Japan’s 25 Year Recession, Essay Example
Japan is believed to have coped with the 25-year recession. Most of the researchers estimate the period of this crisis from 1986 to nearly 2010. This period has been chosen, not on an accidental base. In fact, the recession in Japan started in 1986 with the collapse of the economic bubble, lasted for 10 years and continued with the balance-sheet recession lasted till 2010. However, this long crisis was rather different at some of its points. Moreover, during these 25 years, Japan was able not to lose its positions in the world, especially concerning manufacturing, despite the fact that the problems it faced were quite tough. In these terms, it is crucial to investigate and discuss each of the periods of the recession separately, but in coordination.
The Japan’s 25-year recession started in the late 1980s with the inflation of stock and real estate prices and the development of an asset price bubble. It was formed within several years. Particularly, “stock prices started to rise in the mid-1980s and reached 150 per cent by the end of 1989. After the crash of the bubble, this ratio fell to about the 50-70 per cent range” (Stern and Saxonhouse 100). As regards land prices, they also increased, according to Stern and Saxonhouse. In particular, relatively to nominal GDP, commercial land prices tripled and residential land prices doubled in the late 1980s. Likewise, the stock prices, after the collapse of the bubble, the land prices, in relation to nominal GDP, decreased to only 20 per cent of their peak level. Stern and Saxonhouse emphasize the three main factors that led to the creation of asset price bubble: “loose monetary policy; tax distortions; and financial deregulation” (Stern and Saxonhouse 100). As for the other countries, they also experienced an influence of the three factors mentioned leading to inflation of asset prices. Still, even though Japan did not experience some unique and rare case, the long-term implications of enormous magnitude of the asset price bubble were rather severe and tangible.
For better understanding of the prerequisites for the asset price bubble appearance, it is of vital importance to take a more detailed look at each of three factors that formed it. As regards easy monetary policy, as stated by Stern and Saxonhouse, it was too loose in the late 1980s. Much more attention were paid by the policy makers to stabilizing yen, than to stabilizing overheating economy in general and asset prices bubble in particular. In late 1987, the Bank of Japan (BOJ) made an intention to tight monetary policy. Nevertheless, the fall of stock prices on Black Monday in the United States prevented this intention. Moreover, it debarred Japan from the opportunity to stop the asset price bubble at an early stage until May 1989. Hence, the stock prices hit their peak in the end of 1989, while the land prices in early 1990. It means that such severe implications as asset price deflation could have been alleviated if the BOJ had acted appropriately in 1987 (BOJ 101).
Concerning tax distortions, the major problem was that, until the very end of bubble, Japan supported debt financed real estate investment. It follows that “[t]he marginal rate of inheritance tax has been very high in Japan. It was 75 per cent over 500 million yen until 1988, and it is still 70 per cent over 2 billion yen” (Stern and Saxonhouse 101). As far as during the bubble period, the debt was evaluated at its face value, wealthy individuals were reducing their inheritance rate by borrowing money to buy land. Or else, approximately the same situation was related to real estate. In order to fulfill their tax planning purposes, individuals were investing large sums to real estate. It was profitable because the interest payments could be deducted from their taxable income for companies or individuals who were investing in real estate.
As for Japan’s financial system at that period, it was highly liberalized. At the same time, the increasing internationalization of financial markets was accompanied with the large issuance of government bonds. All the main aspects of monetary policy were gradually liberalized, including the decreasing denomination of limits of interest rates and restraints on the issuance of corporate bonds. Consequently, large quoted companies stopped being customers of Japanese banks and started funding the capital market. This fact made banks worried about the decrease in their profits owing to a declining customer base and bigger funding costs (Stern and Saxonhouse 101).
Undoubtedly, the asset price bubble collapse had a substantial impact on the economy of Japan in 1990s. In general, according to Stern and Saxonhouse, it faced four types of problems related to ineffective fiscal policy; the domestic consequences of international finance; deregulation, corporate governance, and government-sponsored financial institutions; community banking and structural change (Stern and Saxonhouse 5-12). All these issues accelerated Japan’s withdrawal from a recession.
Furthermore, some economists, who research Japan’s recession, including Stern and Saxonhouse assume that Japan and the United States’ had almost the same scenario but in different decades and with different consequences. In fact, they admit the fact that “In both Japan in the late 1980s and the United States in the late 1990s, prices of assets, such as equities and land, rose rapidly even while the prices of goods and services were relatively stable” (Stern and Saxonhouse 2). Under these conditions, it is quite difficult to determine beforehand what exactly the increased asset prices mean to the rate of growth of productivity.
In short, as it is stated by Fitzpatrick, “[d]uring the bubble years of the late 1980s, demand for funds skyrocketed and the BOJ tightened monetary policy to clamp down on this booming economy” (Fitzpatrick 6). The asset price bubble burst in 1990, leading to the decrease in demand for funds. Thus, BOJ managed to have brought rates down to nearly zero by 1995. Yet, the reaction was a polar opposite of the expectations, when the demand for funds went into negative territory. As a result, the entire corporate sector of Japan was paying off debt with zero interest rate (Fitzpatrick 6).
A collapse of an asset prices bubble is believed to be responsible for the problems of Japanese economy over a 10 years’ period since 1990s. This long stagnation and recession that the economy of Japan has experienced from 1990 to 2003 is sometimes called “The Great Recession” by analogy with the Great American Depression of 1929-1933. Truly, in both cases it was a deflation crisis as a result of an asset prices bubble burst. However, its form in the United Stets was critical, and, in Japan, it was mitigated. Nevertheless, it is a common situation that this decade is called “The Lost Decade”, presupposing significant problems in the economy.
However, in Japan it was not a common recession. Unlike the ordinary one, it did not happen due to the overproduction of some products, some inflationary pressures, central bank tightening or inventory build-up. It took Japan almost 10 years to realize the trap the economy of the country got into, when individuals were minimizing debt instead of maximizing their profits. This type of recession presupposes self-sufficient growth of economy only when the balance sheets of private sector are repaired.
Considering the typical cyclical recession, the balance sheets of private sector are not badly affected and individuals are forward-looking. Thus, even with the low interest rate people borrow money and buy products and services, making the economy work. While in a balance sheet recession, after asset pricing shocks and after bubble collapse, people are not interested in borrowing (Fitzpatrick 3).
During the Japan’s Great Recession, the downturn in the economy depressed asset prices even more, making urgent for companies to pay their debt two times faster. This fact led to the break of a basic economic mechanism of transferring savings into investments. As Fitzpatrick states, “falling land and equities prices, starting in 1990, wiped out wealth amounting to 1,500 trillion yen, a figure equivalent to three years of national output” (8). However, even after the burst of asset prices bubble and the massive loss of wealth, the GDP of Japan is growing (Fitzpatrick 10). Besides, it let Japan after so many years of recession come out of it. The reason for such a success was that the government has never let GDP fell below its bubble peak by growing incomes and putting in fiscal stimulus.
Many of the researchers admit the dependence of Japanese interest rates on those of United States, for instance, according to Stern and Saxonhouse, “for much of the past 25 years interest rates on Japanese loans tended to move in tandem with US interest rates even while always maintaining a substantial negative differential” (Stern and Saxonhouse 5). Equally important, even the negative differential between Japanese and the U.S. interest rates does not cause uncommon problems in conducting the economic policy of Japan, as long as interest rates of United States are relatively high. Still, when the U.S. interest rates have fallen, they pushed Japanese ones to a zero. It means that if the interest rates are close to zero, such means of economic recovery as monetary policy cannot perform its effectiveness (Stern and Saxonhouse 6).
According to Infectious Greed, “[f]rom that perspective, the last 15 years in Japan . . . have . . . been characterized by a sharp increase in private savings and debt pay downs. The government has effectively become the sole remaining borrower in these economies. In other words, there is plenty of excess private sector savings to finance government debt” (Infectious Greed 6). Additionally, because of the recession, Japan has fallen out of time of economic dynamics of the developed countries and has lost in the rate of competitiveness, but it has not lost its positions in international trade. Moreover, in Infectious Greed, it is stated that Japanese prime minister Naoto Kan is the person who saved the economy of Japan firstly in 1988 from the deep crisis in the banking sector, and then he is the one who has led Japan as closer as possible to an end of 25 year balance-sheet recession (Infectious Greed 2).
As regards the current state of affairs in Japan, they are quite controversial. On the one hand, as Fitzpatrick states, “the private sector’s debt repayment stopped in 2005” (Fitzpatrick 18). At that point in time, people started looking forward. However, despite the fact that the balance sheets of the Japanese are clean, and the interest rates are almost zero, they do not tend to borrow money, because they are tired of 10 years debt repayment. This appears to be one more parallel with The American Great Depression. At that time, people, who have overcome the recession, “refused to borrow money for the rest of their lives” (Fitzpatrick 18). The same situation is in Japan. Consequently, the government, through its policies, was trying to encourage companies somehow to go on borrowing.
All these methods could have been implemented before 2008, when the new economic crisis emerged, leading to a global recession. In terms of crisis, Japan has to go “into fire fighting mode, instead of trying to overcome the debt trauma, because once demand is collapsing all around the world, who is going to borrow money to invest in more capacity?” (Fitzpatrick 18). Furthermore, it needs to return to providing domestic stimulus measures. Additionally, the problem of getting debt-traumatized companies and individuals to borrow again has not disappeared or been sold. It follows that on the stage of overcoming the implications of 25 year recession, Japan, alongside with the rest of the world, got into a new crisis trap. Moreover, the catastrophic earthquakes in March 2011 led to significant economic problems, as well. Thus, having overcome the long-term recession, Japan was led by the circumstances to new critical economic troubles.
In brief, Japanese 25-year recession was not at all a tragedy in the modern economic history. Still, there are the reasons for drawing a parallel between it and the Great American Depression. In both cases, the stagnation was preceded by “boom” on credit and stock markets. Additionally, both were accompanied by deflation of stocks and real estate prices. Furthermore, “The Great Recession” was a result not only of the mistakes of financial, budget and monetary policies, but also of the discrepancy of a number of other Japanese economic institutions with the terms of globalization. In order to overcome the financial crisis, the BOJ needed to implement unconventional monetary policy. Japan has managed to overcome the recession only after the serious reforms that have changed a lot in its economic setup.
Fitzpatrick, Karin-Marie. “KOO’s “Good News.” [email protected] 11 September 2009: 1-19. Web. 11 November 2011. <http://welling.weedenco.com/files/NLPP00001/803.pdf>
Infectious Greed. “Koo: Japan Nears End of 25-Year (!) Balance-Sheet Recession.” Infectious Greed, 2010. Web. 11 November 2011 <http://paul.kedrosky.com/archives/2010/06/koo_japan_nears.html>
Stern, Robert M., and Saxonhouse, Gary R. Japan’s lost decade: origins, consequences and prospects for recovery. Wiley-Blackwell, 2004. Print.
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