Introduction

Japan's success in coping with two rounds of skyrocketing oil prices in the 1970s has dramatically changed both its economic structure and competitiveness in the world market. The oil shocks of the 1970s were regarded in Japan as a national emergency to a country poor in raw materials and arable land. As a result, the government and the business community worked rigorously to maintain the competitiveness of Japanese industry through research and development to reduce energy costs and industrial restructuring efforts.

By the end of the 1970s, these objectives had been largely achieved. Japan had invested almost twice as much as the United States in research and development to reduce energy costs and to create newer and younger vintages of capital stock in Japan. Overall investment in Japan has grown much faster than overall investment in other advanced countries. For instance, capital perunit of employment between 1973 and 1979 increased at an average annual rate of 6.1 percent in Japan, whereas in the United States it grew at an average annual rate of only 0.9 percent. Japanese imports and exports roughly balanced at the rate of 16 percent of GNP in 1981 and the excess of savings over domestic investment exactly matched the government's budget deficit, leaving domestic effective demand and supply in equilibrium.

In the early 1980s there was a growing concern among government officials and business groups, notably the Keidanren (the most powerful federation of business organizations in Japan), that the large government deficit would eventually cripple the economy and that the size of the government was becoming too large.