Japan's economy is the most advanced in Asia and the second most technologically advanced in the world, behind the United States. Total GDP in nominal terms in 2001, at $4.147 trillion, was also second only to the United States, but in purchasing power parity (PPP) terms, given the high price level in Japan and the low price level in China, Japan's estimated GDP of $3.45 trillion (PPP), according to the US Central Intelligence Agency (CIA), put it third behind the United States and China. In per capita GDP, measured in purchasing power parity terms, Japan was fifth among the major nations of the world: $27,200 (PPP) put it behind only the United States, Switzerland, Denmark, and Ireland according to the CIA estimates. Japan was the first Asian country to develop a large urban middle-class industrial society. It was also the first Asian country where a sharp reduction in birthrate set the stage for notable further increases in per capita income.
Since 1952, the number of farmers has fallen sharply, while expansion has been concentrated in industry and trade. The agriculture sector in 2001 accounted for only 2% of the GDP, although it remains somewhat subsidized, employing a relatively high 5% of the labor force. Domestic raw materials are far too limited to provide for the nation's needs, and imports must be relied on for such basics as many raw cotton, raw wool, bauxite, and crude rubber, with fuels and foodstuffs heading the list materials. The primary engine of Japan's modern growth has been the need to pay for these basic imports with manufactured exports. The exchange of high value-added finished products for low value-added commodities and raw materials has been the basis for both its high level of industrialization and its persistently high trade surpluses. Up until the mid-1980s, economic development depended on continued expansion in exports. With the steady appreciation of the yen in real terms since 1985, however, the country's economic structure has undergone some adjustment. Business investment became the second major engine of growth. Facilitated by growing wage rates, favorable credit conditions, cuts in personal and corporate income tax rates and other stimulative measures by the government, domestic demand as well as direct foreign investment have played an increasingly important role as a source of growth in recent years.
During the late 1980s, a 70% appreciation of the yen's value against the US dollar helped narrow Japan's trade surplus by 19% for two consecutive years in 1988/89 and 1989/90. This was accompanied by low rates of unemployment as well as strong growth in consumer spending and private investment, in turn contributing to a healthy 5% annual growth rate in the GNP between 1987 and 1990. The end of the period of lowered growth, 1975 to 1990, coincided with the collapse of the Cold War confrontation. The period that has followed, 1991 to 2003, has been characterized by very low to stagnant growth, and three dips into recession. The investment boom of the late 1980s, known retrospectively as the bubble economy, had its corresponding bust 1991 to 1994, leaving mountains of debts that still constitute a major drag on the economy because the government continues to hesitate to implement the major restructuring reforms urgently urged on it by outside observers to clear up credit lines for new investment and new forms of business organization. GDP growth rates fell to 1.0%, .3%, .6%, and 1.5% in the period 1992 to 1995. A spurt of recovery to 5% in 1996 was cut short by the Asian financial crisis, and Japan saw its first recession year since 1974 when GDP declined 1% in 1998.
Recovery from the Asian financial crisis was itself cut short in 2001, with the onset of a global slowdown and the aftershocks of the 11 September 2001 terrorist attacks on the United States: real GDP growth, according to IMF estimates, dropped from 2.2% in 2000 to -0.5% in 2001. Whether 2002 will be a third recessional since the collapse of the bubble economy remains to be seen. Strong growth in the first quarters of 2002 driven by strong exports were followed by signs of weakening towards the end, as the yen began to strengthen against the dollar, and unemployment reached a new high of 5.4%. The depth of recessions have been minimalized by massive stimulus packages and tax cuts across the period of stagnant growth. Recently, major tax cuts have been made in 1999 and 2003, and in 2001, the government implemented its ninth massive stimulus package since 1992, this one for ¥11 trillion (about $960 billion). The annual budget deficit has been above 7% of GDP since 1999, and is forecast at7.3% of GDP for 2002. Total national debt, at 146% of GDP, is proportionately the highest among developed countries.
The weakness of the banking sector has become an increasingly acute issue as the stock market, the other major avenue of business capitalization, has virtually collapsed in the context of the 2001–2002 global retrenchment in stock market prices, losing about 80% of its value since 1992. Accompanying corporate scandals and spectacular bankruptcies have done nothing to convince the cautious Japanese that they should forsake their conservative practices like the postal savings programs for riskier stock investments. The Japanese propensity to save has traditionally been high, even before World War II, when it was measured at 12.5% in 1925. Since the World War II, the propensity to consume, the obverse of the propensity to save, has steadily decreased as the economy moved from recovery to high growth to low growth to stagnation: from 95% in 1947 to an estimated 74% in 2001. High savings are matched by high individual indebtedness, due mainly to long term mortgage loans.
The relatively young Prime Minister Koizumi seemed to promise more radical economic reform, but whatever his intentions, the reversals in the global economy in 2001 and 2002 have constrained him to more of the "muddling through" that has characterized Japanese economic policy for the past decade. After a period of recovery following World War II (from 1947 to 1960), Japan entered into about 15 years of rapid growth (1961 to 1975) that was arrested by the world oil crisis, signaled by the first oil shock in 1973. In 1974, for the first time since World War II, the GNP fell (by 1.8%). The recession was cushioned, however, by the nation's ability to improve its trade balance (by $11 billion) by increasing exports while reducing imports. The recovery of the mid-1970s was slowed by the second oil shock, in 1978–79, and although the Japanese economy continued to outperform those of most other industrial countries, growth in GNP slowed to an estimated 4.1% yearly in real terms for 1979– 82, compared with 8.9% for 1969–72.
Meanwhile, the continued stimulation of exports, especially of automobiles and video equipment, combined with Japan's restrictive tariffs and other barriers against imports, led to increasingly strident criticism of the nation's trade practices in the United States and Western Europe. As early as 1971, Japan agreed to limit textile exports to the United States, and in the 1980s it also imposed limits on exports of steel, automobiles, and television sets. Similar limits were adopted for exports to Canada, France (where criticism focused on videocassette recorders), and West Germany. Nevertheless, Japan's trade surpluses with the US and other countries continued to swell through the mid-1980s, helped by a number of factors, most notably the misalignment of major currencies, particularly between the dollar and the yen.