cause, effect and recommendation: financial crisis in japan

Topics: Monetary policy, Financial crisis, Keynesian economics Pages: 10 (3504 words) Published: December 23, 2013
INTRODUCTION
Long before the United States faced the economic bubble in 2006 that has affected many parts of the United States housing market, the Japan already undergone such situation and they manage to overcome it although it went on for so many years. During the 1990s and into the early years of the 21st century, Japan experienced prolonged recessionary economic conditions triggered by the bursting of a bubble in its equity and real estate markets and an ensuing banking crisis. (Nanto, 2009) Japan experience now has becoming a model for many countries especially the U.S in coping with the housing bubble. Many countries have turned Japan experience in shaping various policies to improve the understanding on the crisis that they are currently facing. However, in this paper we will be discussing on the causes of the crisis, the impact and also some recommendation that we think suitable in counter back such crisis. The causes are various if we look into each aspect such as policy, practices, regulatory and much more but we only focus on several causes such as bank failure and liquidity problem. There are also many impacts from the Japan’s bubble crisis but in this paper we are focusing more on the loans impact and little about the firm’s impact. In recommendation, we try to give our idea based on how the Japanese cope up with the crisis during the bubble period. Briefly, the Japanese asset price bubble was an economic crisis situation faced by Japan from 1986 to roughly 1991 which real estate and stock prices were greatly inflated. The bubble period saw the price of land, art and even golf club membership rose to very high levels. The total value of land in Japan in 1980 at one point was over four times the real estate value of the entire United States. At this point, the banks and the monetary agencies not yet realize how deep their problem is. Land development assumes it is only the nature of the Japanese terrain that real estate values would always raise due to its scarcity. The government then raised short term property gain to 150% which the rate where only the most desperate home sellers would have take it. The banks also did the wrong thing when they lend more and did not even sure they will get return of their money. The real causes will be explained in the next point of this paper. CAUSES OF JAPAN FINANCIAL CRISIS

In the late 1980s Japan has experienced the financial crisis that will be the nightmare tragedy for Japan as Japan’s ‘lost decade’ even though Japan is one of the strongest countries in the world in term of economic and financial. This crisis also has known as Japanese asset price bubble that happened from 1986 to 1991. One of the causes that led to the crisis is liquidity of money. According to Keynesian economics, liquidity trap is where there are injections of cash into the private banking system by a central bank fail to lower interest rates and fail to recover economic growth. In simple word, liquidity is when there is too much money in the market for a limited item. Generally, at that time, Japan has been moving to a competitive, market-based system of banking, and capital market and facing difficulties in banking in order to enhance efficiency in the competition. For instant, they failed in creating a prudential regulatory system and the creation and then busting of the stock and real estate market bubbles. The competition made businesses invested in new capital equipment to become more competitive in international market. During the late of 1980s, Japan facing with the problems of liquidity when Japan’s monetary authorities flooded the market with liquidity of money to cope with the rising value of the yen especially in Japan’s stock market, real estate ventures, and foreign investment and the money growth has become out of control. The second cause of the bubble in Japan is government and banks in Japan lack of effectiveness. The problem occurred when the price of land rose to extraordinary...

References: Alesina, A., F. R. Campante, et al. (2008). “Why Is Fiscal Policy Often Procyclical?” Journal of the European Economic Association 6(5): 1006-1036.
Baldacci, E., S. Gupta, et al. (July 2009). “How Effective is Fiscal Policy Response in Systemic Banking Crises?” IMF Working Paper 160.
Bordo, M., B. Eichengreen, et al. (2001). “Is the Crisis Problem Growing More Severe?” Economic Policy 16(32): 53-82.
Budnevich, L. (2002). “Countercyclical Fiscal Policy, A Review of the Literature, Empirical Evidence and some Policy Proposals.” Working Papers.
Caballero, Ricardo J., Hoshi, Takeo and Anil K Kashyap, 2008, “Zombie Lending and
Depressed Restructuring in Japan”, American Economic Review, vol
Claessens, S., D. Klingebiel, et al. (2004). Resolving Systemic Financial Crises: Policies and Institutions, World Bank.
Claessens, S., G. Dell’Ariccia, et al. (2010). “Cross-country Experiences and Policy Implications from the Global Financial Crisis.” Economic Policy 25(62): 267-293.
Claessens, S., G. Dell’Ariccia, et al. (2010). “Cross-country Experiences and Policy Implications from the Global Financial Crisis.” Economic Policy 25(62): 267-293.
Clarida, Richard, Jordi Gali, and Mark Gertler. 1999. “The Science of Monetary Policy: A New Keynesian Perspective.” Journal of Economic Literature 37 (4):1661-707.
De Long, J. Bradford. 2000. “The Triumph of Monetarism?” Journal of Economic Perspectives 14 (1):83-94.
Dreher, A. (2009). “IMF Conditionality: Theory and Evidence.” Public Choice 141(1): 233-267
Eaton, J
Evanoff, D. D. and G. G. Kaufman, Eds. (2005). Systemic Financial Crises: Resolving Large Bank Insolvencies. Singapore, World Scientific Publishing C. Ptc.Ltd.
Fischer, S. (1998). “In Defense of the IMF: Specialized Tools for a Specialized Task.” Foreign Affairs 77(4): 103?
Goodfriend, Marvin
Gordon, D. B. and E. M. Leeper (2005). “Are Countercyclical Fiscal Policies Counterproductive?” NBER Working paper
Honohan, P
Hoshi, Takeo and Anil K Kashyap, 2005, “Solutions to Japan’s Banking Problems: What Might Work
and What Definitely Will Fail” in Hugh Patrick, Takatoshi Ito, and David
Hutchison, M. M. and Noy, I. (2005) 'How Bad Are Twins? Output Costs of Currency and Banking Crises ', Journal of Money, Credit and Banking 37(4): 725-52.
IMF (April 2009) Global Financial Stability Report: Responding to the Financial Crisis and Measuring Systemic Risks, Washington, D.C.: International Monetary Fund.
IMF (Oct. 2009). World Economic Outlook: Sustaining the Recovery. Washington, IMF.
Kaminsky, G. L. (2006). “Currency crises: Are they all the same?” Journal of International Money and Finance 25(3): 503-527.
Kaminsky, G. L. and C. M. Reinhart (1999). “The Twin Crises: The Causes of Banking and Balance-Of-Payments Problems.” The American Economic Review 89(3): 473-500.
Laeven, L. and F. Valencia (2008). “Systemic Banking Crises: A New Database.” IMF Working Paper WP/08/224.
Manasse, P. and N. Roubini (2009). ““Rules of thumb” for Sovereign Debt Crises.” Journal of International Economics 78(2): 192-205.
Park, Y. C. and J.-W. Lee (2002). Recovery and Sustainability in East Asia. Korean crisis and recovery. D. T. Coe, S.-J. Kim and I. M. Fund. Washington, D.C., International Monetary Fund; Korea Institute for International Economic Policy: 353-396.
Peek, Joe and Eric S. Rosengren, 2005, “Unnatural Selection: Perverse Incentives and the
Misallocation of Credit in Japan”, American Economic Review, 95(4), pp
Reinhart, C. M. and K. S. Rogoff (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton, Princeton University Press.
Taylor, J. B. (2000). “Reassessing Discretionary Fiscal Policy.” The Journal of Economic Perspectives 14(3): 21-36.
Taylor, J. B. (2009). “The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong.” NBER Working Paper Series 14631.
Uwe Vollmer,Ralf Bebenroth (2012). “The Financial Crisis in Japan: Causes and Policy Reactions by the
Bank of Japan”
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Impact of Ongoing Financial Crisis on UK Essay
  • Essay about causes of financial crisis
  • Financial Crisis Essay
  • Impacts of Financial Crisis on Japan Essay
  • The Effects of the Global Financial Crisis of 2008 on Japan and Resultant Pest Analysis Essay
  • Essay on The Effect That the Financial Crisis Has Had on the Global Economy.
  • The Mortgage Crisi- Cause and Effect Essay
  • Global Financial Crisis Essay

Become a StudyMode Member

Sign Up - It's Free