From the mid-1950s until the collapse of its bubble economy in 1989, Japan's postwar legal, political, economic and social system played a critical role in helping Japanese industry catch up with the west. A spirit of national consensus promoted close cooperation between business and government, giving rise to a stable employment system and a willingness to emphasize savings and investment over consumption. Combining a dedication to high-quality manufacturing with a corporate structure that encouraged market share over quarterly profits, Japanese companies quickly expanded to become a formidable force in the world economy.

Today, however, the maturation of Japan's economy, rapid development of information technologies and integration of world markets have created a need for more flexible and innovative business practices. Many of the structures and institutions that proved so valuable in the past are no longer sufficient to meet the needs of a more mature, service-oriented economy. Reform is essential to embrace the changes needed to reduce high costs and encourage creativity, new business formation and the adoption and development of new technologies. It will also be necessary to eliminate the regulatory rigidities that prevent Japan from achieving the global competitiveness it will need to sustain growth into the next century.

- Unprecedented Reforms Are Envisioned in Japan by FY2001

The Japanese government adopted a comprehensive "Program for Economic Structural Reform" in December 1996. It envisions major changes by FY2001, through "supply-side" reforms designed to create greater efficiencies and a lower-cost business environment. While substantial progress is now being achieved, over the short term, the uncertainties that accompany any dramatic change have clearly shaken the confidence of the Japanese people. Even if Japan were able to endure this pain, a further Japanese downturn would exacerbate financial pressures among its troubled Asian neighbors. It would also reduce Japan's ability to absorb imports and negatively impact world trade and capital flows.

- Fiscal Stimulus Measures Will Ease the Transition

To offset the deflationary influence of "supply-side" reform, the use of public funds has become a necessary option. Three stimulus packages, totaling more than $650 billion, were introduced in 1998. These "demand-side" initiatives combine real spending allocations and tax cuts. They will help Japan achieve a positive growth rate of one percent or more in FY1999 and engineer an economic recovery by FY2000. Other initiatives have been enacted to facilitate the treatment of bad loans and to resolve the credit crunch now plaguing Japanese firms.

Japan recognizes the road ahead will not be easy. Industries need to be restructured, inefficient enterprises closed and workers retrained. Already, however, Japan's retail, financial services, telecommunications and many other industrial sectors are in the midst of a dramatic transformation that promises to greatly enhance Japan's potential as a business and investment location for both Japanese and foreign firms.

A complete copy of JETRO's latest FOCUS: ECONOMIC RECOVERY NEWSLETTER can be viewed at its Internet web site: http://www.jetro.org/newyork/newsnet/focus/focus2.html

CONTACT: JETRO NY
Hidehiko Nishiyama
Executive Director
Tel: 212-997-0416, Fax: 212-997-0464
E-mail: nishiyamah@newyork.jetro.org

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