By the 1970s Japan was gaining recognition in the West for its successful “model of capitalism,” from which other countries had a lot to learn. Lifetime employment and close interfirm relationships – mochiai and keiretsu – were seen as keys to Japan's corporate success. Behind these plaudits, however, lurked serious institutional vulnerabilities in Japanese welfare capitalism. Japan's postwar welfare capitalism rested on a couple of assumptions. The first assumption was that the economy would continue to expand at a rapid pace. The second one was that the demographic structure would remain relatively young. The Japanese system of social protection was particularly vulnerable to any changes in these two assumptions. The oil crisis of 1973 challenged the first assumption by abruptly ending Japan's high economic growth. A shortfall in corporate profits and the tax revenue led the Japanese government to issue “deficit bonds” worth 2.9 trillion yen to finance its budget in 1975. Since then, the Japanese state has depended on “borrowing” to make ends meet. Furthermore – to mention changes in the second assumption – not only was life expectancy increasing, but so was the average age of employees of large firms.

Numerous reform attempts followed in the aftermath of the first oil crisis. The government tried to reform Japan's unemployment insurance, health care, pension, children's allowance, agricultural subsidies, and taxation system.