Weak domestic demand has been the bane of Japan's economy in the post-industrial era. Japanese growth remains export and capex driven, leaving Japan with no recourse to domestic demand when external demand falters. Until the 1980s, post-war Japan's GDP growth was driven primarily by reconstruction and exports. The success of Japan's manufacturing sector during the 1960s onward in penetrating foreign markets and the emergence of a second post-war generation created a robust consumer society within Japan, which increasingly drove growth as the 1980s progressed. The real estate asset bubble of the late 1980s, which burst and left a deflationary legacy, has meant that exporting has continued to hold an outsized role in driving growth relative to other OECD nations. Consumer spending accounts for only about 55% of Japan's GDP, compared to almost 70% in the U.S..
Japan’s potent export sector helped the country keep pace internationally in GDP terms throughout the deflationary period, but the global economic downturn in late 2008 kicked this final leg of Japan’s chair from beneath it. The Japanese government now sees a revival of domestic demand as a policy priority even if it pins more realistic hope on an ultimate return of global demand for its manufactured goods. Japan's economic policy and legal framework still prioritizes the growth of large, export-oriented industries over that of households and small and medium sized businesses. Outlined below are factors keeping private domestic demand weak.
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