What Type of Economic System Does Japan Have?


Japan has an industrialized global free market economy. A free market economy is a competitive economic system in which businesses compete with each other for profit and the prices of goods and services are based on supply and demand. Japan’s economic system is very similar to that of the United States.

Economic Snapshot Because Japan is a relatively small country with geographical features that hinder large-scale natural resource use, it relies heavily on the import of raw materials such as oil and petroleum, while also exporting a high volume of electronic goods. Japan is also a world leader in processing raw imported materials, which contributes to its strong manufacturing sector.

While Japan is a leader in the manufacturing of cars and electronic goods, the service sector makes up the largest portion of Japan’s economy. This is typical for highly developed nations. The finance industry makes up a large percentage of the service sector in Japan. The Tokyo Stock Exchange is one of the world’s most valuable exchanges, and Japan is one of the highest creditor nations in the world.

The Edo Period The first of three recognized periods in Japan’s economic history, the Edo period began in 1603 and lasted until 1868. The Edo period began with an increase in trade between Japan and foreign nations, most notably China. It was also marked by the establishment of several Japanese embassies in foreign countries, which further facilitated international trade. Ultimately, this era of trade was short lived, as the Japanese government reacted to the increase in trade by establishing isolationist economic policies, fearing that Japan was losing its national identity. After these policies were introduced, the economy shifted into a period of stability and mild growth, during which rice was often interchangeable with currency.

The Meiji Restoration Trade increased again in the mid-19th century during what is now called the Meiji Restoration. After Japan’s borders were opened, the country saw remarkable economic growth until the end of World War II. During this time, Japan was one of the first Asian countries to industrialize in the late-19th century alongside Western counterparts. Additionally, Japan recruited thousands of Westerners to move to Japan to help teach Japanese workers about Western technology as well as educate them in the subjects of math and science. The success of this endeavor led to the elevation of education in Japanese society as an essential tool to success.

Post World War II The world’s economic downturn after World War II was especially difficult on Japan. It took 20 years for the Japanese economy to fully recover, before Japan experienced high rates of growth in the 1960s. While the annual growth slowed from 10% to 5% in the 1970s, the world began to recognize Japan’s strong economy in the 1980s. In the 1990s Japan experienced another economic downturn, which was resolved in the mid-2000s due to a monetary policy called Quantitative Easing.