Manufacturing Bubble Bursts in Japan

The Wall Street Journal - TOKYO -- Japan has largely escaped the housing bubble and huge credit losses that are weighing on the U.S. and Europe. Then why is Japan's economy shrinking faster?

Economists and corporate executives are realizing that the nation suffers from the bursting of another type of bubble -- one in manufacturing. Between 2002 and 2007, Japan's manufacturing sector boomed, driven by soaring demand for Japanese automobiles and electronic gadgets by consumers globally, including Americans feeling flush amid rising home prices. Fueling the gains was a weak yen that kept Japanese products competitive and propelled yen-based revenue and earnings for companies such as Toyota Motor and Sony to lofty highs.

Many in Japan were relieved to see their economy growing at a healthy pace again thanks to strong exports, after a slump for more than a decade. But many didn't realize just how vulnerable the economy was becoming to consumers abroad, despite decades of hectoring from the U.S. and Europe that Japan needed to rely less on exports and more on domestic demand.

The foreign advice was hard to implement. That's because workers' pay was kept low amid competition from low-cost nations like China, making it tougher for them to spend.http://online.wsj.com/article/SB123293183725014261.html