In the years following World War II, government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (1% of GDP) helped Japan develop a technologically advanced economy.
Two notable characteristics of the post-war economy were the close interlocking structures of manufacturers, suppliers, and distributors, known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force.
Both features are now eroding under the dual pressures of global competition and domestic demographic change.
Japan's industrial sector is heavily dependent on imported raw materials and fuels. A small agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. While self-sufficient in rice production, Japan imports about 60% of its food on a caloric basis.
For three decades, overall real economic growth had been spectacular — a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s.
Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of inefficient investment and an asset price bubble in the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor.
Modest economic growth continued after 2000, but the economy has fallen into recession three times since 2008. A sharp downturn in business investment and global demand for Japan's exports in late 2008 pushed Japan into recession.
Government stimulus spending helped the economy recover in late 2009 and 2010, but the economy contracted again in 2011 as the massive 9.0 magnitude earthquake and the ensuing tsunami in March disrupted manufacturing.
The economy has largely recovered in the two years since the disaster, but reconstruction in the Tohoku region has been uneven.
Newly-elected Prime Minister Shinzo ABE has declared the economy his government's top priority; he has pledged to reconsider his predecessor's plan to permanently close nuclear power plants and is pursuing an economic revitalization agenda of fiscal stimulus and regulatory reform and has said he will press the Bank of Japan to loosen monetary policy.
Measured on a purchasing power parity (PPP) basis that adjusts for price differences, Japan in 2012 stood as the fourth-largest economy in the world after second-place China, which surpassed Japan in 2001, and third-place India, which edged out Japan in 2012.
The new government will continue a longstanding debate on restructuring the economy and reining in Japan's huge government debt, which exceeds 200% of GDP.
Persistent deflation, reliance on exports to drive growth, and an aging and shrinking population are other major long-term challenges for the economy.