North Asia and deflation

Japan’s economic recovery from the Second World War was based on four primary pillars, namely enforced import substitution in a number of key areas (such as agriculture); a policy of systematic “financial repression” that lowered the returns to savers but provided corporate and government borrowers with inexpensive credit; the encouragement of exports via a “cheap currency”; and intensive central government development planning.

We suspect that although these policies produced a rapid industrial renaissance and therefore helped immensely to achieve the West’s aim of building a stronger Japan that could act as a bulwark against the feared spread of communism in Asia, we strongly suspect that the adopted policies adversely impacted a large number – if not the majority – of the population over the longer term. 

In the grand scheme of things, the initial introduction of these policies was probably justified by the extreme circumstances that Japan found itself in in the post-war period, but the policy mix was already becoming inappropriate by the late 1960s (witness the booms, busts and inflation that Japan suffered in the late 1960s and early 1970s).

Nevertheless, the model was allowed to persist not just through the 1970s but the 1980s, 1990s and even 2000s as well, with few signs of the much-needed reforms that were required. We suspect that the Bubble Economy of the 1980s and the long-running slump that has followed it were partly the result of Japan’s over-long adherence to what has been described as the North Asian Development Model.