Problems with Japanese Economy

Year 1990 started with the collapse of Japanese stock market. It was the result of asset price bubble that took real estate prices to rock bottom. Nikkei average dropped from around 40,000 to 14,000 in just a year. Japans high growth economy suddenly stopped and shrunk. Before the crisis, it was believed that Japan, if it grows with the same pace, will surpass the economy of the USA by 2010. But since the crisis started, their economy didn’t move at all.

Japan got itself into decade long recession. To further aggravate the situation, macroeconomic parameter like deflation started corroding the economy. Prices of goods and services died down every day. Manufacturing capacity of plants was reduced. This lead to large scale layoff and reduced the personal disposable income of people of Japan.  There was no money left in the system. Most of the banks had properties as collateral for the loans they have given. Banks were reluctant to call in the loans because these properties have lost their values and there were no buyers even at reduced price. Competitor nation like South Korea and China were taking over the position of Japanese manufacturers.

In the year 1999, unemployment rate exceeded 4%. From the graph it can be observed that starting 1991 till late 2003, there was no improvement in unemployment and it went to touch 5.8% before showing a sign of recovery thereafter. Massive layoff’s further resulted in default on bank loans and increase in suicide rate across the country. Post bubble financial crisis started with the collapse of Sanyo Securities and Yamaichi Securities which are compared to Bear Stearns and Lehman Brothers of the USA.

Government tried to control the situation by reducing interest rate. It reduced it to give a boost to economy. But because of high NPA’s which banks were carrying on their balance sheet, they were reluctant to give loan. In the year 2000, Interest rates bottomed to nearly zero level. There was very little sign of recovery. This forced government to start the quantitative easing, to pump more liquidity in the system.

In the year 1998, government established a 60 trillion yen funding to promote economic recovery. The national budget of 1999 included a large increase in public project spending and increased measures like increase in tax credits for a new home purchase.

In 1998, Diet passed a series of financial reforms. Diet consists of House of Representatives and House of Councillors, to whom Legislative power is vested. One of the major acts was Financial reconstruction law, which authorizes use of $515 billion to acquire failed financial institutions. The institution soon took control of Long Term Credit Bank of Japan and Nippon Credit Bank. Further 17 major Japanese banks were merged to make 4 megabank groups. 

Deflation was another problem which started creeping in the economy. As it can be seen from the  

Graph that inflation bottomed to sub-zero level in the late 90’s. Property prices were declining, companies were not investing in plants and machineries. The idea that price will be cheaper in future was driving them away from spending and blocking the liquidity of system. New York times reported “Deflation has left a deep imprint on the Japanese, breeding generational tensions and culture of pessimism, fatalism and reduced expectations.