Japan's Economic Growth and Foreign Direct Investment

Abstract

By any measure, Japan's economic performance over the past century and a half has been a huge success. Forced to open up to the outside world in 1859, the country embarked on wide-ranging institutional and economic reforms that set it on a path of rapid industrialization. Defeat in World War II was followed by even more spectacular progress, with the country registering sustained rates of economic growth unprecedented anywhere in the world. The acquisition of foreign technology played a central role in Japan's rapid development; yet, in contrast with more recent Asian success stories such as Malaysia, Thailand, or China, foreign direct investment (FDI) played no part in Japan's postwar economic rise. This quite naturally raises the question: if the country's economy fared so well without inward direct investment until only quite recently, why should the low levels matter now? The reason, of course, is the dismal performance of the Japanese economy during the 1990s and early 2000s and the deep-seated structural problems that the prolonged recession exposed. Following the era of high-speed growth from 1955 to 1973, during which the economy expanded at an average annual rate of 9.3 percent, and a still respectable average annual growth rate of 3.8 percent during 1974–91, the economy almost came to a standstill, with average annual growth reaching barely 1 percent from 1992 to 2002 (see Figure 4.1). What caused the Japanese economy to stagnate for more than a decade remains a hotly debated issue.