Japan's economy used to be the one that everyone wanted to emulate. Now after a seemingly unending period of poor performance, everyone is urging Japan to continue its reforms even though the economy is improving. The economy initially recovered from its third recession in ten years on the coattails of strong exports to the U.S. and China. But now, once again Japan is struggling to recover from a deep recession which has been exacerbated by the precipitous drop in world trade.

 

Japan's problems continue to stem in part from both political and economic structural imbalances. And these problems have made it virtually impossible to untangle the after effects of the 1980s stock market collapse and real estate bubbles. When Junichiro Koizumi became prime minister in April 2001, he promised to rid Japan of its bad debts and bankrupt companies and get the country growing again. However, since Koizumi left office in 2006 when his term in parliament expired, the political system has wobbled. The Democratic Party of Japan (DPJ) was swept into power in September 2009 but was unable to keep a prime minister in office for very long. Because the DPJ is made up of divergent groups, there was incessant bickering with the result that few new policies were enacted and the party's grip on power teetered. The DPJ lost the December 2012 elections and the Liberal Democratic Party (LDP) returned to power.

 

The prime minister since mid-December 2012 is Shinzo Abe. He replaced Yoshihiko Noda of the DPJ. Mr Abe is determined to defeat long lingering deflation and renew growth in the sagging Japanese economy by fiscal stimulus and the use a more expansionary monetary policy through asset purchases and the establishment of a 2.0 percent inflation target from the Bank of Japan. His plan for Japan's economic recovery has been named 'Abenomics'. Upon taking office, he named a new governor of the BoJ, Haruhiko Kuroda. At his first meeting as governor, Kuroda initiated a wide ranging quantitative easing program. Since Abe's election the yen has dropped in value against both the U.S. dollar and euro.

 

Historically, Japanese companies have relied more on bank financing than equity and bond issuance. The economy consists of two distinct tiers: the large and powerful multinational companies and a plethora of small, often family-owned, enterprises. Manufacturing has been the mainstay of Japan's economy since the 1960s and still accounts for just over 20 percent of current price GDP. The electronics and car industries continue to dominate Japan's manufacturing sector and are household names in international markets. But both industries have suffered in recent years from the strength of the yen, which has forced them to move manufacturing facilities to lower-cost countries in order to remain competitive. Another feature of Japan's economy is the high rate of investment, both in the private sector and, more recently in the public sector (largely because of the endless stream of fiscal stimulus packages).

 

The country was upended by the March 11, 2011 earthquake and tsunami and the ensuing power and supply chain problems which made a return to a new normal difficult — the economy continues to struggle to recover.

 

Abenomics — a program designed to get the economy growing again and ridding the economy of deflation recently suffered some setbacks. The economy is currently in a technical recession — GDP declined in both the second and third quarters after the enactment of a sales tax increase on April first. Now, Prime Minister Shinzo Abe has called a snap election in the lower house of parliament for December 2014 and postponed the second half of the tax increase for 18 months to April 2017.

 

Prime Minister Shinzo Abe retained his post at the December 14 snap election, albeit with a very low turnout, giving the LDP four more years to overcome business sector conservatism and chip away at structural reforms. On December 27, 2014 the prime minister approved a $29.17 billion stimulus package meant to boost consumer spending and regional economic activity, seeking to revive an economy in recession.

 

The spending package focuses on small businesses, rural communities and post-disaster reconstruction. Its passage marks the first major act by Mr. Abe's new cabinet since his party's decisive win this month in an election he had framed as a referendum on his economic policies. Mr. Abe had vowed during the campaign to concentrate on spreading the wealth outside Tokyo and to help businesses and consumers hurt by a sharp decline in the yen's exchange rate.