Historical background

In 1603, a Tokugawa shogunate (military dictatorship) ushered in a long period of isolation from foreign influence in order to secure its power. For more than two centuries this policy enabled Japan to enjoy stability and a flowering of its indigenous culture. Following the Treaty of Kanagawa with the US in 1854, Japan opened its ports and began to intensively modernize and industrialize. During the late 19th and early 20th centuries, Japan became a regional power that was able to defeat the forces of both China and Russia. It occupied Korea, Formosa (Taiwan), and southern Sakhalin Island. In 1931-32 Japan occupied Manchuria, and in 1937 it launched a full-scale invasion of China. Japan attacked US forces in 1941 - triggering America's entry into World War II - and soon occupied much of East and Southeast Asia. After its defeat in World War II, Japan recovered to become an economic power and a staunch ally of the US. While the emperor retains his throne as a symbol of national unity, elected politicians - with heavy input from bureaucrats and business executives - wield actual decisionmaking power. The economy experienced a major slowdown starting in the 1990s following three decades of unprecedented growth, but Japan still remains a major economic power, both in Asia and globally. In January 2009, Japan assumed a nonpermanent seat on the UN Security Council for the 2009-10 term.

Economic overview

In the years following World War II, government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (1% of GDP) helped Japan advance with extraordinary speed to the rank of second most technologically powerful economy in the world after the US. Today, measured on a purchasing power parity (PPP) basis, Japan is the third-largest economy in the world after the US and China. Two notable characteristic of the post-war economy were the close interlocking structures of manufacturers, suppliers, and distributors, known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force. Both features are now eroding under the dual pressures of global competition and domestic demographic change. Japan's industrial sector is heavily dependent on imported raw materials and fuels. A tiny agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. Usually self sufficient in rice, Japan imports about 60% of its food on a caloric basis. Japan maintains one of the world's largest fishing fleets and accounts for nearly 15% of the global catch. For three decades, overall real economic growth had been spectacular - a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s. Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of inefficient investment and an asset price bubble in the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor. In October 2007 Japan's longest post-war period of economic expansion ended after 69 months and Japan entered into recession in 2008, with 2009 marking a return to near 0% interest rates. The 10-year privatization of Japan Post, which has functioned not only as the national postal delivery system but also, through its banking and insurance facilities as Japan's largest financial institution, was completed in October 2007, marking a major milestone in the process of structural reform. The Japanese financial sector was not heavily exposed to sub-prime mortgages or their derivative instruments and weathered the initial effect of the global credit crunch, but a sharp downturn in business investment and global demand for Japan's exports in late 2008 pushed Japan further into a recession. Japan's huge government debt, which totals 170% of GDP, and the aging of the population are two major long-run problems. Debate continues on the role of and effects of reform in restructuring the economy.