Japan's economic journey: lessons from rise and stagnation

Business Recorder

21-05-2025

Japan's economic story is a rollercoaster of triumph and cautionary tales. From the ashes of World War II to global dominance in the 1980s, and then a prolonged stagnation, Japan's trajectory offers valuable lessons for nations and policymakers. By diving into its rise, fall, and potential paths forward, we can uncover insights about resilience, adaptability, and the perils of complacency.
The post-war miracle: rebuilding from ruins
After World War II, Japan was a shattered nation. By 1946, industrial output had plummeted to 27.6 percent of pre-war levels, and nearly 40 percent of its infrastructure was destroyed. Famine loomed, but US food aid in 1946 prevented widespread starvation.
Between 1945 and 1952, the US injected roughly dollar 2.2 billion (adjusted for inflation) in aid, distinct from Europe's Marshall Plan, to stabilize Japan's economy. This lifeline rebuilt key sectors like steel and textiles.
Under the US-led Supreme Command for Allied Powers (SCAP), Japan accessed cutting-edge technologies from the US and beyond. The Ministry of International Trade and Industry (MITI) played a pivotal role, securing low-cost technology imports that modernized industries. This foundation propelled Japan toward dominance in electronics, automotive, and robotics. Lesson: External support and strategic institutions can kick-start recovery, but leveraging global knowledge is key to sustained growth.
Export-led growth: riding the global wave
The Korean War (1950–1953) was a turning point. US military procurement, peaking at 7 percent of Japan's GNP in 1953, fuelled industries like steel and automotive. Toyota, for instance, scaled up through military contracts. By 1960, industrial output soared to 350 percent of pre-war levels. From 1957 to 1973, Japan's GNP grew at a staggering 10 percent annually, with GDP rising from dollar 91 billion in 1965 to dollar 1.1 trillion by 1980 (in nominal terms).
Japan became an export juggernaut, flooding US markets with cars, electronics, and machinery. Even the 1973 and 1979 oil shocks couldn't derail it. MITI's subsidies bolstered high-tech sectors, with firms like NEC and Toshiba leading in semiconductors. Growth slowed to 5 percent annually in the 1970s, still outpacing the US.
Lesson: Aligning industrial policy with global demand can drive explosive growth, but resilience requires adapting to external shocks.
The bubble and bust: when euphoria backfires
By the 1980s, Japan was on top of the world. Low interest rates and speculative fervour fuelled a bubble, with the Nikkei Index hitting 38,957 in 1989. Real estate prices skyrocketed—Tokyo's land was briefly worth more than all US real estate combined.
But the bubble was unsustainable. In 1990, the Bank of Japan raised interest rates, and by 1992, the Nikkei crashed to 14,000. The 'Lost Decade' (1991–2003) followed, marked by deflation, a credit crunch, and GDP growth averaging just 1.14 percent.
Banks, burdened with non-performing loans, couldn't lend. Businesses stagnated, and consumer confidence tanked. Japan's failure to swiftly recapitalize banks or clear bad debt prolonged the crisis. Lesson: Unchecked speculation and delayed reforms can turn prosperity into paralysis. Proactive regulation is critical.
China's rise: a new global order
While Japan faltered, China surged. Deng Xiaoping's reforms in the 1980s transformed China into a market-driven export giant. By 2001, its WTO accession solidified its global trade dominance. China's low labour costs undercut Japan's exports. By 1999, China surpassed Japan as Asia's largest economy by purchasing power parity, and in 2010, it became the world's second-largest economy.
Japanese giants like Sony and Panasonic lost market share to Chinese competitors. Japan's strong yen and high labour costs didn't help.
By 2024, Japan's GDP was an estimated dollar 4.2 trillion, down from dollar 5.7 trillion in 2010, while China's neared dollar 18 trillion (in PPP terns around 40 trillion dollars).
Lesson: Global competition waits for no one. Staying cost-competitive and innovative is non-negotiable.
Structural woes: ageing, debt, and inertia
Japan's stagnation wasn't just external. An ageing population—36 percent of citizens were over 65 by 2024—shrank the workforce. The fertility rate, at 1.26 births per woman, couldn't sustain growth. Public debt ballooned to dollar 8.84 trillion (263 percent of GDP), among the highest globally. Innovation lagged, with Japan trailing in AI and digital tech investments. In 2023, Japan's R&D spending was 3.3 percent of GDP, solid but behind South Korea's 4.9 percent.
Regulatory inertia compounded the problem. Slow bank recapitalization and resistance to structural reforms deepened the malaise. Japan also shunned immigration, with foreigners making up just 2.3 percent of the population in 2024, compared to 14 percent in the US. Lesson: Demographic decline and rigid systems can choke progress. Flexibility and openness are vital.
Missed opportunities: what Japan could have done?
Japan's stagnation wasn't inevitable. In the 1980s, macroprudential policies—like stricter lending rules—could have tamed the bubble. After the 1991 crash, rapid bank recapitalization and debt restructuring might have restored confidence, as seen in Sweden's 1990s recovery.
Embracing skilled immigration in tech and engineering could have offset demographic decline, boosting R&D in fields like AI and robotics. Globally, Japan could have invested in emerging markets like Africa and Southeast Asia, securing trade routes and lowering costs. Instead, its focus remained inward.
Lesson: Timely intervention and global engagement can prevent prolonged decline.
The US-Japan-China triangle: a global perspective
The US was Japan's catalyst. Post-war aid, open markets, and tech transfers fuelled Japan's miracle. But China's rise disrupted this dynamic. While the US benefited from cheap Chinese imports, it lost 5 million manufacturing jobs between 2000 and 2015. Japan, caught between China's cost advantage and US market flexibility, struggled to adapt.
Lesson: Global alliances and markets drive growth, but adaptability is key when new players emerge.
The way forward: revitalizing Japan
Japan's story isn't over. To reclaim relevance, it must act boldly:
Embrace immigration: Welcoming skilled workers in tech, finance, and biotech could rejuvenate the workforce. Singapore's 40 percent foreign workforce shows how this can work.
Invest globally: Partnering with developing nations in Asia and Africa for manufacturing and resources could cut costs and build trade networks.
Lead in innovation: Doubling down on generative AI, green tech, and robotics—where Japan still has expertise—could restore its edge. In 2023, Japan led in industrial robot exports, a strength to build on.
Form strategic alliances: Collaborating with nations like India and Vietnam could counterbalance China's dominance.
Lessons for Pakistan from Japan's rise and stagnation
Japan's economic rise from post-war ruin to global industrial power offers Pakistan a compelling blueprint for smart integration into the global economy. Japan's targeted policies, such as tech-focused imports and export-led growth, were catalysed by strong institutions like MITI and global partnerships, especially with the US. Pakistan, too, can exploit its geopolitical significance through projects like CPEC, but the key is to pivot from infrastructure-heavy deals to tech transfer and workforce empowerment. The real game-changer would be embedding itself in emerging global value chains—particularly in digital services, green energy, and AI.
However, Pakistan's potential will remain untapped unless it turns its so-called 'demographic dividend' into a development powerhouse. Japan's tech dominance rested on massive investments in education and R&D, while Pakistan lags with underfunded, outdated systems.
With over 60 percent of its population under 30, Pakistan must revolutionize learning—investing heavily in STEM through latest tools and technologies, investing in human intelligence through massive and universal digitalization, and high-tech skills.
Programmes modelled on successful initiatives in China, South Korea, and other innovation-driven nations could empower Pakistan's youth to become drivers of technological advancement. Equally important is regulatory reform and the creation of a robust ecosystem that nurtures startups and strengthens digital infrastructure. If Pakistan aspires to compete in the high-tech global economy—beyond traditional sectors like textiles and remittances—it must prioritize innovation, entrepreneurship, and tech-enabled industries.
At the same time, Pakistan must absorb the critical lesson from Japan's economic stagnation: adapt swiftly or risk being left behind. Unlike Japan, which struggled to adjust to China's rapid ascent, Pakistan stands at a unique crossroads—with the chance to collaborate with China's booming tech sector. Leveraging opportunities within China's dollar 1.5 trillion digital economy—through CPEC-linked ventures and broader technological cooperation—could deliver transformative dividends.
However, alliances alone won't suffice. Pakistan must launch a bold 'Sci-Tech-Human Power Complex' revolution that integrates universal high-tech education, quality healthcare, and full inclusion of women in the workforce. Empowering the entire population, not just a select few, is the only way to unlock sustained growth. By embracing innovation, remaining agile, and staying open to global trends, Pakistan can build a future that avoids the pitfalls of stagnation and fully realizes its immense potential.
Copyright Business Recorder, 2025