Economy Profile :
GDP: US$3927 billion
World GDP ranking: 2nd
GDP per head: US$31,451
Annual growth: 0%
Inflation: 2%
Major industries: Motor vehicles, Heavy machinery, chemicals etc. etc.

Postwar Recovery :
For some years following Japan's defeat in World War II, the nation's economy was almost totally paralyzed from wartime destruction, with severe food shortages, runaway inflation, and rampant black-marketeering. The nation had lost all of its overseas territories, and its population had soared beyond the 80-million mark with the addition of some 6 million repatriates from abroad. Factories had been burnt down in air raids. Domestic demand dropped with the halt of military procurements, and overseas trade was restricted by the Occupation forces. But the Japanese people set about rebuilding their war-devastated economy, initially assisted by rehabilitation aid from the United States. By 1951 the gross national product had recovered to the 1934-36 level. Population growth inhibited the recovery of the nation's per capita income, but by 1954 this indicator also had regained its 1934-36 level in real terms. Demobilized military personnel and returning civilians joined the labor force, providing an ample supply of workers for economic reconstruction in the early postwar period.
Various social reforms carried out after the war helped shape a basic framework for subsequent economic development. The postwar demilitarization and the prohibition of rearmament written into the new Constitution eliminated the heavy drain of military spending on the nation's economic resources. The breakup of the zaibatsu (large business trusts) set loose the forces of free competition, and the ownership of farmland was redistributed on a wholesale basis among former tenant farmers, giving them fresh incentives to improve their lot. Barriers to labor union activities were also removed, with the result that workers' job security became better protected and the way was opened for a steady rise in wage levels.
Under the "priority production system," stress was placed on increased output of coal and steel, the two main focuses of the nation's industrial endeavor. An upswing in steel production laid the foundation for an overall takeoff of production, featuring a surge in capital investment sustained by the recovery of consumption. Production subsequently increased not only in the key material industries, such as steel and chemicals, but also in new industries producing consumer goods, such as television sets and automobiles.
Repid Economic growth :
Japan's economy continued to expand rapidly from the mid-1950s through the 1960s, experiencing only two short recessions, in 1962 and 1965. The annual growth rate averaged close to 11% in real terms for the decade of the 1960s. This compared with 4.6% for the Federal Republic of Germany and 4.3% for the United States in the period from 1960 to 1972, and it was well above twice Japan's own average prewar growth rate of about 4% a year.
It is generally agreed that the rapid expansion of Japan's economy from the late 1950s through the 1960s was powered by the vigorous investment of private industry in new plant and equipment. The high level of savings of Japanese households provided banks and other financial institutions with ample funds for heavy investment in the private sector. The upsurge in capital spending was associated with the introduction of new technology, often under license from foreign companies. Investment for modernization made Japanese industries more competitive on the world market, created new products, and brought Japanese enterprises the benefits of mass production and improved productivity per worker.
Another factor behind Japan's economic growth during this period was the availability of an abundant labor force with a high level of education. Reasonably large numbers of young people entered the labor force every year, and there was also a heavy migration of agricultural workers to manufacturing and service jobs located mostly in the larger cities.
As best exemplified in the 10-year Income-Doubling Plan announced in 1960, the Government's economic policies at the time aimed to encourage savings, stimulate investment, protect growth industries, and promote exports. Japan benefited from an expansionary world economic climate and the availability of an abundant supply of relatively cheap energy from abroad throughout this period.
After a short recession in 1965, the Japanese economy enjoyed a long period of prosperity until around the summer of 1970, with the real growth rate during this period averaging close to 12%. The main factor behind this growth was rising capital investment, used for major outlays designed to bring about economies of scale, build additional facilities to increase export capacity, and acquire equipment needed to respond to changes in the economic and social environments, such as labor-saving tools and pollution-cutting devices. Increases in exports due to the stronger price competitiveness of Japanese products also supported the sustained rise in business activity.
Economy at a crossroad :
With the rapid expansion of its GNP, by 1968 Japan had come to rank second only to the United States among the market economies in terms of national economic scale. At the same time, however, this fast growth gave rise to various problems and imbalances: a relative delay in modernizing such areas as agriculture and smaller businesses; a sustained upward trend in consumer prices; a shortage of housing and infrastructure like roads and other facilities for daily use; environmental pollution and the destruction of nature; and the depopulation of rural areas and overcrowding in the cities.
Japan's sustained prosperity boosted its international standing, but the rapid increase in its exports and the growing surplus in its balance of payments led to increased moves toward protectionism in other countries. Changes in the international and domestic circumstances surrounding the Japanese economy that had built up quietly during the latter half of the 1960s suddenly surfaced in the period from 1970 to 1975. In August 1971 the United States announced the suspension of the dollar's convertibility into gold, in effect bringing an end to the Bretton Woods international monetary system, which had been one of the major pillars supporting the economic development of the free world in the postwar period. In February 1973 the world's major countries, including Japan, switched to a system of floating exchange rates. The turmoil in international monetary affairs contributed to a worldwide bout of inflation.
Within Japan, inflationary tendencies were aggravated by the loose monetary policies adopted to stimulate economic activity and to reduce the country's current account surplus. The first oil crisis, in the fall of 1973, fanned the flames of inflation even higher, and consumer prices rose more than 20% in 1974.
In response the Government raised interest rates, cut back on public investment, and took other steps to rein in total demand, causing a sharp drop in economic growth. Real growth in fiscal 1974 (April 1974-March 1975) fell to -0.5%, and the country found itself in the most serious economic straits it had experienced since the early postwar years. The oil crisis highlighted the fragility of Japan's economy, which had come to rely heavily on imported oil as a source of energy. In the years that followed, economic activity recovered somewhat but never reached the levels of the rapid-growth period. Moreover, the fiscal picture was clouded by the fall in tax revenues that resulted from the sluggishness of the economy. In its supplementary budget for fiscal 1975 the Government was forced to resort to deficit financing for the first time since the war, and the budget remained in the red until fiscal 1990.
Late in 1978, just as Japan was finally showing signs of recovering from the effects of the first oil crisis, the revolution in Iran sparked a second round of oil price hikes. Learning from its experience in the first crisis, the Government countered quickly with tight money and other steps to keep inflation from getting out of hand, and by the summer of 1980 prices had more or less stabilized. But the economy entered a recessionary phase as businesses cut inventory levels and reduced capital spending and as individuals reduced their consumption spending and housing investment. High interest rates in the United States further prolonged the recession in Japan.
The double-digit growth rates that the Japanese economy had maintained during the 1960s and early 1970s ended with the first oil crisis, and growth rates of less than 4% were common after the second oil crisis. Japanese industry, facing dramatic increases in both energy and labor costs as a result of the crises, made desperate efforts to reduce energy and labor requirements and to introduce new technology. These efforts have actually placed Japan in a stronger competitive position internationally than before the crises.
In the early 1980s a global economic recession caused oil consumption to slump and sharply weakened the solidarity of the Organization of Petroleum Exporting Countries. OPEC cut its posted prices in March 1983, marking the start of a period of cheaper oil.
The combination of these developments with a weak yen and a recovery in the U.S. economy had a beneficial effect on the Japanese economy in the early 1980s. Dramatic increases in private-sector capital investment and growth in export sales finally brought the economy out of the long tunnel of recession; real growth climbed to 4.1% in fiscal 1984 and 1985.