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Japan’s Stagnationist Crises

Joseph Halevi teaches in the Political Economy Discipline at the University of Sydney and is associated with the Institut de Recherches Economiques sur la Production et le Développement (IREPD) at the Université Pierre Mendès France in Grenoble, France. Bill Lucarelli is a Lecturer in Economics at the University of Western Sydney (MacArthur), Australia. Contact the MR office for a full set of references.

The severe economic stagnation in Japan over the 1990s and into the present decade, is one of the most portentous developments in the recent history of world capitalism. In this article, Joseph Halevi and Bill Lucarelli account for the Japanese stagnation in terms inspired by the work of Paul Baran, Paul Sweezy, and Harry Magdoff. MR readers will find this article, which deals with the complicated issue of exchange rate fluctuations and their effect on national economies, more difficult than most articles that we publish on economics in the magazine. Yet we include it here because of its obvious importance and its clarity in describing a very complex set of global economic changes.

The Editors


In this article we will argue that the Japanese economic crisis is connected to a process of oligopolistic accumulation and to Japan’s role as the regional economic hegemon in East Asia. The combination of these two factors generates a classic Baran-Sweezy-Magdoff perspective on the crisis in Japan.

The Dynamics of Export-Led Profits

Manufacturing acted as the engine of growth in Japan’s post-war economic development. The expansion of manufacturing output created a virtuous circle of cumulative increases in output and productivity, which in turn, set in motion an expanding share of export markets. The Ministry of International Trade and Industry (MITI) developed a highly successful strategy of industrial targeting in heavy industry sectors such as steel, petrochemicals, automobiles, industrial machinery, and electrical machinery. Wage growth lagged behind economic growth, which increased the share of profits for future investment. At the same time, public investment in infrastructure was largely devoted to the provision of public goods for the private sector (e.g., transport, R & D, training, etc.) rather than to the funding of a social wage and public services (e.g., housing, welfare, recreation, etc.). This “skewed” development towards the capital-goods sector and exports at the expense of the wage-goods sector still characterizes Japan’s economic development.

Japan exhibited a type of development that was explicitly aimed at catching up with the more advanced industrial countries. The sequence has followed three stages since the Meiji restoration:

  1. Export of primary products and import of light industrial goods.
  2. Export of light industrial goods and import of heavy industrial goods and raw materials.
  3. Export of heavy industrial goods and import of raw materials.

Most of the development in the post-war period up until the 1980s was therefore driven by investment in heavy industries. These sectors exhibited large sunk costs and economies of scale, which acted as effective barriers to entry. Consequently, a highly oligopolistic industrial structure emerged, dominated by a few large keiretsu, like Mitsui, Mitsubishi, and Sumitomo. These large conglomerates exhibited a very hierarchical pattern through a subcontracting system with the small-to-medium sized enterprises (SMEs) or the chusho-kigyo. This structure still survives today, and the SMEs account for about 80 percent of the total labor force. However, their contribution to overall productivity is quite low, estimated at less than half of the levels of the larger firms. Japan’s industrial anatomy thus exhibits dualistic features in which the large conglomerates dominate the economy, while the growth of effective demand has been stunted by the relative neglect of the wage-goods sector.

State control over the banking system gave the authorities enormous leverage over investment. At the same time, restrictions were imposed on Japanese firms from raising capital by stock floatation or from foreign sources. The engine room of this “convoy system” of state-directed investment has been performed by the Ministry of Finance, which has also underwritten the financial viability of the major banks, and by the Bank of Japan. Competition was effectively regulated through administrative guidance in which the state encouraged the cross-ownership of shares between the big banks and the large keiretsu. Consequently, the flow and circulation of funds was usually through indirect finance supplied by the banks affiliated to each respective industrial grouping. The formation of a bureaucratic web of tacit “credit rights” was integral to the reconstruction of Japanese capitalism.

A high level of structural autonomy of the state from civil society was developed in the geopolitical context of the Cold War in which the Americans supported authoritarian and semi-authoritarian regimes as strategic “bulwarks” in their struggle against the perceived threat of Communism. Indeed, the Korean War boom and the Vietnam War promoted the rise of Japanese economic and regional power. At the same time, Japan enjoyed the benefits of the U.S. military umbrella, which had the effect of diverting potential military spending into investment in productive capacity. The United States also lifted the barriers to the transfer of technology. Japan could now take advantage of the dynamic economies of scale and assimilate both the codified and tacit knowledge embodied in foreign technologies.

The Onset of Crisis and Stagnation

Postwar economic development in Japan has been characterized by the outflow of capital. Persistent trade surpluses have led to the accumulation of foreign exchange reserves. Under a flexible exchange rate regime, the accumulation of surpluses has inevitably induced a secular appreciation of the exchange rate. Under normal circumstances this would tend to erode international export competitiveness. In Japan, however, the yen appreciation has been effectively countered with the export of capital through foreign direct investment (FDI). The Ministry of Finance has also been able to limit the extent of yen appreciation either through open market operations in concert with the Bank of Japan or by a tacit agreement with the U.S. monetary authorities.

For many years, the United States has been a debtor nation, that is, it imports more than it exports. Japan has used its trade surpluses, which take the form of a buildup of foreign currencies in Japan (dollars, for example, used to buy yen when people or businesses in the U.S. purchase Japanese goods) to accommodate the U.S. trade deficit. The U.S. must borrow money to finance its trade deficit, and the Japanese have been the primary lenders. Through its external surpluses, Japan has financed successive U.S. current account deficits either directly by purchasing U.S. bonds and securities, or indirectly by denominating its trade and overseas claims in the U.S. dollar rather than the yen. This tacit agreement between the Japanese and American monetary authorities has been based on the assumption that Japan would continue to recycle its trade surpluses by purchasing U.S. government bonds and securities. In return, Japan would have access to the U.S. domestic market, which would provide an expansionary impetus for Japanese export-led growth. This tacit reciprocity imparts considerable leverage to the Japanese monetary authorities over their U.S. counterparts and has been deployed as a bargaining weapon in trade negotiations.

In the long-run, the outflow of FDI can only provide a temporary respite to the process of economic maturity. Sooner or later, foreign assets generate income in the form of repatriated profits and dividends, which will be spent in the domestic market. Japan will inevitably cease to be a net capital exporter and become a “rentier” nation. This evolution has its antecedents in the decline of Pax Britannica last century and the relative demise of Pax Americana after the collapse of the Bretton Woods system in the early 1970s. In the case of the United Kingdom, industrial maturity was characterized by the outflow of capital, which promoted the industrialization of foreign rivals and eventually led to the U.K.’s industrial decline. The same general process contributed to relative U.S. decline in the period leading up to Nixon’s abandonment of the dollar’s convertibility into gold in 1971.

But unlike the United States, Japan has been very reluctant to relocate strategic high technology and knowledge intensive industries to their competitors in East Asia. Nor has it been willing to export its technical know-how and scientific knowledge. Japan’s major international competitive advantage lies in its sophisticated machinery and equipment sectors. Exports of electronics, integrated circuits, computers and mechatronics (industrial robots) have become the most dynamic growth poles over the past decade. In short, Japan has sought to capitalize on its leading role in the high value-added, low energy-using industries.

None of this, however, allowed Japan to escape the stagnation tendencies that normally accompany economic maturity. The current Japanese crisis has both a liquidity and an overaccumulation aspect. The liquidity crisis has its roots in the chain of events that led to the expansionary monetary policies enacted after the September 1985 Plaza accords appreciated the yen in relation to the U.S. dollar. The attempt to keep the economy up while the yen was rapidly appreciating led to the biggest build-up of excess liquidity in modern history. When the speculative bubble eventually burst in the early 1990s, the Japanese economy was effectively caught in a liquidity trap from which it has yet to recover. No matter how far the interest rate was lowered, it failed to reignite investment.

The overaccumulation crisis is due to the structural propensity to build productive capacity while experiencing a concomitant and relative diminution of effective demand. In a large industrialized country like Japan, the investment of the large oligopolistic keiretsu that dominate the Japanese economy depends on the level of effective demand, which determines the degree of utilization of productive capacity and the level of profits. The only components of effective demand presently keeping the Japanese economy afloat are government spending and net exports. In the absence of a recovery of domestic consumption, both of these components will ultimately reach their economic and political limits.

With the sharp yen appreciation after the Plaza accords of 1985, Japanese corporations accelerated their export of capital, mostly destined to East Asia, which had the effect of increasing aggregate profits. Indeed, by the late 1980s, most of the large keiretsu began to generate internal funds for investment and curtailed their traditional reliance on the Bank of Japan and the big banks. Deprived of their traditional sources of investment, the banks began to engage in reckless speculation in real estate and the stock market. At the same time, the Bank of Japan lowered interest rates, and the Ministry of Finance pursued an expansionary monetary policy after the October stock market crashes of 1987. This excess liquidity, however, had the effect of inducing a speculative financial “bubble.” The large keiretsu that had invested in extra capacity to meet the demand by the 1980s boom soon found that they were straddled with massive excess capacity. In 1989–1990, the Bank of Japan increased interest rates from 3.8 percent to 8.2 percent, which triggered the bursting of the financial bubble. Stock market prices tumbled by more than 60 percent from their peaks.

The high yen made Japanese wages simultaneously too high and too low. In terms of costs, wages were too high to compete against East Asian exports and sustain previous levels of manufacturing employment. From the standpoint of effective demand, however, wages were too low to absorb the excess capacity. Throughout the post-1985 period, Japanese corporations had sought to accelerate their exports in order to resolve their problem of domestic surplus capacity and counteract a falling profitability. The high yen after 1985 had a perverse effect in that capital could appropriate higher profits through a strategy of exporting capital to East Asia in order to then export goods from these production zones to Europe and the United States. The Japanese domestic market itself could not act as the engine of growth as long as real wages lagged behind productivity growth. The FDI provided low cost production sites in East Asia that enabled Japanese corporations to export to the high wage markets in Europe and the United States. In essence, Japan sought “to maintain its export-led growth strategy by ‘regionalizing’ it.”1

The Crisis of the Japanese East Asian Strategy: A Baran-Sweezy-Magdoff Perspective

Japan constitutes the very core of capitalist development in the East Asian region. It represents the source of growth from the productive and technological side; it does not, however, represent the main source of effective demand. The latter is provided by markets external to the region, in particular by the United States. East Asia therefore has a structural deficit with Japan. The ability to sustain this situation depends on the capacity to generate net export revenues outside the area itself. In the 1985-1995 period the decline in the value of the U.S. dollar and the consequent shift of Japan’s FDI towards Asia generated an even higher deficit for Asia vis-à-vis Japan. The pressure to find export markets outside Japan became stronger. In this context, the following must be borne in mind.

Precisely because they have all the structural inputs necessary to generate new machinery and equipment with which to produce new items, Japanese corporations are in a position to reap the benefits from the production of highly competitive, price-sensitive products, provided they are the outcome of technological innovations. Furthermore, Japan is the major supplier of capital goods to the East Asian region, including countries where FDI is small such as South Korea. In addition to capital goods and systems used in production, a great deal of the infrastructure in East and Southeast Asia (power stations, electricity grids, bridges, etc.), has been built using Japanese companies and their technological systems. These two factors, capital goods used in production and capital goods used in infrastructure, tie the whole of East and Southeast Asia to Japan’s productive system. This gives Japanese corporations structural and institutional dominance in the area without, at the same time, making Japan a major dynamic source of effective demand for the region.

The structural fault separating Japan from the rest of Asia has to do with the positioning of the Japanese economy in the framework of U.S. geopolitical presence in the area. Washington’s war in Korea jumpstarted the Japanese economy. Later, additional U.S. spending on direct transfer payments to Japan and the much greater expenditures engendered by the Vietnam War liberated the Japanese economy from the obsession with a structural deficit in the balance of payments. Exports rose quite rapidly through a strategy of industrial targeting, mostly because of high levels of domestic investment and output growth. Overall, however, Japan’s share of exports in national income was quite moderate, never exceeding 12 percent of the gross domestic product. By contrast in the 1930s—when industrialization was accompanied by imperialist expansion into China and by a heavy preoccupation to generate external revenues in order to pay for the importation of strategic products—exports exceeded 18 percent of GDP.

Compared to Japan, the other major Asian countries of capitalist industrialization—South Korea and Taiwan—did not follow the same pattern even when they aimed at a policy of significant self-reliance in relation to foreign direct investment inflows. Their industrialization involved a high share of imports in relation to national income, a pattern that they did not change once they reached higher levels of development and of per capita income. In the fifteen years preceding the 1960s and the Kennedy-Johnson invasion of Vietnam, South Korea and Taiwan tended to be import-dependent on the United States and export-dependent on Japan, reflecting, in relation to the latter, a colonial pattern of trade. The situation was radically and abruptly changed with the rapid industrial spurt that began in the early sixties in conjunction with the renewed American spending in the area connected to the intervention in Vietnam. The United States became the export market for the area as a whole, inclusive of Japan, while South Korea and Taiwan imported mostly from Japan. This process recreated a Japanese economic zone in Asia. The heavy deficit vis-à-vis Japan implied that profitable export markets could be found only in areas external to the region, notably in the United States.

This pattern has been reinforced by the growth of Japanese FDI in Thailand, Malaysia, and Singapore. At a first glance, the People’s Republic of China—which swiftly inserted itself into a hitherto purely American-Japanese zone—appears not to follow the above pattern. Yet, if Hong Kong is included, and it must be since it is a major gateway for the trade of the People’s Republic, the combined current account position of China vis-à-vis Japan is negative.

By the end of the 1960s the Japanese economy was already approaching the maturity stage. As pointed out by Paul Sweezy in 1953, maturity is attained when surplus labor from agriculture is dwindling and the industrial sector becomes as a whole a modern sector with up-to-date capital stock. Expansionary needs can be met out of depreciation funds with little new net investment, since it is no longer necessary to build up productive capacity from scratch. Under these conditions accumulation can be maintained by realizing profits abroad, or alternatively, profits and accumulation will have to give way to a higher share of wages and social consumption. This did not happen since the dynamic of real wages seldom kept pace with that of productivity. Indeed, from 1973 onward real wage expansion always fell short of productivity growth.

U.S. spending on its wars in Asia, while enabling the rebirth of capitalist Japan and the creation of a Japanese economic zone, also brought about the crisis of the dollar-gold based international monetary system. Nixon’s 1971 proclamation of the end of the fixed parity system rooted in dollar convertibility into gold initiated a confrontation between the dollar and its rivals associated with the resulting devaluation of the American currency. That confrontation impacted Japan more than Europe. During the last years of the 1960s, Japan began to accumulate a balance of payments surplus. This meant that the external sector began to generate substantial net profits for Japanese corporations. However, the demise of the fixed parity system and the ensuing speculative push on raw material and oil prices, thwarted thereafter the ability of Japanese corporations to expand profits by means of exports.

Between 1973 and 1980 Japan suffered a significant decline in the share of its external surplus in GDP when it averaged no more than 0.3 percent of GDP (OECD Historical Statistics 1986, 1996). Throughout the 1970s, Japan had an endemic crisis of unused capacity making its economy more vulnerable than that of Germany. Germany was able to protect the profits realized abroad from the devaluation of the dollar by using its hegemony in Europe. Germany was, and is, at the very heart of Europe’s industrial structure. Thus German exports were essential for the normal functioning of every aspect of Europe’s productive apparatus.

Although East Asia began to attract significant foreign direct investment from Japan precisely in those years, it could not as yet act as a hinterland sustaining the realization of profits because of the still limited level of development of those countries. Japanese corporations responded to the crisis by enforcing a tight wage policy and through further restructuring, which, however, compressed domestic demand relative to the growth of productive capacity.

The temporary solution to Japan’s overaccumulation crisis came from the United States’ geo-strategic political economy. The Reagan years of renewed military spending and budget deficits, coupled with restrictive monetary policies and high interest rates, lifted, in a selective manner, the level of demand in the United States, revalued the U.S. dollar, and enabled an overall expansion of exports from both Japan and East Asia. This is the period in which a virtuous circle was established. In addition to Japanese exports to North America, Japan’s exports were needed to sustain East Asia’s regional and, especially, extra-regional exports. The region rapidly became a sizeable Japanese hinterland and, by 1995, the majority of Japan’s surplus in the balance of payments was realized within the region. In fact, the economic synergy between Japan and East Asia increased when the economic conflict with the United States was renewed by the devaluation of the dollar after the Plaza accords were signed in New York in September 1985.

This time the devaluation of the dollar continued relentlessly for a good decade and it reflected the change in the perception by the United States of its role in world capitalism. Although seesawing since the beginning of the defeat of the intervention in Vietnam, Washington continued for nearly two additional decades to operate as a guarantor of the economic and political interests of European and especially of Japanese and Asian capitalism. During the Nixon–Carter period, Washington used the devaluation of the dollar to reappropriate portions of profits surrendered to Japanese and European corporations. In so doing it opened a series of conflicts with Japan. But at the same time, as eloquently told in a most important book by Jung-En Woo, Washington made clear to Japan its willingness to undertake a full-fledged rescue operation of South Korea which then was mired in a deep financial crisis.2

Japan’s power position in East Asia is not therefore independent from the geopolitical and geoeconomic strategies and perceptions of the United States. During Reagan’s first term in office, another wave of concessions, intertwined with the deregulation policies pursued domestically, had favored Japan, East Asia, and China. And everything that stimulates production and exports in East Asia and China stimulates Japan’s exports and direct investment to the region. Japan, while a regional economic power (even hegemon), is not in itself the fulcrum of a regional system of production and coordination because the whole area, including Japan, is still firmly anchored to the economic system centered in the United States.

The devaluation of the U.S. dollar in the wake of the Plaza Accords was a deliberate instrument for furthering the unilateralist U.S. strategy of opening up markets for U.S. corporations and its main target was Japan. The automobile war, the telecommunication war (Motorola), and the microchips war, were the salient events during a decade of a seemingly unending devaluation of the U.S. currency vis-à-vis the Japanese yen. Although the outcome of these confrontations is not so clear-cut, it did put the Japanese leadership on a constant defensive basis thereby weakening the cohesion between the political, bureaucratic, and business components of the ruling classes of these two countries.

On Japan’s American front, the devaluation of the currency could not but have negative effects on the profits of Japanese corporations. Financially it devalued dollar-denominated assets; productively it put a further squeeze on the profit margins earned on those products exported to the United States for which there was a U.S. or European competitor. Although the devaluation of the dollar stimulated the flow of Japanese FDI into the United States, the persistent devaluation did not help the links between Japanese transplant factories in the United States and the home base. The higher yen costs of intermediate products and technologies imported from the home company could not be fully passed on to final prices. To be sure, Japanese corporations operating in the United States might have become more or less autonomous units like the U.S. multinationals in Europe, and thus less dependent on imports from their home companies. Yet one of the main features of Japan’s multinational investment is the tight links it maintains with the homeland as an engineering, productive, and export base.

In the end, East and Southeast Asia turned out to be the safest route to the maintenance of economic dominance for Japan. However, a safe zone can also become a stagnant area. The dynamism of the area was tied to its capacity to export, mostly to the United States. Exports, and expectations about exports, fueled investment in the form of FDI into the East Asian region, which meant imports from Japan as well as domestic growth which also required imports from Japan. Under the conditions of a depreciating dollar, the mechanism could operate successfully because of the particular position the U.S. currency had in the monetary and exchange rate arrangements of the countries of the area. The pegging of the area’s currencies against the dollar stimulated the pattern of expectations concerning exports and, consequently, the flow of Japanese FDI. Thus even the economic synergy between Japan and its zone depended upon factors in which the United States political economy played a key role.

In fact, the synergy between Japan and East and Southeast Asia depended on the special circumstances that permitted those countries to generate extra-regional exports. The reason why the Japanese economy itself could not become the hub of a regional production alliance is due to two factors. Although Japan successfully utilized its regional economic dominance in order to realize net exports, it was both unable and unwilling to guarantee the stability of the region. Moreover, its ruling classes should have understood that a continuing depreciation of the dollar would further undermine Japan’s national economy, preventing it from squaring the circle.

The disruptive effects caused by the devaluation of the dollar on the whole financial and productive system of Japan were understood instead by the American authorities who in June 1995 began to talk the dollar up. The following three years witnessed an appreciation of the American currency vis-à-vis the yen which ended the synergy with the Asian zone. In other words, from June 1995, Japan’s export expansion into its East Asian and Southeast Asian hinterland came into conflict with the economic viability of its own national sphere. During the decade of the devaluation of the dollar relative to the yen, the pegging of the east Asian currencies to the dollar acted both as an anti-inflationary device and as a stimulus to exports. Japanese corporations literally built their regional power on the asymmetric movements of the area’s currencies relative to the yen.

Commentators have pointed out that the peg was already being undermined by the recurrent devaluations of the yuan, the Chinese currency. Few stressed that Japan’s exports and FDI to China were actually benefiting from the success of China’s export drive and competitive devaluations. The economic power of Japan in the region—increasingly used not as a process of integration like that of Germany within Europe, but to combat the disruptive effects of the devaluation of the dollar—was oriented towards gaining as much as possible from the peg against the dollar as well as from the growth of China’s export sector.

Under the circumstances, the relief for the Japanese national economy represented by the 1995 revaluation of the dollar did not materialize because of the collapse of the asymmetric synergy between Japan and Asia. A well-known economist, Michio Morishima, has suggested a solution based on a sort of Asian Economic Community. Yet neither Japan nor the United States have the political will to initiate an East Asian Common Market which would have to assign a major political role to the People’s Republic of China and create within itself an Asian Payments Union. The international public expenditure generated by Cold War Keynesianism has ended but the politics of the Cold War with its special armament programs (directed against China) is far from over. This political orientation is today accompanied by a greater struggle for the control over finance and liquid markets, which is what the ideology of globalization is all about. The Asian crash and the Japanese stagnation both turn out to be simply a new episode in the crisis of the regime that sustained the post-war period of capitalist expansion.

Concluding Remarks

At the time of this writing, Japan was still caught in the quagmire of recession. Successive stimulus measures through public works programs and the bail-out of insolvent banks had blown out the budget deficit to over 10 percent of GDP, while the ratio of government debt was estimated at over 120 percent of GDP. These measures kept the economy afloat but did not get it out of the crisis. On the other hand, if the Japanese authorities were to succumb to western demands from the OECD and the IMF and launch a neoliberal strategy of market liberalization, the short-term impact would be disastrous. A depressive spiral of bankruptcies and growing unemployment, not witnessed since the Great Depression, could be set in motion.

It would be more correct to see the banking crisis as symptomatic of a much deeper structural distortion. Severe excess capacity has been built up over the past decades. Yet, the possibilities of reigniting profitable demand on a massive scale are limited. Quite simply, Japanese workers will not spend because of growing employment insecurity and the need to save for retirement in the face of a rudimentary social wage and a threadbare social safety net. Japan continues to accumulate a current account surplus, most notably with the United States. But a large proportion of this trade surplus is due to falling imports as a result of the stagnation of the domestic economy. The problem of excess capacity will compel Japanese corporations to expand their exports in order to counteract a falling profitability on the domestic market, but the expansion of exports is unlikely to be attained without resorting to drastic measures of wage reduction and restructuring, thereby competing and clashing with the Asian hinterland.

The deepening stagnation in Japan is now part of the larger Asian crisis. No systematic synergies exist any longer between Japan and its area of influence. In this respect Japan and East Asia constitute the most vulnerable point of the international political economy of U.S. imperialism. On one hand, this area is fully tied to the American economy; on the other hand, it contains two countries of world importance: Japan, as a productive core, and the People’s Republic of China. The external surpluses of these two countries and of Taiwan represent a major part of the U.S. deficit. Thus the surpluses must be channeled to the financing of the international position of the United States. By the same token the two trillion dollar savings in Japan’s deposits must be opened up to the hedge funds and other institutions mainly operating from, or in conjunction with, Wall Street. But these linkages are being jeopardized by the crisis of accumulation in Japan. Hence a big component of the financial web on which contemporary world capital rests is being thoroughly undermined.


  1. Robert Gilpin, The Challenge to Global Capitalism (Princeton, New Jersey: Princeton University Press, 2000), 270.
  2. Jung-en Woo, Race to the swift: state and finance in Korean industrialization (New York: Columbia University Press, 1991).