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Japanese Economic Crisis And Deflation Essay

3471 words - 14 pages

Contents
I. EXECUTIVE SUMMARY 2
II. BACKGROUND 3
III. WHAT LED TO THE RECESSION? 4
IV. THE LOST DECADE 5
V. FISCAL POLICY 8
VI. MONETARY POLICY 9
VII. COMPARISON BETWEEN JAPAN AND THE U.S. 12
VIII. EXHIBITS 15
A. CHART 1 – GENERAL GOVERNMENT GROSS DEBT AS % OF GDP - COMPARISON 15
B. CHART 2 – NOMINAL GDP OF JAPAN - TREND 16
C. CHART 3 – REAL GDP OF JAPAN - TREND 17
D. CHART 4 – PER CAPITA GDP OF JAPAN - TREND 18
F. CHART 5 – INFLATION RATE OF JAPAN 19
G. CHART 6 – DISCOUNT AND LOAN RATES FROM BANK OF JAPAN 20
H. CHART 7 – UNEMPLOYMENT RATE – JAPAN 21
I. CHART 8 – NIKKEI 225 INDEX 21
IX. REFERENCES 22


I. Executive Summary
Japan experienced a period of exceptional ...view middle of the document...

By comparing and contrasting the Japanese situation with the recession currently being experienced by the U.S. and much of world, the paper attempts to find clues to bring the U.S. and the rest of the world out of this recession and provides policy measures that could be adopted to reverse the current downward recessionary spiral.

II. Background
The United States is now going through one of the worst economic crises since the Great Depression and so is most of the world. Many economists and politicians are turning to Japan’s economic history to learn from their prolonged economic crisis, searching for clues to help solve the quagmire of problems surrounding the U.S. “It has been almost a decade since the stock market crash of 1990 ended the late 1980s bubble. Japan is not suffering a short-term recession but a long-term stagnation.” Many theories and ideas exist as to why Japan experienced an economic slowdown and deflation from 1990 - 2000 and beyond.
The Japanese economy grew immensely from the post World War II ruins, quickly becoming an export powerhouse and the second-largest economy in the world. America and Japan made up approximately 40% of the global economy by the mid 1980s. The later half of the 1980s shifted Japan into “overdrive,” creating easy credit, uncontrolled financial conjecture and unfathomable industrial expansion. The Tokyo Stock Exchange seemed to be consistently on the rise. Japan was outperforming the United States with U.S. consumers buying most of its products. At the same time, real estate prices in Japan were rising to astronomical proportions. In the beginning of 1990 “a square meter of prime Ginza real estate cost as much as $300,000.”
Then both the stock market and the real estate bubbles burst leaving lenders with massive amounts of bad loans. Initially the response from officials in Japan was denial. When officials finally did admit to the problem, several policy mistakes were made causing the economy to enter a cycle of grow – stop - contract then repeat. The money spent on infrastructure failed causing countless bridges to nowhere and numerous piles of poured unused concrete. By the end of the 1990s the government had injected trillions in public funds but Japan was already entwined in what became known as the “lost decade.”
III. What Led to the Recession?
Japan had spectacular economic growth from 1953-1973 during which it transformed from a predominantly agriculture economy to one of the leading industrialized economies of the world. Although the growth slowed down in the late 1970s Japan still maintained healthy economic growth until the end of the 1980s. It is important to understand some of the reasons attributed to the strong economic growth of Japan in the 1970s and 1980s to explain the causes of the recession the Japanese economy later went through.
Some attribute the stellar growth of Japan to the strong fundamentals of the economy such as: higher education, higher...

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