japan economic growth

Topics: Monetary policy, Central bank, Inflation Pages: 5 (1955 words) Published: November 20, 2013


Deflation in Japan or The Lost Decade

Japan’s economic development of the 1980s ended at the start of the 1990s. At the end of 1980s, irregularities inside the Japanese economic organization had qualified a hypothetical asset price bubble of massive scale by Japanese enterprises, banks and securities corporations. The mixture of extremely high land prices and low interest rates temporarily caused sharp liquidity of the market. This led to enormous borrowing and strong investment mainly in domestic and global stocks and securities. Realizing that this bubble was unsupportable, the Finance Ministry of JAPAN precisely increased interest rates in late 1980’s. This severe course of action metaphorically bursted the bubble, and the JSE (Japan stock exchange) market collided. A debt crisis trailed and the Japanese banks and insurances were now burdened with uncollectable bills, uncollectable loans and had to write off many debts as bad debts. The financial associations were bailed out from the government, credits from the reserve bank or known as central bank and the ability to delay the acknowledgement of losses, eventually turning them into the banks whose net worth is less than or so called Zombie banks.

Zombie banks are considered to be one of the important causes for the Japan economic stagnation. Michael Schuman ( Asia business correspondent for Time Magazine ) said that Japan's economy would not have started to improve until this practice had terminated, he also indicated that these banks kept inserting more capitals into loss-making “Zombie firms“ to keep them floating, arguing that they were too huge to fail.

Banks kept insolvent firms alive by continuing to deliver them with credits, often at below-market interest rates. These so-called “zombie” firms regularly suffered from low productivity and lagging technology, but were kept moving because the banks were loath to show loan defaults on their balance sheets. Most of these technically insolvent firms were protected from foreign competition and many were small. And they were often better at lobbying local politicians for forbearance than producing what consumers wanted at competitive cost. Most of these enterprises were too much in debt to do much more than stay alive on bail-out funds. Finally, most of these weakening companies became unsupportable, and merging of companies started to take place, turning the four important national banks in Japan. Several Japanese businesses were loaded with huge debts, and it turn out to be very difficult to take loans or credit from the bank. Therefore during the time from 1990 till 2010 was known as "lost decade", this was when the economy slowed down or grew at a miserable rate. Unemployment rates were on the rise, but not at a threatening level. Many Japanese firms substituted a large part of their labour force with temporary workers, who had little or no job security and very few aids. Japan’s economy has not been fully recovered yet and is still making efforts to overcome from this situation.

Japan Policies
Fiscal policy and Monetary easing

The “Lost decade” was there for more than 20 years and Japan was trying hard to get back on track. To end the era, it used aggressive monetary easing to depreciate the value of their currency Yen in the global market. The Bank of Japan had retained short-term interest rates somewhere around zero ever since 1999. With quantitative easing, commercial banks were flooded with surplus liquidity to promote private loaning, giving them large stocks of excess capitals, and hence little risk of shortage of liquidity. The BOJ achieved this by purchasing many government bonds than would be essential to fix the interest rate to zero. The Bank of Japan allowed the commercial bank current account balance to increase from ¥5 trillion yen to ¥35 trillion for a 4-year period beginning in March 2001.Bank Of Japan made three times the amount of long-term Japan...
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