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JAPAN

In 1603, a Tokugawa shogunate (military dictatorship) ushered in a long period of isolation from foreign influence in order to secure its power. For more than two centuries this policy enabled Japan to enjoy stability and a flowering of its indigenous culture. Following the Treaty of Kanagawa with the US in 1854, Japan opened its ports and began to intensively modernize and industrialize. During the late 19th and early 20th centuries, Japan became a regional power that was able to defeat the forces of both China and Russia. It occupied Korea, Formosa (Taiwan), and southern Sakhalin Island. In 1931-32 Japan occupied Manchuria, and in 1937 it launched a full-scale invasion of China. Japan attacked US forces in 1941 - triggering America's entry into World War II - and soon occupied much of East and Southeast Asia. After its defeat in World War II, Japan recovered to become an economic power and a staunch ally of the US. While the emperor retains his throne as a symbol of national unity, elected politicians - with heavy input from bureaucrats and business executives - wield actual decisionmaking power. The economy experienced a major slowdown starting in the 1990s following three decades of unprecedented growth, but Japan still remains a major economic power, both in Asia and globally.

Government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (1% of GDP) helped Japan advance with extraordinary rapidity to the rank of second most technologically powerful economy in the world after the US and the third-largest economy in the world after the US and China, measured on a purchasing power parity (PPP) basis. One notable characteristic of the economy has been how manufacturers, suppliers, and distributors have worked together in closely-knit groups called keiretsu. A second basic feature has been the guarantee of lifetime employment for a substantial portion of the urban labor force. Both features have now eroded. Japan's industrial sector is heavily dependent on imported raw materials and fuels. The tiny agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. Usually self sufficient in rice, Japan must import about 55% of its food on a caloric basis. Japan maintains one of the world's largest fishing fleets and accounts for nearly 15% of the global catch. For three decades, overall real economic growth had been spectacular - a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s. Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of overinvestment and an asset price bubble during the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor. In 2002-08, growth improved and the lingering fears of deflation in prices and economic activity lessened, leading the central bank to raise interest rates to 0.25% in July 2006, up from the near 0% rate of the six years prior, and to 0.75% in December 2007. In addition, the 10-year privatization of Japan Post, which has functioned not only as the national postal delivery system but also, through its banking and insurance facilities as Japan's largest financial institution, was completed in October 2007, marking a major milestone in the process of structural reform. The Japanese financial sector weathered the initial impact of the global credit crunch, but a sharp downturn in business investment and global demand for Japan's exports in late 2008 pushed Japan into a recession. Furthermore, Japan's huge government debt, which totals 170% of GDP, and the aging of the population are two major long-run problems. Some fear that a rise in taxes could endanger the current economic recovery. Debate also continues on the role of and effects of reform in restructuring the economy, particularly with respect to increasing income disparities.

JAPAN

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