cause, effect and recommendation: financial crisis in japan

Topics: Monetary policy, Financial crisis, Keynesian economics Pages: 10 (3504 words) Published: December 23, 2013
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...

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