Japan is one of the most remarkable nations of the 20th century, and the most astounding fact about them is that despite being destroyed during World War II, in just 23 years it rose from the ashes to become the second-largest economy in the world by 1968, surpassing such giants as France, Britain, and Russia. In the 1960s, the Japan Economy grew at a rapid rate of 10 percent per year and even reached 12.9 percent, but after thawing, the Japan economy grew at a slower rate.
The first decade of Japan’s progress was lost as a result of the two oil crises of the 1970s. To punish the American Allies for supporting Israel during the Arab-Israeli War, OPEC nations increased the price of oil from $2 to $11 per barrel. In 1979, the second oil shock occurred. This is when Iran ceased oil exports to the globe. In the 1970s, Japan’s economic growth stagnated since 99.7 percent of its oil was imported at the time. As a result, the price of fuel rose, inflation soared, and the country’s economy slowed. Can the Japanese be faulted? Not so, but the second decade they lost was the result of a dreadful error, and it was the United States of America that drove them to make it.
What Did We Do?
This narrative dates back to 1985 in Japan, and if you examine this graph, you can see that the Japanese Yen was appreciating significantly versus the dollar. In 1971, 357 JPY were required to purchase one dollar, but by 1985 AI, just 260 yen were required. The United States, France, Germany, the United Kingdom, and Japan, however, opted to weaken the dollar against these trade partners.
If you sold 500 yen worth of machine components from Japan to the United States in 1985, your cost on the American market would be 1.92 times that amount.
However, after four years of selling the identical machine part for 500 yen on the foreign market, it now costs the buyer 3.96 dollars, indicating that the price of your product on the worldwide market has climbed by 100. As a result, when this was applied to all Japanese exports, the country’s exports became prohibitively expensive, causing enterprises to close because they could no longer compete with overseas exporters.
To compensate for these losses to the exporters, the bank of Japan enacted a revolutionary policy in which they lowered the lending rates of the banks so that more people and traders could obtain loans and grow their businesses. If you look at the interest rates in Japan, they dropped from five percent to just 2.5 percent, and the banks in Japan began granting loans very leniently. Japan was where the famed asset price bubble began.
Asset price inflation
The burst of Japan’s economic bubble wiped out savings and cost Millions their jobs. As usual, let’s try to understand the Japanese bubble with a story.
People took out loans to purchase land, which led to an increase in the number of buyers in the market, which in turn led to an increase in the price of land. When the price of land rose, buyers pledged it as collateral for additional loans, which led to an influx of new buyers and a further increase in the market price of land.
This is the reason why comparing the land values in Japan before and after 1985 will blow your head. In 1985, a square meter of land cost 0.5 million yen, but in just six years, that same square meter of land cost four times as much as 2 million yen. The same was true of the stock market, where the Japanese index soared from 10,000 points to nearly 40,000 points in just five years, leading to an increase in the number of people taking out loans. When people began to borrow from the markets, the virtuous cycle unexpectedly came to a stop due to excessively high-interest rates. This resulted in a fall in demand for land, which in turn led to a decline in land values; this marked the beginning of the crisis.
Do you recall our previous land purchasers? They purchased land for 10 million yen and obtained a loan for 8 million yen. Because the price of their land had increased to 25 million yen, they took out an additional loan of 10 million yen. Well, what can I say? The value of the land they had committed to the bank decreased from 25.0 to 20.0 to 18.15.10 to 8,000,000. This indicates the bank Because no bank was ready to accept land as collateral, the price of land decreased. This caused banks to sell more land, and the result was an economic catastrophe. This ladies and gentlemen is the origin of a catastrophe that precipitated a precipitous decline in land and stock prices in Japan forty years ago and continues to wreak havoc to this day. As a result of the non-performing Assets in Japan tripling from 2 trillion yen to 13 trillion yen in just three years, forcing the failure of some banks and a recession from which they have not yet recovered, they have not yet returned to their 1985 levels. This occurred while the United States economy continued to expand as a result of the Plaza Accord.
Why, when the Japanese economy was in such poor shape, did they not open up to international investment and expand their economy as China has?
The keiretsu model is the third explanation for Japan’s failure. It is ironic because the same approach helped Japan become the world’s second-largest economy. How even is that possible? Let’s examine briefly what the keiretsu model is and how it worked and failed.
In Japan, we use a cutthroat contract, which means that if I, as a large company, sign a contract with you tomorrow to buy a sunroof for forty dollars per unit for five years, I will still buy it from you for forty dollars unless you cannot sell it, in which case I will sue you or go to another vendor, even if he offers me one for thirty dollars. The transactions of the Japanese keiretsu were the exact opposite of this.
In this instance, contractors, subcontractors, manufacturers, and suppliers are supported by a Core Company and a major Bank. This group constitutes a keiratsu. Diverse entities do not participate in the supplier’s activities and assume no risk associated with the supplier.
All of these entities’ owners invest in each other’s businesses, and the major bank that supports them would own stakes in all of these companies; instead of having a five-year contract with its suppliers like American companies do, Toyota forms a rock-solid relationship with its suppliers by having them sign contracts that are between 20 and 30 years long; this is an example of how well they function as a company compared to American companies.
Say a Toyota supplier needed 10,000 tonnes of steel to create his components, thus if the price of steel soared, this part manufacturer’s costs would immediately double under the U.S. system. The supplier would be forced to sell the part at a lower profit, but Toyota would place an order for 110 000 tonnes of steel. If the manufacturer ordered 10 000 tonnes of steel separately, he would pay 26 000 yen per tonne, but since Toyota is placing a large order of 110 000 tonnes of steel, they would be able to get it for 20 000 yen per tonne.
Secondly, if the part manufacturer is experiencing trouble with profits, the bank in Kiritsu will readily offer a low-interest loan so that the company has enough capital to expand, and as soon as cash flow returns to normal, the loan can be repaid very easily, making expansion easier even if there is a cash shortage.
The third most surprising principle I uncovered was that these businesses share their R&D data and engineers within Kirito. This is why Japanese corporations were able to invest in their research and development while taking very large risks. As a result, they were able to rapidly expand, and rather than competing with one another, they competed on the international market.
How did keiretsu Fail
Few people observed the system’s three flaws: First, over 23 years, these creative groups grew so powerful and large that if a young Japanese man wished to launch a game-changing manufacturing model that could lower production costs by 30%, he could do so with relative ease.
Toyota had already signed a long-term contract with their keiretsu enterprises, making it impossible for him to obtain a contract. Even Japan’s government regulations made it difficult for foreign companies to produce a profit, inhibiting India’s innovation. If Amazon and Flipkart were not competing, nobody would introduce e-commerce to India’s tier 3 and tier 4 cities. Not because they are Japanese, but because they are members of the same keiretsu, Japanese banks favor Japanese enterprises for loans. If Amazon had intended to invest 500 crores in India in 2021, they would have deployed 250 crores of their money and re-invested the remaining 250 crores in Indian bonds; the entire surplus capital would have been invested in the Indian economy. If Amazon desired to invest 500 crores in India, it would have been required to purchase Indian rupees. Therefore, when the Russia-Ukraine conflict erupted again, Japan’s economy, which imports more than 90 percent of its energy and is not the best place for foreign workers or investors, is a mess that is deteriorating with each passing day.
What ought India to do?
The first lesson you must learn from this case study is that you should never, ever alter your economic system significantly for the benefit of a foreign nation. This is because there are no friends in geopolitics, only interests. Secondly, if you do not alter your economic policies over time, they will eventually destroy your economy. In this instance, this was observed utilizing a keiretsu model. Lastly, in this globalized society, if you do not embrace foreign investments and hide your true identity, you will be left behind.