Is Japan's Economic Strength Fortuitous?

Of all the advanced countries, Japan is the most vulnerable to the impact of oil crises. This fact is clear from OECD data (1978) showing that 73.5% of Japan's total energy consumption is accounted for by oil, 99.8% of which is imported, with the Middle East supplying 78.5%. At the time of the first oil shock, Japan (1) was hit by a severe inflation, due partly to the excess liquidity that preceded it, (2) watched its trade balance slip into heavy deficits, and (3) underwent a drastic decline in economic growth, due to the deflation policy and the income transfer to the oil-producing countries, thus recording zero growth in 1974 — the lowest since the war. Furthermore, under the second oil shock, the trade balance again suffered, with a deficit of $13.9 billion on the current account and a deficit of $19.0 billion on the basic balance in 1979.