There is no doubt that the Japanese government has played a significant role in the shaping of the Japanese economy, especially the unprecedented growth that has occurred within the last 50 years. So much so, that the rest of the world looks to them to see what they did ñrightî, and they try to apply it to their own countries. This paper is mainly a discussion of what the Japanese government did do right, in shaping industries and planning JapanÍs economic development. We should keep in mind, however, that Japan is unique, and the growth that it has experienced could not necessarily be copied everywhere else in the world. To what extent has government been involved is the shaping of the economy by means of policy? I argue that government undoubtedly has played an interventionist role in JapanÍs economic life, and even though mainstream economists agree that government should stay out of economics as much as possible, the economy has grown as a planned result of a judicious government that was guided by an equally judicious private sector.

The Japanese government is able to encourage economic growth and play an important role in economics for a variety of reasons. First of all, after the occupation, the Japanese government focused on the economy over all its other responsibilities. Thus, the entire country single-mindedly worked towards the economic betterment of Japan. The Japanese people have been willing to sacrifice imported goods, and the development of the countryÍs infrastructure for the economyÍs growth. In fact, the consumers have surprisingly little power in Japan. With the exception of the  late 1960Ís through the mid-1970Ís, consumers have had little impact of the shaping of the Japanese economy. Overall, the Japanese government and the LDP have enjoyed much support from that Japanese people to create and execute economic politics, much more so than other governments, including the US.

This obviously has allowed the Japanese government much freedom, and the leeway to listen to big business instead. The business community is very well organized and there is already a close relationship between the LDP and big business. In fact, 66% of the LDPÍs financing comes form big business. Also, national economic organizations exist to help facilitate the relationship between government and business. MITI and the Ministry of Finance are one of the most powerful agents in directing economic policy. In other words, a forum exists already that gives the Japanese government a lot of liberty to direct economic policy.

It is important to note first and foremost that big business has become the backbone to JapanÍs growing economy. JapanÍs web of big businesses, or keiretsu, have done incredibly well, and they have pulled the rest of the economy along with them. Out of the 500 largest non-US corporations in the world, 130 of them are Japanese.  Of the worldÍs top fifty industrial corporations, 5 of them are Japanese.   So, in supporting big business, the government has helped support the growth of the economy.

The precedent for the close relationship that exists between government and business was set in the early to mid-Meiji period. The zaibatsu, a collection of four family owned companies, and the government established close connections, as the zaibatsu would attain state properties at a low cost, and they would receive valuable government contracts. After the occupation, the zaibatsu was somewhat broken up to form a close alliance of firms, or keiretsu. This is referred to in the West as ñJapan, Inc.î It implies an allegiance of Japanese companies that invest in each other and are completely interconnected. They are a united front to which the government must obviously listen. Arguably, ñmoney politicsî does not exists in Japan more than it does in other places, except  in Japan it is more open and accepted.

In terms of policy, the government has passed legislature that supports big business, and protects its industries. After the occupation, the government set rigorous controls on foreign trade and exchange transactions. There were quotas set on imported industrial raw materials and other imports. Also, foreign investment was tightly monitored and restricted. The industries that the government has protected that are not successful are agriculture, coal, and merchant shipping industry. The government supported these industries even though they could not compete on a global level because of political pressure. Japanese government protected their infant industries, however, it is important to note that they didnÍt make the mistake in protecting them to the point that they allowed inefficient industries to stick around for too long.

After the war, the Ministry of Trade and Industry decided to establish industries in which Japan would have a comparative advantage and industries which would require comprehensive utilization of capital and technology ¿ industries such as steel, oil refining, petrochemicals, automobiles, aircraft, industrial machinery, and electronics. They realized that on a long-term perspective, those industries would yield maximum return considering that Japan is relatively scare in resources. They were definitely right, as the electronics industry especially has relinquished high growth rates in the past 30 years, and Japan has been at the forefront of this industry. MITI has advocated several policies such as import protection in the form of tariffs, controls on foreign investment and on purchases of foreign technology, financial aid to select industries through government lending institutions, selective tax incentives, and administrative leadership to prevent excess in investment and production. Also, MITI played an administrative role in distributing resources among Japanese industries.

Japan has historically resisted direct foreign investment. Japanese equity markets are tight even today. In the 1950Ís, the government even had control over foreign exchange rates. Instead, Japanese business relies on debt from Japanese banks. Since the government backs the banks, the government is in control of the businesses too. The Japanese government (like the FED) sets the required reserve ratio and they would make provisions to help private banks over loan to certain sectors.  This practice where the government will guarantee loans to certain sectors is called window guidance.

In conclusion, these policies are not entirely unique to Japan, however what is unique is the support the government has enjoyed from its citizens. Of course, the government claims that the economy has grown as much as it has because of their doing, and it is true, however, the Japanese government has also enjoyed much freedom and popularity. The countries in Asia that are also beginning to boom ¿ namely Taiwan, South Korea, Singapore, and possibly China ¿ have written their own success stories, but not as elegantly as Japan has. Japan has a strong middle class, and it has not been ravished and exploited by entrepreneurs, unlike its Asian counterparts. Thus, Japan will remain a economic force to be reckoned with into the 21st century.