But with increase in wages ushered in by massive industrialization, a break down of the social structure due to western influence which had an impact on the employment pattern (previously a Japanese employee stayed with a company for his life, and the company took care of him so well that even during times of layoff, he was loaned to another company, rather than being retrenched. Also, companies encouraged and workers prefered to educate and employ the next generation as per the company needs. It was more of a life long partnership) and the reluctance of the Japanese to take the lead in the Services Sector led to the gradual decline of Japanese Economy. By the second decade of the new millineum Japanese economy was in deep trouble.
The Japanese product, though superior in quality, was priced higher than those made in Taiwan or Vietnam or China. It lost its competitive edge in electronics to Korea and manufacturing edge to China. Unfortunately for them, during this period, the consumer preference world over started changing. The product life cycles became shorter and shorter, and consumers wanted good (not the best quality) products that are less expensive but would last at most a year or two. This went against the concept of Japanese products that were of the highest quality lasting longer, but were expensive. When they started compromising on quality for cost, they ended up in big trouble like Toytota did recently. Over the period of time Japan had started accumulating debt. The Country was being run more and more on debt, and it was falling into a debt trap. By 2010, the Public Debt of Japan had reached an alarming 196.4% of the GDP (compare this with US - 58.9%, Germany - 74.8%, India - 55.9%. Even the beleagured Greece had only 144% and Italy 119%. Japan was second in the list, below Zimbabwe) and its fiscal deficit was 9.4%. Both unsustainable in the long run. Just prior to the Earth quake, the rating agencies were planning to downgrade the rating of Japan, which would have made it difficult and more expensive for them to get additional debt.
By the beginning of 2011, Japanese economy has been virtually red flagged. The unemployment rate was at a high at 5%, as against the long term average of 2.6%. Despite the interest rate being zero, the GDP was showing a negative growth rate (The GDP growth rate was -5.2% in 2009-10). The inflation was 0%, which is not good news, as a minimum level of inflation is required to encourage producers to invest in additional production.Even the exports were sluggish. Japan, like a typical Asian Country, saves more internally than it spends, leading to less reliance on the local demand, but more on the foreign demand.
It was in the above scenario that the Earth Quake and the Tsunami struck. The loss, in human terms, social terms and in economic terms have been huge. With the blast in the reactor adversely affecting the electrical supply, manufacturing could be badly hit. And food inflation is likely to be high, as the epicentre of the Tsunami were essentially the region which was known for agriculture. In the short run, the Japanese economy could be adversely affected.
But there is a ray of hope amidst the pall of gloom. Japan will require massive reconstruction. This means large scale construction activities. Demand for Cement and Steel will go up. And this would also lead to more jobs. More jobs means more wages and hence more money in ciculation, which in turn translates to more demand for products and services. The Japan Central Bank has already pumped in $ 184 billion into the market post earth quake. This is to facilitate lending for reconstruction. Add to this the huge amount of financial aid to be received from all over the world. We could see the Japanese economy reviving in the medium term.
Japanese people are resilient, if not anything else. National catastrophes like the one we saw last week tends to bring out the patriotism in people. They tend to work harder and longer. Remember, this was a country battered and bruised after the World War II. They were shocked to submission by the two atom bombs that destroyed Hiroshima and Nagasaki. But from the ashes of those cities, they built the modern Japan, made it the second largest economy in the world (till recently) and gave the world the wonderful concepts of quality management.
Let us hope they show the same spirit this time around too. That is the best way for Japan to pay homage to its earthquake/tsunami victims.
