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One of the features of the current global recession is that something unthinkable has happened the Japanese economy

y slipped, at least temporarily, into a trade deficit. How did this happen? What will the consequences be? Economic performance in Japanthe world's second largest economy, the largest in Asia, and the world's largest creditor countryis going from bad to worse. Growth has essentially been flat since 1992, and the economy is now shrinking at an annualized rate of more than 3 percent. The OECD (1997) and Posen (1998) calculate that as a consequence of this prolonged period of subpar growth, Japan has accumulated a substantial "output gap" indicating that actual growth is well below potential. Given Japan's characteristics, one conservatively could expect national income to grow at approximately 2.5 percentwith a transitory period of faster growth to absorb accumulated slack. Japan has experienced a severe economic recession since the early 1990s, despite a short lived recovery in between, is one of the most significant developments in the recent history of capitalism. In this article I will examine critically the reasons behind Japanese economic recession and this seems to be connected with the process of oligopolistic accumulation. I mean the current Japanese crisis is an over production crisis and largely due to the structural propensity to build productive capacity while experiencing a decline in effective demand. The levels of effective demand depend on Keiretsu (Note 1), which determines the degree of utilization of productive capacity and levels of profits. At present exports and government spending is playing a crucial role in maintaining the levels of effective demand. Though Japan has not suffered greatly from a housing collapse or toxic assets, its economy has been hit harder by the crisis than the US or EU. Japans contraction is almost entirely due to a steep fall in external demand. This column uses input-output analysis to show that the fall in US demand has had an amplified effect on Japan because it not only reduces Japanese net exports to the US but also net exports of intermediate goods to Asian countries, where they would have been assembled for final export to the US. Though Japan has not suffered greatly from a housing collapse or toxic assets, its economy has been in some respects hit harder by the global crisis than the US or EU, as several analysts have noted (e.g. Buiter 2009). Japans GDP contraction in the fourth quarter of 2008 was nearly double that of the US (12.1% vs. 6.3%).1 Japans contraction is almost entirely due to a steep fall in external demand its drop in net exports accounts for 11.8 percentage points of the decline. In contrast, the US experienced only a decrease in net exports responsible for only 0.15 percentage points of the contraction, meaning that its 6.3% contraction in GDP was almost entirely due to decreased domestic demand. Why did Japan experience such an exceptionally serious decline in overseas demand? A large share of Japans exports consists of capital and durable consumer goods, such as cars, electric machinery, machine tools, and their components. It is very likely that investment in plant and equipment, as a consequence of what is known as the acceleration principle, suffered a particularly steep decline due to the global downturn. Simultaneously, households have been

holding back purchases of durable consumer goods due to liquidity constraints and diminished expectations. Consumer demand has shifted from high-end items to inexpensive goods, as illustrated by the boost in sales experienced by firms such as Wal-Mart and Uniqlo. But Japan specialises in the production of high-end items (Fukao et al. 2003), so the disruption and shift in global demand appears to have hurt Japans exports particularly badly. Trade flows brought the global recession to Japan relatively late, but due to this lag with greater severity. Until the fourth quarter of 2008, Japans exports had remained largely unchanged. When they did drop, the negative impact on GDP was particularly large. However, this also means that from the first quarter of 2009 onward, the negative impact of external demand on GDP growth is likely to diminish. The third and fourth sources of contraction are well known mechanisms in open economy macroeconomics. However, the first two points concern new phenomena worthy of attention. Here, we attempt to estimate the impact of the contraction in triangular trade using the Asian International Input-Output Tables (Asian I-O Tables) of the Institute of Developing Economies. The Asian I-O Tables have been compiled for the analysis of inter-industry linkages through trade in the ten economies of Japan, China, South Korea, Taiwan, Singapore, Thailand, Malaysia, Indonesia, the Philippines, and the US. Products of the same industry are treated as different goods if they are produced by different countries, and from these tables, it is possible to determine, for example, the input in Chinas automotive industry of metal products made in Japan or South Korea. In our calculation, we make the Keynesian assumption that final demand and its derived demand determine the level of production in each country. Based on this assumption, we can estimate using the Asian I-O Tables the effect of a decrease in triangular trade, for instance, a situation where a decline in US final demand brings about a decline in production in China and Vietnam, which in turn results in a decrease in Japans intermediate goods exports. For the exercise here, we estimate the change in trade and production in response to a 1% decrease in US final demand for the products of all ten countries, including the US itself. The final demand of the nine other countries is assumed to remain unchanged. We also suppose that the value of trade of the ten countries with the rest of the world remains unchanged.2 Unfortunately, the latest available edition of the Asian I-O Tables is from 2000 and therefore somewhat dated. While this cannot be helped, we did use the Trade Industry Database published by the Research Institute of Economy, Trade and Industry and statistics from the US Bureau of Economic Analysis for 2007 in order to replicate as closely as possible the structure of US final demand by producer country and industry just before the global economic crisis. The decrease in US final demand decreases Asias exports of final goods, decreases US intermediate input demand and thus Asias exports of intermediate inputs, and in turn decreases Asian production, thus reducing the trade of intermediate inputs amongst the Asian economies.

In the case of Japan, the largest fall in net exports in intermediate goods is observed in exports to the US, but net exports of intermediate goods to the Asian countries, including China, also decrease. On the other hand, in the case of China, net exports of intermediate goods to the US also fall substantially, but because Chinas imports of intermediate goods from other Asian countries, including Japan, decline3, net exports to these countries actually increase. This comparison shows that the impact of a contraction in triangular trade on Japan due to a decrease in US demand is greater than the drop in exports to the US alone, while the opposite is the case for China. the change in net exports by partner country for Japan and China including trade in both intermediate and final goods. The contraction in net exports of intermediate goods to the US is much greater for Japan than for China, simply because the value of Japans exports of intermediate goods to the US are much greater and because of the impact of the contraction in triangular trade. But because China exports considerably more final goods to the US than Japan does, it faces a much greater decrease in total net exports than Japan. I have analyzed the factors which had contributed towards severe economic recession in Japan and it seems to be an over accumulation crisis. It is largely due to the structural propensity to build productive capacity while experiencing decline in effective demand. In fact, the economic growth rate fell from average of 4.1 % per year in the 1980s to an average just 1 % in 1990s. Such a sharp decline in growth rates were termed as Japans lost decade. Moreover, the total amount of public debt is 151.2 % of the GDP in 2005, which is by far the highest among the major developed countries. This huge state debt is the result of neoliberal policies of tax rate reductions for the rich and also lower tax revenue due to long period of economic recession. It has been forecasted that the Japanese population will be declining by 2010, with an increasingly large percentage of the population having retired from the employment. It means, the growth of labour will be affected as labour supply will decline, and economic growth has to be increasingly relied upon capital. However, the rising costs of capital will limit this, as currently Japanese industry faces massive over-capacity problems. the major cause behind the recession in Japanese economy, I found the issue wage share growth in national income in quite crucial, effects the levels of aggregate demand in country. Only relying on export to boost growth as happened in post war Japan is not the long term solution. As I have discussed in previous section that the share of wages in national income declined sharply in Japan, which seems to be the major factors behind the crisis. I found this aspect of the Japanese development is largely neglected in the neo-liberal discussions. Since the imposition neo-liberal economic reforms in the Japan the income of the working people has declined and benefits of the productivity growth was not equally shared between employees and employers. I find this to be major factor behind the lack of domestic demand and recession in Japanese economy. The analysis provided by neo-liberal economists about the Japanese economic crisis is flawed because it does not question the capitalist mode of exploitation, where intensification of labour exploitation goes along with increased waste of resources on unproductive activities. The

neoliberal economists overlook the contradictions between production for profit and production for human needs. The crisis is clearly visible when the corporate sectors experience difficulties in finding productive investment avenues to channel their surplus. However, since the late 1980s the growing role of financial sector in the economy with speculative activities has further worsened the problems of effective demands. The credit led boom aided by the financial sector also encouraged further investment in unproductive activities such as speculation, advertising etc. What happened? Japanese stock prices reached a recent peak in the summer of 2007 and, with the outbreak of the US subprime loan crisis, began a gradual but substantial decline through the fall of 2008. The decline in stock prices placed a strain on the balance sheet and capital adequacy ratios of commercial banks and, as a result, limited their willingness to lend by the summer of 2008. The Lehman Brothers shock in September 2008 further depressed the stock market and aggravated the strains on Japanese commercial banks. Bank of Japan data indicate that new loans for equipment funds declined by 9% (year-on-year) in the third quarter of 2008, followed by a 10% decline in the fourth quarter. This, coupled with the lagged impact of the negative terms of trade shock (arising from the sharp rise in oil and other commodity prices until the summer of 2008), may to some extent explain the sluggishness of industrial activity. Notable exceptions were electronic parts and devices as well as transportation equipment, the production of which had shown earlier signs of softening. In November, however, manufacturing production collapsed precipitously in all major sectors (from 100 in October to 93, seasonally adjusted). Overall manufacturing production continued to fall and reached 70 in February 2009 before recovering somewhat. The collapse was even more spectacular for transportation equipment (52 in February 2009 compared with 110 in September 2008) and general machinery (59 compared with 99). The production of general machinery remained depressed even after production began to pick up in other sectors from the spring of 2009. The downward movement of industrial production closely followed the downward movement of exports. Although the major factor behind the collapse of Japanese exports was a worldwide shrinkage of demand and trade following the Lehman shock, the sharp appreciation of the yen was an additional blow to Japans export-oriented firms.The total value of exports, which stood at 7,360 billion yen () in September 2008, declined moderately to 6,915 billion in October and collapsed thereafter. Exports in January 2009, at 3,480 billion, were less than 50% of the previous peak in September 2008. The decline was across the board, but most pronounced in the export of industrial supplies, capital equipment, and consumer durables, Japans three main categories of export products (which together account for over 90% of Japans total exports). The decline was also registered not only for exports to the US and Western Europe (which together account for over 40% of Japans total exports), where the financial crisis originated, but also for exports to emerging and developing Asia, Japans largest export market now accounting for over 50% of total exports.

Of the decline in exports of 3,880 billion from September 2008 to January 2009, emerging (and developing) Asia accounted for over 51%, which is roughly the share of emerging Asia in Japans total exports. This implies that Japanese exports collapsed almost uniformly across destination markets. The composition of export declines, however, differed across regions, reflecting the different content of trade. Within emerging Asia, 86% of the decline was in industrial supplies and capital goods, whereas this share for the US and Western Europe was smaller at 60%. On the other hand, only 6% of the export decline for emerging Asia was consumer durables, while the share for the advanced markets was larger at 36%. This is a reflection of the fact that, though emerging Asia is the largest export market, it is not the dominant market for consumer durables; more consumer durables are shipped to the advanced markets of the US and Western Europe. Essentially, the export of industrial supplies and capital goods to emerging Asia was most severely affected as the regions demand for Japanese parts, components, and capital goods all critical inputs for the production of final consumer productsdeclined steeply. Japan was affected by the shrinkage of triangular trade where Japan and the Asian newly industrialized economies (the Republic of Korea (hereafter Korea), Singapore, and Taipei, China) export parts and components to the PRC and other emerging Asian economies, which in turn assemble them to produce final products for the US and European markets. Thus, Japanese exports collapsed because both the export of consumer durables to the advanced markets and the export of industrial supplies and capital goods to emerging Asia fell sharply, as a consequence of the contraction of private consumption and the softening of investment spending in the US and Europe.