ukiyo-e, performances like kabuki and noh, or a distinctly aesthetic style of gardens, architecture or paintings, the eclectic contributions of this culturally effervescent country are admired the world over. The country has also been a fertile ground for various forms of martial arts like sumo, judo,karate, and kendo. Sushi and sashimi are epicurean examples of how the sophisticated and refined Japanese culinary delights are enjoyed by connoisseurs transcending regions all over the globe.

A Maiko, or apprentice Geisha in a traditional Japanese kimono. A young girl may become a Maiko at 16, and then must undergo five years of training to become a full-fledged Geisha.

The much famed and celebrated Geisha, a traditional female Japanese entertainer, is deep-rooted in age-old Japanese culture. The Geishas belong to an elegant and elite cultural class, skilled in long-established and venerable Japanese performing arts like classical music and dance, as well as customary practices, such as tea ceremonies. However, with interest in classical Japanese arts gradually fading in contemporary times, and the strains of a slowing economy taking their toll, the Geisha culture in Japan is paling into oblivion in the modern world.

Buddhism and Shintoism are the primary religions practiced by the 84% of the Japanese, and their teachings are deeply interwoven into the everyday life of the people. The Japanese are also deeply influenced by Confucianism, an ancient Chinese ethical and philosophical system, which entails the practice of proper forms of conduct, especially in social and familial relationships.

Economy

Rise of a behemoth in the world economy

For a country that had been ravaged by war, and was plagued with the animosity of most of the leading countries worldwide, Japan has indeed traversed a daunting path to emerge as a global economic force. With an economy in 1951 barely 5% that of the U.S. and a GDP half the size of West Germany, Japan has scaled astronomical heights and today prides itself as the second largest economy in the world. Currently, the Japanese economy is 33% of the U.S. economy, 1.5 times that of Germany and 1.8 times the size of the U.K. economy. Moreover, it is not just the extent, but also the pace of the post-war economic recovery and the resounding growth thereafter that continues to amaze the rest of the world.

Japanese industry and infrastructure, which were virtually destroyed during the World War II, were systematically rebuilt to transform the country into a global economic leader by the mid 1960s. A critical factor conducive to economic growth in Japan was the fact that it had experienced phenomenal economic expansion in the Meiji era just preceding World War II. In the decade before World War II, the economy averaged a growth rate of 5% per year, which was one of the highest growth rates in the world, though in terms of the level of economic development, it still lagged behind the U.S., Canada and most of Western Europe.

While Japan also had a skilled work force, both in the technical and managerial aspects, efficiency in industry was lacking, due to the absence of modern machinery and equipment. Post-World War II, the seven-year U.S. occupation of Japan proved to be a blessing in disguise as the Japanese received $2 billion in aid from the U.S. in the form of food, fertilizers, petroleum products and industrial materials. The country was also saved from spending on defense, adhering to the World War Peace Clause that asserted that Japan would not maintain its own military forces, and U.S. would provide it military protection if necessary. Moreover, Japanese families saved extensively between 1950 and 1960, with funds channeled through the banking system to finance business and investment in the economy at relatively low rates of interest.

Japan’s position in the league of the world’s most affluent nations was cemented with its Organization of Economic Co-operation and Development (OECD) membership coming through in 1964. The same year, Tokyo hosted the Olympic Games signifying a fundamental shift in how the world perceived Japan. This was the first time that the Olympic Games were held in a non-western Asian country and it bolstered the fact that the world was gradually acknowledging Japan as a key player in the global landscape. Astonishingly, the erstwhile war torn country had firmly launched itself into a growth trajectory of over 10% in the decade spanning the 1960s.

Underpinnings of an economic marvel

It is a matter of pride for Japan that it houses one of the most educated, skilled and healthy human populations in the world. Ranking eighth globally in terms of human development and boasting the highest life expectancy in the world, the country has successfully offset the disadvantages of having limited natural resources and arable land. While the unparalleled economic recovery of Japan after World War II was propelled by the manufacturing sector, primarily by the automobile and the consumer electronics industry, the economy has progressively become more broad-based today.

Today, the service sector contributes to over 72% of the country’s GDP, while industry comprises 26% of the economy. Out of the 67 Fortune 500 companies (2007) that Japan takes prides in, 37% hail from the services sector. Traditionally, Japanese firms have excelled in process innovation and excellence, delivering quality products that have always inspired confidence worldwide. The country has nurtured and developed world leaders in automobile production and automotive engine technology.

One of the main reasons for the perceptible shift to a service-oriented economy was the advancement of information technology, and the subsequent growth of supporting industries which deliver software and information. As incomes have progressively risen, consumer demand has over a period of time witnessed a significant shift towards services. Ongoing globalization has also resulted in a dispersion of manufacturing activities of Japanese companies to cheaper locations across the globe. Overseas production accounted for around 15% of total production in 2005, and a whopping 63% of Japanese companies in all manufacturing industries carried out overseas production.

Exports have always been one of the critical drivers of the Japanese economy, and the country has been consistently clocking a trade surplus since 1981. Not surprisingly, this robust trade performance has enabled Japan to have the second largest stock of foreign exchange reserves in the world. While the domestic economy is witnessing a paradigm shift towards the services sector, Japan’s external demand is still driven by manufacturing, as over 65% of its exports are comprised of transport equipment, electrical machinery, and general machinery.

Japan has also emerged as a global financial center, with the Tokyo Stock Exchange as the second largest stock exchange in the world, next to the New York Stock Exchange.

Stumbling blocks slacken pace

Until the mid-1980s, Japan's economy enjoyed favorable conditions and stable growth, with low inflation and a low unemployment rate. As the economy matured, growth rates averaged 5% in the 1970s and 4% in the 1980s. However, the appreciation of the yen in 1985 rendered the export sector uncompetitive, causing a moderation in growth from 4.4% in 1985 to 2.9% in 1986. The government tried to provide an economic stimulus with a drastic easing of the monetary policy, through deep rate cuts. This action boosted investment as well as corporate profits, and these conducive conditions caused excessive funds to flow into the stock market and the real estate sector, thereby causing abnormally inflated increases in asset values. The government, in order to tackle this financial bubble, subsequently followed a stringent monetary policy and increased rates.

Following the rate hikes, stock prices plummeted in 1990, followed by sharp declines in real estate prices. The Nikkei stock market index fell more than 60% between 1989 and 1992, and real estate prices plunged a whopping 80% between 1991 and 1998. The gross domestic product (GDP) of the economy stagnated in the 1990s, turning negative in 1998. By 2000, the unemployment rate rose from 2.1% in 1991 to 4.7%. The financial system of the country also witnessed an unprecedented collapse- huge bad debts were created in the loan portfolios of financial institutions because corporate borrowers suffered serious losses due to declining stocks and real estate prices.

To revive the sagging economy, the government initiated fiscal stimulus packages or spending programs totaling over 100 trillion yen ($947 billion) in the 1990s, resulting in the skyrocketing of the gross public debt and the budget deficit. To foster economic recovery, Japan also followed an easing of its monetary policy, with short-term rates reduced to 0 between 2001 and 2005. After bottoming out in 2002, the Japanese economy staged an export-led recovery, ending an extended period of economic stagnation and breaking a vicious cycle of falling prices and financial instability. GDP grew by 2.6% in 2005 and 2.2% in 2006, marginally slowing to 2% in 2007. This expansion is likely to continue in the next two years with GDP expected to grow between 1.5-2%. The unemployment rate also dropped from 5.4% in 2002 to 3.8% in May 2007. As a testimony to its resilience, the Japanese economy weathered this prolonged deceleration and has retained its status as the second largest economy in the world.

Braving the perils of a globalized world

The subprime crisis, which originated in the U.S. in 2006 and the subsequent weakening of the global economy will most likely have an impact on Japan, which is highly leveraged by its external sector, a potential Achilles heel. Encouragingly, while both the U.S. and the E.U. regions are significant export destinations, the country also has a strong export presence in the emerging and rapidly growing economies of Asia, especially China. This factor will mitigate the risks for this intensely outward-oriented economy, which aspires to sustain a growth trajectory.

The onslaught of globalization and greater integration in the global economy has also posed many challenges for Japan. While Japan has long been the undisputed leader in the manufacturing domain, the forces of liberalization and lowering of trade barriers across the globe have resulted in an intensely competitive environment constituted largely by emerging economies the world over. Japan’s demographic structure also reveals a declining as well as an aging population. The average age of the population is currently 41 years, and will most likely escalate to 53 years by 2050. In order to augment these shrinking domestic markets, Japan has to increasingly seek markets beyond its geographical domain. Firms operating within Japan will also have to increasingly orient their products and services to the gradually changing demographic profile of the country.

Innovation will be another key to surviving and thriving in a competitive environment. While this is definitely a core strength, the country will have to move beyond process innovation. The Japanese will have to strengthen product innovation, organization, business models, and boost the application of information technology to complement product offerings. The fact that Japan is only second to the U.S., in terms of the number of patents registered with the United States Patent and Trademark Office (USPTO), is a telling sign that the country will continue to build on this key strength.

Japanese firms, which have been global leaders in the manufacturing arena, will also need to actively diversify their operations, especially into services; or alternatively, outsource certain business operations to retain cost competitiveness in world markets. Currently, Japan is the third largest outsourcer of business operations, after the U.S. and Germany.

Surprisingly, while Japan has a strong outward orientation, and its companies boast of a worldwide presence, the nation has insufficient levels of import penetration, inward foreign direct investment (FDI) flows, as well as the presence of foreign workers, when compared to its developed country peers. The World Investment Report (2007) classifies Japan as an economy with high inward FDI potential but low FDI performance. The country needs to galvanize itself to attract much more foreign participation in its domestic sectors, especially the fast growing services sector, where productivity and efficiency need to be enhanced.

The sun never sets

Japan is a resilient country, with an undying spirit to excel. With renewed vigor, the nation has ascended to glorious heights after each setback that it has encountered. While the first half of the 20th century has been a witness to its emergence as a contemporary global power, as well as its subsequent virtual destruction, the latter half saw the country’s spectacular ascent yet again, scaling the global economic landscape. The onset of the 21st century has seen the country successfully battle a protracted recession, firmly entrenching its position as a colossal economic force. Clearly, the land of the rising sun has matured but not aged, and seems poised to dazzle the world with its radiance yet again.