Japan is the world's second largest economy with a gross domestic product of roughly more than AU$5. 2 trillion in 1997. Japan's economy is larger than that of Germany, the United Kingdom and France combined. It is ten times the size of China and seventeen times the size of India. Japan represents almost three quarter of the entire Asian economy. Furthermore in 1996, Japan's economy had the highest growth rate of 3.
6% in the industrialised world. The Japanese economic pie grew at an annual rate of ten percent from the mid 1950's until the Arab oil shocks of the early 70's. The Japanese then managed to maintain much more modest but steady growth rates until the early 1990's. However, Japan's macroeconomic policy mismanagement deserves special attention, where in late 80's and early 90's, the Japanese government made two major macroeconomic policy mistakes. In 1986 when, following the sharp decline in the price of oil, the Yen appreciated more than expected and economic growth slowed more than desired, the sole policy response was monetary stimulus. Although the policy succeeded in accelerating the economic growth, the problem is that the policy was continued for too long.
That was considered to be the first macroeconomic mistake. The second mistake was not in easing the monetary policy and fiscal policy sooner and more forcefully in the early 90's. The authorities saw the downturn as primarily a business cycle. They underestimated both the cumulative effect of structural problems, and the long-lasting effects of the huge ongoing decline in the asset values. During most of the 1980's, after achieving one of the highest economic growth rates in the industrialized world, the economy slowed considerable in the early 1990's. Sinking stock and real estate prices marked the end of the "Bubble economy" of the late 1980's.
Moreover, over-investment and over-hiring in the late 1980's forced many Japanese companies to undertake cost-cutting efforts in the 1990's. As a consequence, many Japanese companies were encouraged to shift their production overseas in order to better service export markets.