Japan has the second largest economy in the world. Its Gross Domestic Product (GDP) totaled $4,193US billion in 1997 ($33,317US per capita). Thus, the Japanese enjoy a very high standard of living. JapanÆs foreign exchange reserves are the largest in the world ($203.22US billion in 1998) and Japan is the world's largest creditor. Labor productivity is one of the highest in the world and the labor market is regulated by the 1947 Employment Security Law. The Ministry of Labour seeks to prevent excessive dislocation or job mobility among workers, and employment services (such as employment agencies) are therefore tightly controlled.
Despite these successes, the Japanese economy has experienced a downturn in the 1990s. Growth has slowed, average annual GDP growth falling to 1.4 per cent (1991-95). The government attempted to stimulate the economy in the early 1990s through public spending, but this served only to put public finances in an unsustainable position. As a result, in 1997 Japan found itself in its worst recession since World War II. The slowdown in the Japanese economy has been not only more severe but has also lasted longer than expected.
With the downturn in the economy, the Japanese government was under pressure to make specific changes to its policies. Economists suggested several significant structural adjustments that should be made to the Japanese economy. First, the banks needed to clean up bad debts that resulted from the collapse of the bubble economy. Second, corporate management had to take steps to deal with the effect of having to pay the world's highest labor costs, which resulted from the strong yen pushing up Japan's average wages to the highest in the world. Third, Japanese industry was facing increased competition due to the globalization of the world economy and the emergence of newly industrialized economies such as Asian countries who were catching up with Japan as inexpensive labor m...