The Ever-Changing Roles
of Japan and China:

A Detailed Look at the Evolution
of Japanese and Chinese Economies

By Nicole Gable, April 2002


“In assessing China’s economic progress and future potential, there is inevitably a comparison with Japan, at first glance the parallel seems entirely approprate, however, looking closer we see they are worlds apart.”

       Clyde V. Prestowitz, Jr for the Miami Herald

Obviously, these two nations are ones that can have a greater effect on the world’s economy than we can even comprehnd.  With its sheer size, China is quickly becoming an integral part of the global economy.  Its share of the world trade has grown four hundred percent since 1978 to 3.6 percent, making it the tenth largest trading nation in the world.[i]  Both imports and exports have steadily increased since the early 50s, showing favorable trade balances since 1989 (with the exclusion of 1993 due to the Asian Financial Crisis, Exhibits A, B, and C).  Also, Central Bank Governor Dai Xaiglong says that he expects China to lure $45 billion in foreign direct investment annually for the next 5 years, trailing only the United States as a recipient of investment.  Chinese policy makers have set their goal of doubling the size of the $1.1 trillion economy within a decade, but are aware that this requires increased trade and increased foreign investment.[ii]

Japan, although in recent history experiencing a wrenching recession, has been termed one of the three pillars in the world economy, along with the United States and the whole of Europe.[iii]  “Japan crashed back into global markets in the 1960s, became the largest surplus and creditor country in the 1980s, and was viewed by many as the world’s dominant economy by 1990.”[iv]  But, times have changed, and the once dominator has plunged into recession. 

The following discussion will delve into the histories of the two nations and how these histories have shaped their economic development.  It will shed light on how the role of the state has been of stark contrast between Japan and China.  Over the past half-century of Chinese history, the state has played and integral part in the development of their economic system.  Throughout the years, the government has gone through changes that have greatly influenced the Chinese economy.  For these reasons, the historical path of the Chinese government and its resulting economic strategies are outlined in greater detail below

On the other hand, the role of the Japanese government has been of lesser influence in their economy.  Instead, their economy had been allowed to shape itself to a certain degree.  In light of this, attention will be focused on how the Japanese have emerged a leader due to the evolution of their firms’ practices and how they have managed to overcome some disadvantages that could have been debilitating. 

This will lead the discussion into a more recent comparison of the Chinese and Japanese financial markets.  Reasons for the economic downturn of the Japanese economy will be presented.  Also, the future of Chinese economics will be explored.  

Characteristics of China vs. Japan

China, with its vast land mass and even more overwhelming population, is located in Eastern Asia.  It borders the East China Sea, Korea Bay, Yellow Sea, and the South China Sea, and is in-between North Korea and Vietnam.  It is about 9.6 million square kilometers, which is only slightly smaller than the United States.  It is home to approximately 1.261 billion people (July 2000 est.)[v], making it the world’s most populous country, and one of the most densely populated countries of the world.  Often cited, there is also the notion of a “Greater China,” which would include mainland China plus Taiwan, Hong Kong, and Macao.  Currently, Hong Kong is under China’s rule, while Taiwan seeks to maintain independence from China.  If this convergence were to happen, though, the “Greater China” would account for economic and laborpower resources that would make it the fourth pillar in the world economy (along with United States, Europe, and Japan).[vi]

Japan, like China, is also located in Eastern Asia.  While they are in the same vicinity, Japan is immensely different in size, geography, number of inhabitants, and culture.  Japan is an island economy, slightly smaller than the size of California (about 377,000 square kilometers) – over 25 times smaller than China!  The island chain is located between the North Pacific Ocean and the Sea of Japan, east of the Korean Peninsula, and has approximately 126 million inhabitants (July 1999 est.).[vii]  It is incredibly dense in population, with about 77% of the Japanese people living in urban areas.[viii]

In terms of natural resources, Japan and China are again poles apart.  China is a nation rich in natural resources; its natural resource base is extensive and includes coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium, magnetite, aluminum, lead, zinc, uranium, and the world’s largest hydropower potential.  Japan’s natural resources are negligible, at best.  However, while the Chinese have been endowed with all of these resources, there must be large amounts of capital in order to take full advantage of their benefit, a feat that has been difficult for the Chinese to conquer.

Japan’s economy, partially due to its scarcity in land, has only a small agricultural sector.  Its agriculture is highly subsidized and protected, but even though there is a shortage of land, crop yields among the highest in the world.  They are also, surprisingly, self-sufficient in rice, but must import about 50 percent of its requirements of other grain and fodder crops.  Eleven percent of the land is arable, permanent crops account for only one percent of the land use, and permanent pastures only two percent.[ix] 


Japan’s economy is instead dominated by the service sector and the industrial sector.  Industry is the most important sector of their economy, but is heavily dependent on imported raw materials and fuels (as the country is not inherently rich in either of these). Japan is among world’s largest and technologically advanced producers of steel and nonferrous metallurgy, and its other strengths in industry include heavy electrical equipment, construction and mining equipment, motor vehicles and parts, electronic and telecommunication equipment, machine tools, automated production systems, locomotives and railroad stock, ships, chemicals, and textiles.[x]

The  Modernization of China – Turbulence and the Role of the State

Exploring Chinese history is necessary when trying to understand its economic performance over the last half-century. It is the oldest existing civilization in the world, which is a source of great pride for the Chinese people.  “The rich heritage of the Chinese people is an important if unmeasurable influence on their attitudes toward and participation in the modernization process.”[i]  Below is an overview of the history of China as a nation beginning in 1949.  While not complete, it thorough in that it focuses on the events which have had a direct effect on the Chinese economy over the last fifty years, providing insight into why this period has been one of such inconsistency in terms of progress.

In 1949, when Mao Zedong, a member of the Communist Party, came to power, China was one of the poorest countries in the world.  It had endured decades of war and civil conflict, which nearly devastated infrastructure in the nation.  The Chinese Nationalist Party or Guomindang, the party that was overthrown by the Chinese Communist Party, fled to the island of Taiwan.  Under the rule of Mao Zedong, the new government established a dictatorship which ensured China’s sovereignty, but imposed strict controls over everyday life.  During his initial reign, there was a period of consolidation, which aimed to accomplish two main goals; the first was to redistribute land to individual households to prepare for collectivization, and the second was nationalization and consolidation of the holdings in industry to prepare for national economic planning.[ii]  Above all, the new leadership wanted to eliminate inequalities due to class differences and build the nation into a modern industrial state through strict controls and heavy planning.

Mao slowly began the transition of China from private industry to socialist industry; “the pattern of change was from private ownership to elementary state capitalism, then to advanced state capitalism, and finally to socialist industry.”[iii]  Mao developed a huge state sector, and by 1955, 68 percent of the gross value of output was accounted for by the state industry.[iv]  While China had planned to follow the Soviet model of large-scale industrialization and the collectivization of agriculture, revisions had to be made due to the vast number of Chinese inhabitants, as well as its poverty level and its rural character.  

Some of the biggest differences between the Soviet model and that of Mao were the decreased focus on the agricultural sector, the self-financing of this sector in the early years, and the reliance on the state enterprise as a revenue source for state investment funds.  However, following the Soviet-model, the Chinese did invest greatly in industry, focusing on heavy industry; huge investments in state factories were made, producing goods for heavy industry rather than for consumers or to meet any “real” demand.  Also, as private land ownership was abolished, peasants were persuaded into communes.  In total, there were about 26,000 communes with approximately 4,600 households in each.  As can be imagined, the size and number of these communes made them very difficult to manage and organize, eventually leading to a change of the system altogether.  Overall, in the 1950s, the Chinese economy began to strengthen – GDP doubled per capita during this time and industrial production increased by nine times.[v]  However, close attention must be paid to the final years of the 1950s.

In 1958, and continuing through 1960, the Great Leap Forward was launched.  It was a vision set by Mao in an attempt to mobilize the peasants to increase crop production through collectivization of the farms.  His vision was to use the excess labor to produce steel.  Instead, poor planning and flawed management caused the starvation of more then thirty million people, and a complete halt of all economic progress.  Officially, the government blamed these severe consequences on “bad weather.” 

During the beginning of the 1960s there was a short period of tranquility as the Chinese government sought to erase the devastating effects of the Great Leap.  Unfortunately, this did not last long, as Mao introduced the Great Proletarian Cultural Revolution.  It was a calling of students to rebel against authority and form units of Red Guards.  Soon, China collapsed into anarchy, as schools, offices, and all forms of transportation closed.  Massive riots emerged as the Red Guards fought battles with government troops, and later, fought with other units of Red Guards in a battle for supremacy.  Again, the Chinese were forced to deal with another devastating setback in the progress of their economic development, one with a loss of output equal to or more severe than that of the Great Leap.[vi]  While the Cultural Revolution ended officially in 1969, the Chinese economy went through a period of recovery for years to come, and the politically charged atmosphere remained until Mao’s death in 1976. 

After 1978, Mao’s successor, Deng Xiaoping began a great reform of the Chinese system.  Fundamental changes in their economic policies ensued, emphasizing the introduction of the market and the opening up of the country to foreign trade and investment.  Deng subsequently decentralized economic decision-making, allowing the country to flourish.  Output quadrupled over the next 20 years, and China now has the world’s second-largest GDP.[vii]  These figures, in and of themselves, however, can be misleading.  China is still a poor country despite rapid growth, with GDP per capita at a low $3,800, compared with Japan whose GDP per capita is $23,100 (1999 est.).[viii]  But, due to the number of inhabitants, China’s GDP as a whole still carries much power in the world economy.

The reform era since 1978 has placed China into a period of transition.  Currently, the country has a system that is a combination of state ownership and market allocation.  Deng’s economic reform program moved the economy from a Soviet-style centrally planned economy to a more market-orientated economy with an element of Communist Party control.  The Comparative Economic Systems textbook refers to China as moving towards Market Socialism. “Market socialism is an economic system that combines market resource allocation with state ownership.  In different market-socialist models, state ownership need not be pervasive; there may be private ownership of smaller businesses, but the state should own the most significant ‘means of production’ of society.  This ownership may be in the form of state ownership or ownership by workers.”[ix]

Market Socialism, is, in fact, the closest description of the Chinese system today.  The management of state-controlled firms has been decentralized, property rights reforms have allowed for a drastic increase in private-sector businesses, and goods and factor markets have been freed to a certain extent.  In terms of agriculture, Deng switched from a system of old collectivization to a system of household responsibility, which allowed Chinese farmers to work as entrepreneurs as opposed to being a part of a collective farm.  By the early 1980s, the commune system was a thing of the past, and Chinese agriculture was finally market-dominated on both the input and output sides.  Agricultural output actually doubled during the period of the 1980s.

Deng also supported the growth of the service sector by allowing for the creation of township and village enterprises (TVEs).  These TVEs accounted for one-third of Chinese manufacturing by the mid-1980s, concentrating on services and light industry. 
“Between 1978 and 1981, the share of total investment devoted to heavy industry fell from 54.7 percent to 40.3 percent, a sharp drop in a very short time.  Indeed, the average annual rate of growth of services was 6.1 percent between 1970 and 1980 and 11.2 percent between 1980 and 1991.  Finally, the labor force in the service sector doubled from 48.7 million in 1978 to 99.5 million in 1988.”

All of these spectacular growth rates can be, at least, partially attributed to the fact that an economy under the prohibitive restrictions of planned socialism is not allowed to develop to its market potential.  Once given ease of entry and exit, and allowing markets to clear themselves, economies such as the China’s are simply given the freedom to mature in their own right.  Soon, Deng also set up “free enterprise or trade zones,” located near and around Hong Kong, and relaxed its joint-venture laws.  As a result, foreign investment poured into China, foreign factories were set in these free enterprise zones to produce for export, and the country has become one of the world’s largest exporters (see Exhibits A, B, and C). 

Another area that should be highlighted is the uneven rate of growth among regions in China.  As Exhibit E shows, foreign investment and its resulting positive effect on economic growth has been focused on the areas set up as free enterprise zones.   Therefore, growth has been most concentrated on the coastline, particularly in large urban areas such as Shanghai, near Hong Kong, and the Fujian province opposite Taiwan.  Interior regions of China have lagged behind in growth.  According to Professor Carl Riskin of Columbia University: “China in the 1970s was one of the world’s most egalitarian countries; today, it is certainly one of the more unequal of the developing countries in Asia.”  In cities, income inequality has increased as well, but the government has done little to redistribute the wealth.  Millions of peasants have flooded into China’s cities, looking for their “piece” positive influence due to foreign investment (Exhibit F).  This can be seen even more clearly in Exhibit G, which further explains the reason why so many have made a pilgrimage to the cities of China from the rural areas.  It is true that average household income has risen significantly for the rural population, it is clear that the income increase in urban areas is much more attractive.  The result of this movement into the cities has been very high levels of unemployment, a problem the government has been trying to reduce for decades.

   Success of the Japanese Economy

Since its defeat in WWII, Japan has been governed under a democratic political system established by the Allied occupation forces.  For three decades, overall real economic growth in Japan has been spectacular: a ten percent average in the 1960s, 5 percent average in the 1970s, and a 4 percent average in the 1980s (Exhibit H).  Since then, though, rates of growth have been more volatile.  From 1992 through 1995, growth slowed considerably, but then picked up again in 1996, reaching 3.9 percent.  Since then, the Japanese economy has been in a state of downturn.

Prior to the Meiji Restoration of 1868, Japan was a “fossilized and closed society.”[xi]  Japan was a nation of hereditary class privileges, feudal economic organization, and closed markets.  However, with the Restoration, Japan was opened to international commerce and was able to “catch-up” with the world’s leading economies of the time. 

Since then, the role of the state in Japan has been modest in comparison to China even though in postwar Japan, the government played the crucial role of promoting savings and investment and attracting foreign capital.[xii]  Overall, though, economic planning has not been an important element in the Japanese economy.  The Japanese government’s plans have been pragmatic, with frequently shifting goals.[xiii]  Also, these plans have only been projected for 5-year periods, which is of minimal value to private firms.  Even when plan targets have been proposed, they have typically been exceeded by very large amounts.  While it may seem as though exceeding targets can only be a positive outcome, there is something to say about targets and the plans themselves if they are nearly always achieved – a worthwhile goal is one that is difficult to attain.  Those that can be attained with little effort should not be rendered accomplishments. 

As a result of the lesser role of the Japanese government in forming its economy, the following contrast of the Japanese economy to the Chinese one will not focus on its historical passage through different governments.  Instead, the following discussion will focus on how Japan’s organizational arrangements and its people have fostered economic growth in the nation. 

In Michael E. Porter’s “Competitive Advantage of Nations,” he describes how a nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.  Companies gain advantage against the world’s best competitors because of pressure and challenges.  They benefit from having strong domestic rivals as well as demanding local customers.[xiv] Specifically, he states that national prosperity is created, not inherited.  We can directly see this from the comparison of Japan and China: while China is a nation rich in natural resources, it is Japan that has emerged as a superpower in the world economy.  As Porter explains, a country must have four key determinants that create the national environment where companies are born and learn how to compete.  These are: factor conditions; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry.[xv]

The first, factor conditions, includes labor, land, capital resources, infrastructure, and natural resources.  But this description of factor conditions is incomplete, at least as Michael Porter would like for it to be defined.  Instead, factor conditions are those that are not inherited, but instead created, such as skilled human resources or a scientific base; true advantages in factor conditions come from those that involve sustained and heavy investment.  Therefore, simply being a country rich in natural resources or with a deep pool of labor is not enough for it to become a leader economically.  In fact, Porter proposes, having all of these inherited advantages may even prove to be a disadvantage.  “When there is ample supply of cheap raw materials or abundant labor, companies can simply rest on these advantages and often deploy them inefficiently.  But when companies face a selective disadvantage, like high land costs, labor shortages, or the lack of local raw materials, they must innovate and upgrade to compete.”[xvi]

This can be seen directly when applied to the comparison of Japan and China.  Japan, an island nation with essentially no natural resources, has transformed these shortages into an opportunity for innovation.  These deficiencies in natural resources have actually forced the country to innovate in order to succeed, instead of simply relying on its inherited advantages.  For instance, “just-in-time” production is a direct result of Japan’s land and space constraints.  Companies simply could not afford to hold excess inventory, so they devised a system whereby companies hold nearly no inventory; instead, these companies produce only when orders are taken, and ship out these orders immediately (thus, the terminology “just-in-time”).  Holding inventory, and the inefficiency that comes along with it, is possible in places like the United States where land is available and much less costly.  But this inefficiency is impossible to sustain in a country such as Japan, who has adapted to what may seem to be inherited disadvantages, emerging a more innovative and competitive nation than China. 

The second key to national competitiveness is demand conditions.  This is defined as the character, as opposed to the size, of home demand, and how nations can gain competitive advantage through the insights of demanding and sophisticated buyers.  These demand conditions give a window into consumers’ needs in advance, allowing companies in that country to innovate one step ahead of its world competitors.  Again, this can be applied to China and Japan directly.

While China has an immense number of inhabitants, the majority of them would not be considered “sophisticated” or “demanding” buyers (other than those, perhaps, in large metropolitan cities).  As described, the sheer size of the population is not enough; demand conditions instead refer to the quality of the buyers, not just the quantity.

On the other hand, in Japan there are about a tenth of the number inhabitants as in China, but most would refer to these people as both sophisticated and demanding buyers.  These intense demand conditions require Japanese companies to respond to challenging requests -- forcing them to be on the brink of technology and innovation.  As an example, we can examine the invention of a certain air conditioner: Well-known around the world for its exorbitantly high costs of living, Japan’s space is tight and therefore rent is extremely expensive.  Families live in undersized homes, and typically several family members occupy each bedroom.  Coupled with these cramped living arrangements are muggy and hot summers, and (since natural resources are scarce) high electricity costs.  Companies in Japan have responded by creating a compact, quiet air-conditioning unit powered by energy-saving rotary compressors.  “In industry after industry, the tightly constrained requirements of the Japanese market have forced companies to innovate, yielding products that are kei-haku-tan-sho – light, thin, short, small – and that are internationally accepted.”[xvii]  These seemingly impossible to satisfy requests from Japanese consumers have forced the firms to push themselves ahead of their competitors in terms of the quality, size, and efficiency of their products.

The third and fourth keys to a nation’s competitiveness are related and supporting industries, and firm strategy, structure, and rivalry, respectively.  Both further solidify the argument that Japan, while not rich in natural resources, has emerged a pillar in the world economy, while China, naturally more wealthy than Japan, has lagged and remained a poorer economy. 

Porter’s fourth key (firm strategy, structure, and rivalry) is the most broad of the attributes, but is arguably the most important.  It refers to the companies inside the country, how these companies are created, organized, and managed, as well as the nature of domestic rivalry.  It is known that not one organizational structure is appropriate for all areas of the world – in Spain, a more relaxed corporate environment is what suits the customs of the people, while in Germany this same strategy and organizational structure would likely not succeed due to the culture’s rigidity and organization in management.

The same is true for Japan and China; both must find a firm strategy and structure that fits with the teachings, history, and attitudes of the people.  At one time, the Japanese had found this appropriate managerial system.  In Japan, there is a degree of discipline and devotion to work on the part of laborers, and a degree of paternalism on the part of employers seldom seen in other countries.[xviii]  Corporations, as part of their managerial strategy, set up a system of paternalism, one that is congruent with in the beliefs of the Japanese people.  Established employees of large corporations are, in effect, guaranteed lifetime employment.  This obviously does not include the whole labor force, which would be debilitating for the growth of the economy.  Instead, roughly 30% of the industrial labor force is covered by some form of guaranteed employment.[xix] 

In other economies, this guarantee has been theorized to lead to reduced productivity because of the presumed decreased motivation that arises from the fact that one can no longer lose his/her job.  However, in Japan, this guarantee seems to have been a motivating factor – laborers’ productivity was high, showing perhaps a sense of respect and appreciation felt by the workers for their employing firms.  “[Workers] are taught to think of their company as their family, and they believe if they work hard for the company, the company will take care of them.”[xx]  Thus, the managerial strategy was congruent with the norms of the people, allowing for a synergy between workers and their employers.  (Later, we will see, this guarantee did, in fact, have adverse affects on the efficiency of firms.)

Also, firms in Japan have formed a tight-knit working relationship with others in the industry called “keiretsu.”  These keiretsu are bonds that are formed between manufacturers, suppliers, and distributors in a closely-knit group.  They can essentially be thought of as conglomerates, integrated either horizontally or vertically.  The primary difference between the keiretsu of Japan and the working relationships of China and the rest of the world is the relationship that is developed, aside from a purely financial standpoint.  Each of the companies in the keiretsu is equally concerned with the success of the whole as the success of the individual firm, a trait that can be seen throughout Japanese culture.  Generally speaking, the Japanese people have a deep regard for the group as a whole, and will sacrifice their own victory to allow for the achievement of the group.  Again, this approach to business is congruent with the culture in Japan, and allowed Japanese firms to flourish.  Countries around the world have tried to imitate the Japanese way of doing business through relationship-based management and strategy, but imitation is not the key to success.  While this may have worked for Japan for a period of time, this does not mean the same system can be transplanted into another culture, nor may it be the best system for even the Japanese as time goes on and the people change.

Finally, modern technology played a key role in the success of the Japanese economy.  During the first stages of Japanese development, exports consisted mainly of traditional industries such as textiles.  However, this is the case in nearly all pre-developed nations; it is a starting up point, a base for improvement.  In postwar Japan, a “technology gap” had developed due to its closed economy.  As Western technology assimilated, Japanese exports shifted away from the traditional products toward the high-technology products that Japan, owing its productive but relatively inexpensive labor, could produce with a competitive advantage.[xxi]  This proved to be a catalyst in the economic growth of the nation, giving it further support as it climbed to power. 

Recent Financial Markets of China and Japan

 Worldwide, economic data continues to disappoint investors, workers, and the population as a whole.  The United States is still on the brink of recession, as forecasters struggle to make predictions as to the unknown fate of the world’s most powerful economy.  On the other side of the globe, Asia has gone through a series of ups and downs over the last decade, and as some of these economies are showing signs of recovery, others are still in the bowels of a recession.

 Japan’s Financial Crisis

Japanese financial markets have arguably been hit the hardest.  Currently in their third recession over the last ten years, the nation has been termed the “regional laggard,” especially in recent years.  Ongoing erosion of domestic demand due to near-record unemployment and falling wages has left the smaller Japanese corporations (which is the majority of Japanese industry) reporting still worsening economic conditions.   Plus, capital investment in the area continues to shrink.  Overall, the economy is expected to contract by 1.3 percent in the fiscal year ending March 31, 2002.[i]  On the horizon, it looks as though this weakness will continue.  Businessweek Magazine reports that private-sector machinery fell 15.6 percent, which is the worst performance in over a year.  Plus, Barclays Capital Japan economist Mamoru Yamazaki says he expects the economy to continue to contract by .6 percent in the upcoming fiscal year. 

What caused such turmoil in the Asian financial markets, namely in Japan?  How could an economy that displayed such phenomenal economic growth over the past half-century crumble in the past 10 years?  While there is never only one answer to incredibly complicated questions such as these, there are several key causes that can partially explain the Japanese economy’s downturn.

Morris Goldstein gives three broad, but quite comprehensive reasons to explain how the crisis rose and spread.  The three interrelated problems that might have been key forces in the decline of the Asian foreign exchange are: financial-sector weakness cum easy global liquidity conditions, problems in the external sector, and the contagion running from Thailand to other economies.[ii]  The first explains how financial-sector weakness, the symptom of the problem, arose from easy global liquidity, the actual cause.  This was due to years of bad loans being given out as banks required little to no creditworthiness tests.  The keiretsu relationships of the past “helped” many unfit corporations attain bank loans, which in the end was a primary cause of the entire financial sector crumbling.  The second trouble of the Asian economies was external sector problems.  Most of the nations affected by the Asian crisis had run moderate to large current account deficits during the 1990s.  Also, as Goldstein explains, “Too much investment was directed at speculative activities, overextended industries, over-ambitious infrastructure projects, and inefficient government monopolies.”[iii] 

Third was the contagion of financial disturbances across countries.  Originating in the small country of Thailand, the crisis soon spread to other economies, including larger ones like the Japanese.  There was a sense of a “wake-up” call.  Investors saw Thailand’s economic distress as a sign to reassess creditworthiness of other Asian borrower.  As they soon learned, several of the Asian economies had weaknesses similar to those in Japan.  Also, devaluation dynamics was another major method for the “spread.”  As countries underwent depreciation, their exports relative to others became sooner.  Countries who had not devalued experienced their products becoming less competitive.  Many of these nations devalued their currency to remain competitive in the swarm of decreasing prices. 

Another theory as to the cause of the Japanese financial crisis actually stems from the very characteristics of the economy that strengthened it prior to the 1990s.  Perhaps the strategies described above, including life-long employment and keiretsu, that worked so brilliantly during the 1950s through the 1980s, actually paved the way for its downfall.  As the Japanese economy matured, these strategies and business practices remained stagnant; at one time they were well-fitted for the growing economy, but these past strengths may have actually become the source of current weakness. 

For instance, life-long employment that was appropriate for a growing and expanding nation cannot be sustained in a fully developed nation.  In less developed nations, where the bulk of industry employs low-skilled labor, lifelong employment can be implemented – there is little need to “upgrade” these workers since almost all of them have the same basic capacity.  However, in more established economies, the work force must be mobile; the increased demand of highly skilled labor in an established economy calls for increased improvement of employees, so they cannot be fixed in any one location.  Also, as a firm grows at record pace, as was the case for many Japanese firms during the era of great economic progress, there is little need for layoffs.  However, as the firm becomes more established, growth must slow, and during times of economic distress, layoffs are of great importance in cost-cutting and efficiency.  If firms are required to keep too many employees, profits are eroded, and the company might face severe consequences.

 China: Developing to Become the Next World Power

On the other side of the spectrum, the Chinese economy over the past decade has been booming.  In fact, while the rest of Asia was (and still is) in a state of deep recession, China was been reporting one of the fastest growths in its GDP in over a decade.  In the first quarter of 2002, China’s State Statistical Bureau released that the Chinese economy had grown more than 7.6 percent, which was even higher than expected.  Statistics Bureau Vice Direcor Qiu Xiaohua forecasted second quarter growth at over 7 percent as well. 

As the Chinese economy strengthens, increasing numbers of Hong Kong’s businesspeople are looking northward for economic opportunities.  Throughout time, Hong Kong has not responded well to the idea of integration with mainland China, but these sentiments have changed recently.  With the handover of Hong Kong to China complete (it was a British colony prior to 1997), the focus of their strategizing can now shift from managing the handover to looking at integration as a possible next move.  Also, with China joining the World Trade Organization, and Hong Kong stuck in a deflationary spiral, many say that Hong Kong can no longer wait. 

Another incredibly influential possible event surrounding the Chinese economy is China’s imminent entry into the World Trade Organization (WTO). 

Their entrance into WTO will allow foreign companies to enter into the market through the reduction of tariffs, giving way to much needed competition between firms.  Average tariffs will decrease from 15 percent to 9 percent, while eliminating almost all of their import quotas and discrimination against foreign companies by 2005.  This increase in foreign companies will force Chinese firms to make their business practices more efficient, a necessary change if they hope to compete.  This will, in-turn, facilitate further economic growth in their markets.  In addition, by 2005, the U.S. and the European Union will be required to drop all remaining import quotas on garments and shoes.  China’s vast pool of cheap labor and its developed industrialized parks will give it a considerable advantage in exporting such labor intensive products.  According to the World Bank, China could increase its share of global apparel exports from 20 percent to 47 percent within ten years.[iv]

For China in the short term, the importance of joining the WTO is more political than economic.  By joining, China will be agreeing to the rules and laws of the WTO and opening its borders to the western world by allowing foreign ownership.[v]  Over the long term, though, China’s entrance into the WTO will strengthen its financial institutions and add stability to its economic policies.


Since the 1950s, we have seen the Japanese economy prosper in ways few other civilizations have before.  During this same period, China went through years of ups and downs; they have be plagued with civil and social unrest, an unstable economy at best, and have frequently had to deal with times of complete upheaval.  However, since 1990, times have certainly changed.  Now the Japanese economy has plummeted, while that of the Chinese has flourished.  The Japanese must now restructure its entire banking system, and must force banks to write off nonperforming loans.  It is unclear, though, when Japan will begin to grow again.  From all accounts, this day does not seem near.  The Chinese, on the other hand, have been experiencing a very positive recent history.  Keep in mind, though, that the Chinese economic system, while on the upslope, is still underdeveloped.  After all this growth, annual per capita income is still less than $1,000, while that number is almost 40 times higher in Japan.  Also, Japan’s $4 trillion economy looms over that of China – only $980 billion.  If, strategically speaking, economic weight equals power, then China has much more growing to do before it stands on the same ground as Japan.



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