After the second world war, the economy of Japan grew massively, and the annual growth was reported to be about ten percent from the year 1955 to the year 1970. In the 1970s and the 1980s, the increase was still high at 5 percent. However, there were large bubbles on the economy that developed within the property and the market stocks within the late 1980s that led to a complete collapse of the economy. This meant that there was a prolonged growth that took place in the 1990s in what is known as the lost decade. There have been numerous lingering effects if the lost decade that was felt in the 2000s as the country tried to recover from the year 2005. The world also experienced a massive recession from the year 2008 to the year 2009. The recovery was also affected by the earthquake that took place in March 2011 that was followed by the tsunami. The economy of Japan is the third highest and is still facing numerous challenges such as the weak growth rate that was felt in the last two decades due to the structural problems and deflation that have been in existence from the 1990s. The public debt and the repeated plans by the government to stimulate the economy is the other problem. The newly elected government that is led by the prime minister put out the plans to embark on the recovery and revitalization to return the fortunes of Japan. The policies have been known as Abenomics. This study will analyze the causes and consequences of the most prolonged and most severe recession in Japanese History and the future of Abenomics in Japan.
Keywords: causes of the recession, the Japanese economy, Japanese history, severe recession, bank rates, stock downfall, the future of Abenomics, public debt, economic stimulus.
After the second world war, the economy of Japan grew massively, and the annual growth was reported to be about ten percent from the year 1955 to the year 1970. In the 1970s and the 1980s, the growth was still high at 5 percent. However, there were large bubbles on the economy that developed within the property and the market stocks within the late 1980s that led to a complete collapse of the economy (Corden, and Jayasuriya, 2016). This meant that there was a prolonged growth that took place in the 1990s in what is known as the lost decade. There have been numerous lingering effects if the lost decade that was felt in the 2000s as the country tried to recover from the year 2005 (Glosserman, 2019). The world also experienced a massive recession from the year 2008 to the year 2009. The recovery was also affected by the earthquake that took place in March 2011 that was followed by the tsunami. The economy of Japan is the third highest and is still facing numerous challenges such as the weak growth rate that was felt in the last two decades due to the structural problems and deflation that have been in existence from the 1990s. The public debt and the repeated plans by the government to stimulate the economy is the other problem. The newly elected government that is led by the prime minister put out the plans to embark on the recovery and revitalization to return the fortunes of Japan. The policies have been known as Abenomics (Wei, 2017). Numerous interventions have been put in place to deal with the new interventions and processes to speed up the economic recovery process. Some of the most common problems that are faced by Japan include the high debt that the government owns and the deflation of the country. Even though the economy of Japan is currently the third largest in the whole globe, the weak growth of the economy has been witnessed in the last two decades, and there are structural problems that have led to these kinds of problems. The deflation is accompanied by the massive decries in the prices of the goods that are produced in Japan. This has retrenched from the year 1996 and has contributed massively to deflation in the country. Deflation has had a massive effect on the economy. The other problem is the high level of public debt that has increased through time. The weak economy together with numerous initiatives of the government stimulus have led to the unparallel levels of debts in the major economies. The gross debt was at 238 percent in the year 2012 (Nakano, 2016). If compared to some of the best economies such as the UK, the level stands at 90 percent.
Despite these problems, Japan still has the third highest economy only falling behind the united states and China. Consequently, the prime minister Shinzo Abe started the radicalization plan that revitalized the country. Some of the policies that the prime minister embarked on include the monetary policy, the fiscal policy, and the structural reforms. The monetary reforms involve the bank of Japan that have drastically expanded the easing program qualitatively. This allowed the country to become more aggressive in reducing deflation through the injection of more money into the economy. The second policy is the fiscal one that deals with the short term stimulation of the approaches that boosts the economic activities with numerous plans to eliminate the deficit. This stabilizes the debt of the public level (Yoshino, 2018). The other policy is the structural reforms witnessed in the country. This is the growth strategy that is focused on the long term solutions to the labor market. The other is the deregulation of different sectors within the economy of the country.
Background of the economic transition in Japan
After the war, there was a rapid growth of the economy in Japan that started in the year 1955. The growth increased up to the 1980s. However, the larger bubbles in the economy developed in the stock and property market that started in the year 1989. By the mid-1980s, there were several imbalances in the leading economies in the world. This meant that the G5 countries had to hold a meeting in new york to help the situation. The members of the G5 countries include Japan, USA, UK Germany, and Frace. The agreement from the meeting was known as the plaza accord that led to numerous interventions within the foreign exchange market. The agreement was to strengthen the Japan currency as well as the currency of West Germany against the US dollar. The Yen and the Deutschmark were to have more value as compared to the US dollar. This was also done with the intention of reducing the large surplus of trade in the two countries, Japan and West Germany to help with the reduction of the existing trade deficits in the US.
The agreement resulted in a massive increase in the value of the yen that massively appreciated up to 46 percent against the value of the US dollar. At the end of the year 1986, the Yen value was almost 0.5 times more valuable than the united states dollar. As a result, it was not easy to but the Japanese goods at the international level. The Japanese exporters suffered as a result of an increase in the. The growth started to decline from 6 percent in 1985 p to 2 percent in the year 1986. Mitigation of these effects led to the bank of Japan cutting off the interest rates from 5 percent to 2.5.
(Yoshino, 2018) .
The continuously reducing rates of interest and the tax reforms gave the stimulus that helped in the boosting of the economy for a short time. The annual GDP was realized at the rate of 5.5 percent from the year 1987 to the year 1990. This was followed by slow growth in the 1990s. The period led to lasting effects that was even felt in the 2000s s the economy was being recovered. However, the deep economic recession that was witnessed on the globe also affected the country. The rate of unemployment fell to a level of 2 percent as the government was operating on the surplus budget. The strong forms of the economy together with the borrowing costs in the market eventually led to the bubbling of the economy and the property market. The interest rates also increased by 4 percent from 2 to six percent. The prices of land also reduced sharply.
The lost decade
The lost decade is also known as the lost ten years in Japan and was a period that was accompanied by a massive stagnation in the economy of Japan after the price of the assets hard bubbled and almost collapsed. This was a period that started in the year 1991 onwards. Originally, the term was used to describe the years that began from 1991 to 2000 but can also be included in the recent decade between 2001 to 2010. The whole period is therefore known as the lowest score for the last 20 years by other scholars. The broad impact was mainly experiencing the Japanese economy from 1995 to the year 2007 when the domestic growth product fell from 5.3 trillion to 4.3 trillion dollars based on the nominal terms. The other impact was that the real wages were brought down to up to 5% as the country was experiencing a massive stagnation in terms of price levels. Even though there have been numerous debates and disagreements about the extent and the measure or the setbacks that they lost dick head brought to the Japanese economy, the economic impacts are well established and can be seen because many policymakers in Japan are continuously grappling while dealing with the consequences of the lost decade. Courses of the lost decade
The economic growth that was strongly felt in Japan within the second half of the 20th century came to an abrupt stagnation during the early 1990s. This to place when the plaza accord Dublin and the exchange rate values for the yen against the dollar failed a speculative asset price instigation that was having a massive effect. This bubble was mainly brought about because of the continuous, not growth quotas that were dictated by the Japanese central bank together with the bank of Japan (Corden, and Jayasuriya, 2016). At the time, there are numerous policy mechanisms or window guidance that also influenced the situation massively. The bank of Japan lent more and did not regard the quality of the borrower. This helps in inflating the economy a proportion that was described as a grotesque proportion. As the country tried to deflate these speculations and to keep the inflation of the country at a reasonable level, the bank of Japan decided to race the lending rates from the year 1989. Consequently, the policy leads to the bubble bust as the stock of Japan crashed down massively. Equity prices together with the prices of the assets fell massively thereby leaving the Japanese banks together with other financial institutions leverage overly.
Courses of the lost decade
The bursting of the property market and the stock market led to the debt and corporate crisis. The banking sector had numerous loans and had difficulty in repaying them.
The economic growth that was strongly felt in Japan within the second half of the 20th century came to an abrupt stagnation during the early 1990s (Yoshino, 2018). This to place when the plaza accord Dublin and the exchange rate values for the yen against the dollar failed a speculative asset price instigation that was having a massive effect. This bubble was mainly brought about because of the continuous, growth quotas that were dictated by the Japanese central bank together with the bank of Japan. At the time, there are numerous policy mechanisms or window guidance that also influenced the situation massively. The bank of Japan lent more and did not regard the quality of the borrower. This helps in deflating the economy a proportion that was described as a grotesque proportion. As the country tried to deflate these speculations and to keep the inflation of the country at a reasonable level, the bank of Japan decided to increase the lending rates from the year 1989. Consequently, the policy leads to the bubble bust as the stock of Japan crashed down massively. Equity prices together with the prices of the assets fell massively thereby leaving the Japanese banks together with other financial institutions leverage overly ( Glosserman, 2019).
Most of these companies were having numerous bad debts that could not be settled. Many financial institutions managed to get bails from capital infusion that was done by the government. The initiative also took place together with cheap credit but was given from the central bank together with their postponing ability to recognize the loss. This idea managed to turn them into what was described by economists as zombie banks. Zombie banks have been the major reason for the continued economic stagnation that has taken longer than usual. These banks were continuously injecting funds into zombie firms that were not profitable and always kept them afloat stating that they were too big and could not fail. However, many companies remained debt-ridden and could not just survive on the bailout funds. It is believed that the recovery of the Japanese economy only started after this practice ended.
Consequently, most of the firms that failed were not sustainable for a long time and there was a wave of consolidation that started to take place as a result of the four national banks in the country. Many of the farms within Japan were burdened with numerous debts, and it was quite difficult for them to have repaid it from other institutions. The borrower’s strategy was to use loan sharks, also known as the sarakin to get their loans. From the year 2012, the interest rate was reported to be 0.1% and have remained below 1% from the year 1994 (Wei, 2017). The graph below shows the changes in a discount on interest rates in Japan from the year 1955 to the period of recession.
(Yoshino, 2018) .)
The effects of Japanese lost decade
Despite the economic recovery that took place from the year 2000, there was a conspicuous conception within the 1980s that could not return to the same pre-crash levels. The levels of economic growth that was within the 1980s cannot be restored. The difficulties that were faced in the 1990s led to people frowning on the how they could ostentatiously display their wealth as the firms such as Sony and Toyota had been a massive force and had been dominating their industries for a long time.
The sony and Toyota dominance on the global scale optimized the real reasons why the people were well aware of the advantages that were presented to them. These companies were able to feed off some of the competitions that were brought about by the other East Asian countries and South Korea. South Korea was also a massive producer of the motors and was a major competitor for both Sony and Toyota. Many companies decided to replace their employees, from the ones that were a massive part of their use of the contemporary workers. The contemporary workers also had fewer beneficiaries and very little to offer in the form of security benefits.
Numerous Japanese companies faced the consequence of this recession. From the year 2009, the non-traditional employees for more than a third of the labor forces were provided in the companies. When it comes to the wider workforce in Japan, the counting of wages had stagnated massively. In the year 1997, the workforce was at its peak, and their real wages had fallen to 13% which is the same as the number experienced in developed nations. By this time, Japan had the best GDP and had overtaken many nations (Wei, 2017).
One of the greatest signs of the economic malaise that Japan faced was the realization that it had fallen down the pecking order and its output per capita had reduced massively. The real per capita of Japan was 14% higher than in Australia in the year 1991. However, by 2011, the calculation of the real output shows that it had dropped by 14% below the level of Australia at the time. This shows that within twenty years, the economy was already overtaken in terms of labor efficiency as well as their gross output. Previously, Japan was a global leader of both efficiency and gross domestic output.
The economy of Japan has been in recovery mode after the impacts of the 1991 crash together with their effects attributed by the last decades had messed up the country (Wei, 2017). It took more than 13 years for the growing domestic producers to get back to the level that it was in the year 1995 when the country was classified as one of the best of the developed nations.
As a consequence of their low growth, different initiatives were started to respond to this chronic deflation by Japan. The country attempted the stimulus approach in the economy and different fiscal deficits starting from the year 1991. The economic stimuli resulted in the best effect and it hard a nebulous impact on the economy of Japan. It has also contributed to the huge amount of debt that is burdening the government of Japan. Gross domestic producers expressed as a percentage and Japan have the highest debt level of any nation around the globe with two 140%. Even though the cased in Japanese special, different debts were held at the domestic market together with the bank of Japan. The size of the detriments a significant payment service and is one of the signs that consume warring characteristics of a country’s financial health (Nakano, 2016). There are different interpretations of the lost decades and the effects that it left in Japan. Some economists believe that the lost decade in Japan is a manifestation of the liquidity trap that the country fell into. Liquidity trap implies that the situation is one where the monetary policy cannot lower the nominal interest rate because they are closer to zero. At the same time, the asset bubble in Japan in the year 19990 led to the tripling rate of the stocks and the prices in the market. The high personal rate of saving in Japan was mainly due to the democratic of the aging population that allowed the farms to massively rely on the traditional loans from the banks and the support from the banking networks. This was different from there bond issuing through the capital markets to acquire their capital markets in funds. This relationship between the corporations and banks guaranteed bailout of taxpayers through the bank deposits that were created with a significant moral problem that lead to the atmosphere of crony capitalism leading to a reduced standard of lending. This helped bubble the economy and inflate it massively (Nakano, 2016). The bank of Japan started to increase the rate of borrowing interests from the year 1990 because of the concern that was raised by the economic bubble. By 1991, the stock and land market strategy to decline continued for some time as it reached below 60% of its peak.
The economists stated that the great recession started in the year 1990 and was due to precision in the balance sheet. It was mainly triggered by the stock prices and learned that collapsed causing firms to become massively insolvent as their assets became less what than the liabilities. They could acquire their liabilities at expensive prices while selling their stocks was difficult as they were valued atlas prices. Despite initiatives such as making the interest rates to the lowest level of zero and expansion of money supply to encourage borrowing, the corporation in Japan responded by offering to pay the debts from the business earnings instead of borrowing money to invest on their firms. This is what a business typically does when it gets into huge debt situation. The investment was also key components of the GDP (Nakano, 2016). At the time, the GDP fail 22% between 1990 up to the time that the falling was at its peak in the year 2003. The fans in Japan became the net service after the year 1998 and was opposed to the borrowers.
Borrowing and spending by the government were classified to be one of the main fiscal stimuli that instigated the decline and enabled Japan to maintain the GDP that it had. From this point of view, the fall in GDP avoided the type of great recession that was experienced in us where u.s. GDP fell by 46%. Monetary policy was effective as there was limited demand for the funds and firms were paying their liabilities. Which came to the recession of the balance sheet, the GDP declined due to to the repayment together with those savings of individual borrowings living the stimulus spending of the government that’s the only income to remedy the situation. The monetary policy of Japan or so so high and was held tight throughout the last two be careful made their thing felt in Japan to be prolonged.
An anemic performance of the economy from the early 1990s is because of the low growth rate of aggregate productivity. This hypothesis maintains a contrary opinion to the popular explanations that are given on the extended credit that emerged after the bursting of the asset bubble (Yoshino, 2018). This explanation explores the implications of the evidence that shows the difficulties experienced within the banking sector of Japan and the desired capital expenditure that was fully financed for the most part. It does suggest that a sluggish investment in Japan resulted into the low capital expenditure level but not in terms of the constraints of credit that prohibit many firms from getting finance to their projects with a positive net value. The fiscal and monetary policies increased to the consumption levels within a short time unless the productivity can increase.
The gradual path to an economic success together with a quick reversal that had taken place before the economic decline not be explained by some economists making it difficult to tell the fun back to the lying that it was him especially from the economic perspective. The policymakers how to adopt numerous other policies what can cause short term recovery to the people and the government. Japanese economy had been struck for a level known as the local maximum as a result of the gradual increase in fitness center by the economic landscape the 1970s and 1980s. Without any accompanying change already flexibility in the institutions, Japan successfully adapted to defend changing conditions, but some experts knew the best genius that’s why I needed to be made. It was evident that they are powerless and they could not elect to change without instituting the popular policies that will become improve the economy.
Abenomics: the policies of the Prime Minister, Abe
After the liberal democratic party won the election after being out of office for about four years. The party won the seats of majority members in the lower house election that took place in the year 2012. Shinzo Abe was the LDP leader and decided to make numerous policies that could revive the economy of the country. This was at the base of his campaign, and he promised of the massive economic revitalization. He was previously the prime minister and served for one year from the year 2006v to the year 2007 (Nakano, 2016). Some of the economic policies were known as Abenomics because of the massive efforts and the fact that they were based on economic success with policy changes. These policies can be grouped into three parts. The first set of policies are the monetary policies that have been pushed to the central bank. The bank of Japan became more aggressive as they attempted to end the deflation through the quantitative easing programs. There was the second fiscal policy that had a short term stimulus that boosts the economic activity together with the medium-term plans to eliminate the public debt. The final is the growth strategy that allows the long term plans that consist of the structural reforms within the labor market as well as the other sections in the economy.
The bank of Japan has been trying to end the deflation in the country, that led to the falling of the levels of the prices in the country goods. The policies include cutting down the interest rates to zero and pumping the money that is created back to the economy through the bank. However, the procedure failed to end the deflation even after the year 2012. To implement effective policies, the prime minister appointed the new governor to put in place the new measures known as qualitative reasoning. The first measure was to double the QE within the next two years and doubled the maturity rate of the purchased government bonds. The monetary base had to go up within two years from 138 trillion yen to 270 trillion yen (Yoshino, 2018). One of the key factors to the implementation of these proceedings was the psychological effects that it would break down the deflation and create the expected inflation. The other aspect of releasing too much money was to allow the money to flow in the markets abroad
The government announced that there would be numerous fiscal stimulus that there would be a package that totaled 10 trillion Japanese yen. This would be equal to 2.2 percent of the total growth of the domestic product. It had three basic elements. The first is the addition of funds that could be used for reconstruction from the disasters of the earthquake. The other is the disaster prevention measures that can strengthen the infrastructure of the country. They are also supposed to encourage the business investments that would strengthen the other smaller businesses (Nakano, 2016). Also, these have to be a revitalization of the regions and the money spent. The government approximated that these strategies would boost the economy and create additional 6oo jobs for the country. Through the acknowledgment of the fiscal challenges, the government seeks to secure the fiscal and the national stability through promising to deliver the medium-term fiscal plan. The government also committed to having the primary deficit that excluded the debt interest payments.
The fiscal component that was approved in the Abenomics is important in the long term. However, the most aggressive monetary policies and those that could be applied in the short term were to give the short term monetary solutions. There were to be measures that provided the economic boosts that included the temporary economic tracking of performance. Some of the steps include taking part in the ambitious growth in the country. Increasing the number of female workers especially the mothers who had children together with the young people in employment was one of the aims of the strategy. Also, the deregulation of the energy and health sector prevented the country from the massive competition. These ideas have been viewed as the details that lacked backup.
The future of Abenomics
Even though there are numerous advantages and progress that is being made by the initiatives of the prime minister to recover the economy of Japan and to reduce deflation, there are several concerns especially those that look at the future. There are concerns that the initiatives may not be able to be sustained on a long term basis (Nakano, 2016). There had been numerous attempts in the past to deal with these economic situations. However, most of them failed. The same may be said of the initiatives by the prime minister. The other problem is that they are fought massively buy the other powerful groups such as the farmers and the medical lobbies who believe that the opening of trade will have a massive detrimental impact on the country. The economists who favor the economic reforms have shown various concerns that monetary stimulus gives the boosts to the economy. The governments may also shy from tackling some of the most sensitive issues and structures.
In conclusion, after the second world war, the economy of Japan rapidly grew to become one of the best in the world. However, the growth was affected by numerous factors that led to the country experience numerous problems including a massive increase in the public debt and severe deflation. This paper has discussed the causes and consequences of the longest and most severe recession in Japanese History and the future of Abenomics in the country. Japan as a country suffered from the lost two decades that started in the early 1990s and went all the way through to the year 2012. The problem was only solved when Abe Shinzo became the new prime minister who started to implement some of the most ambitious strategies in the country to recover the economy. The plan for Abenomics had some initiatives that would see the country regain the economic status that it had before the severe recession.
The post-war institution together with the wrong policies at the internal level led to a massive accumulation of the national debt that could not compare t the gross domestic product. The public debt was, therefore, a well-known problem that went on to more than two decades from the 1970s. However, the urgency was mainly seen in the mid-1990s after the asset bubble that led to a stagnated growth. The lost decades had numerous causes and consequences in the country. Despite starting to recover in the mid 200s, the world suffered from the financial crisis and other factors affected the country such as the earthquakes and tsunami. When the prime minister abe took office, he decided to implement some policies that could raise the expectations of the Japanese people ones more. Some of the initiatives include easing and flexibility in the monetary policies together with the growth strategies such as the employment of women. The future of Abenomics is still debatable with numerous institutions acting against it. Reliance on deficit financing has been used to cover the expenses. The reforms have not been as successful as expected.
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