In the two-year period 1980-81, Japan tried to adapt its economy to the effects of the second shock in 1979. In particular, between 1978 and 1980 the current account balance went from a surplus of $ 16.5 billion to a deficit of $ 10.7 billion, while the inflation rate rose to $ 7.5 billion. %. The adjustment was mainly implemented through the adoption of restrictive financial policies which, accompanied by modest wage increases, caused a sharp slowdown in domestic demand and economic growth. The latter was also supported by exports, whose rapid development was favored by the trend in the real effective exchange rate which, in the two-year period 1979-80, depreciated by about 15%. The Japan’s strategy was successful: in 1981 the current account recorded a surplus of almost 5 billion dollars, while the inflation rate was brought back to 4.5%. The adjustment was also achieved without significant costs in terms of growth, which remained at around 3.5%. These trends were partially reversed in 1982. The adoption of more accommodative monetary and fiscal policies favored a recovery in domestic demand. The foreign component of demand, on the other hand, has lost its importance due to the recession underway in the rest of the world.
In the three-year period 1983-85 there was a phase of sustained economic growth which was triggered by a recovery in exports, especially to the United States. At the same time, the current account surplus rapidly increased, reaching about 50 billion dollars in 1985. In this period, one of the main objectives of the government was to reduce the public deficit since, following the expansionary fiscal policies adopted in from the second half of the seventies, there had been a rapid growth of the public debt. The government deficit was thus reduced from nearly 4% of GDP in 1983 to less than 1% in 1985. Thanks in part to subdued wage growth, the inflation rate was kept at around 2%.
According to vaultedwatches, the economic policies followed by Japan in the first half of the 1980s aroused international criticism as the country’s large current account surpluses constituted an obstacle to rebalancing the balance of payments of the United States and some developing countries.. In particular, Japan, being the second largest economic power in the world, has been urged by the main industrial countries to take on greater responsibilities to ensure the growth of trade and the world economy. In this regard, it was underlined that the country must rely mainly on domestic demand as the engine of growth and that it must take measures to encourage the expansion of imports, especially of manufactured goods. In the following years, Japanese economic policies were therefore more influenced by international considerations and by the relaunch of the process of economic cooperation between the major industrial countries, which began in September 1985 following the Plaza agreements. A new phase of development of the Japanese economy began in 1985: it moved from the phase of growth led by exports to a new phase, still in progress, mainly driven by the dynamics of domestic demand (public and private). Between 1980 and 1984, domestic demand had grown at an annual rate of, on average, about 2.2%; between 1985 and 1990, domestic demand grew at an annual rate of, on average, 5.3%.
In the period 1986-88 there was a reorientation of economic policies. During 1986 there was a decline in interest rates, favored by four successive reductions in the official discount rate which was brought from 5 to 3%. From the end of the year there was also an acceleration in the growth rate of monetary aggregates, due to the massive interventions in support of the dollar carried out by the Bank of Japan. Fiscal policy also became moderately expansionary: in 1987 and 1988 spending packages were approved which were mainly based on increasing public investment. These policies have stimulated a vigorous recovery in domestic demand which has dragged economic growth.
The sharp improvement in the terms of trade resulting from the fall in oil prices at the end of 1985 helped to support the dynamics of domestic demand but slowed down the process of adjusting the external accounts. In this respect, following the strong appreciation of the exchange rate in real terms, between 1985 and 1988 exports in volume remained almost stationary, while imports in volume increased by about one third. However, also due to the effects of the ” J curve ” deriving from the appreciation of the yen, the current account surplus increased from 50 to 80 billion dollars during this period.
The favorable trends that emerged in 1988 continued in 1989. The economy of Japan developed at a sustained pace (+ 4.8%), thanks to the growth in investments and internal consumption. This made it possible to reduce the current account surplus by more than $ 20 billion. 1989 was a year characterized by various negative phenomena, however inserted in a general framework that has remained largely positive. Growth in both GDP and domestic demand was less rapid than in 1988, but still at levels well above 1986. The current account balance was about $ 57 billion compared to about $ 80 in 1988. By contrast the inflation rate rose to 1.8%, mainly as a result of a sustained wage increase. The commitment in the fight against
In 1990, GDP grew more than in 1989 and unemployment fell further. At the same time, the anti-inflationary commitment of the monetary authorities continued and promoted further upward adjustments in the discount rate; this, in August, reached 6%, thus favoring the strengthening of the yen which, in turn, contributed to a further drastic reduction in the current account, which fell to around 36 billion dollars.
1991 was another year of expansion with an inflation rate below 3%. GDP growth, which took place above all in the first half, was driven by consumption and public spending which offset the slowdown in private investment. The current account has returned to a level close to that of 1988. Monetary and credit policy, although more relaxed than in 1990, has remained restrictive. While the commitment towards the progressive reduction of public debt continued, fiscal policy was oriented in favor of an increase in investments in infrastructures.