Japanese Economy Essays (5775 words) - Economic History Of Japan

Japanese Economy The Japanese economy is the second largest in the world, behind only the American economy. As such, its decade long downward slide has many lessons the American economy can learn from. The difference between the economies is one of degree, not type. Our own economy has been faltering of late, bringing fear of recession. The Japanese have been on that road for over ten years, and of late have been making aggressive moves towards a restructuring. This paper will look at the types of reforms planned in the Japanese economy, and more importantly if these reforms will be enough to pull a modern economy from the doldrums. The current state of the Japanese economy has much to do with a failure to adjust. In post-WWII Japan the country's economy experienced a bubble economy. This era of high growth is very similar to that which the American economy experienced after WWII. A booming population and a new focus on industry were mostly responsible for the unprecedented growth in both countries. In the mid-1980's, Japan's central bank reduced prime interest rates in response to what was then considered a moderate slowing. This lowering wasn't enough to give the economy a chance at sustained growth, as it wasn't combined with robust reform. Japanese banks took advantage of the low rates, and began taking on massive debt. The slowdown never truly stopped, though there were quarters of greater growth. Though the economy grew by one percent on average, the combination of out of control debt and little population growth led the economy down a path of ever slowing growth. Today this debt, coupled with distrust of banks by depositors, has held back even the most well though out and well intentioned reform. Simply put, no restructuring can lead to real gains if the banks continue to fall behind on debt payments. In April, the normally optimistic Central Bank of Japan issued a report downgrading its forecast for the Japanese economy, the third straight month it has done so. This was also the first report since September 1995 that the admitted that the economy is in a state of deflation. Deflation is the lowering of prices, and leads to lower corporate profits across the board. Deflation has a crippling effect on an economy, and demands an immediate and strong response. The report attributed this most recent downturn to lower industrial output and corporate investment (AP, April 13). Though this report was an improvement to the normally unrealistic forecasts from the bank, the Central Bank's response to the downturn is anything but realistic. The bank lowered already low interest rates to an effective rate of zero percent. In a familiar scenario, this has led to Japanese banks stampeding to get even more loans. The Central Bank of Japan sees this as but one step in their new, more aggressive stance. They are to be applauded for this, as it involves coupling the lower rate with economic packages designed to give Japanese firms a way to upgrade their devalued equipment, thus boosting industrial output. One package set a two-year deadline for major banks to dispose of their riskiest bad loans. These loans were taken out by the banks during the easy lending period of the mid-1980's. In the view of many economists, these loans are the very thing crippling the Japanese economy and holding the country back from a successful turn-around (The 21st Century Public Policy Institute, 1998). It seems that it would have been more appropriate for the Central Bank to hold prime rates at the previous level. This, combined with the deadline for repayment of the riskiest debt, may have been just what the economy needed to attain serious growth. As it stands, however, there exists no plan to hike the rate back up. The rate lowering has already had negative effects. The Nikkei, Japan's main indicator of investment health is in danger of falling to a 16 year low. It appears that even the banks and investors know that the rate, though inviting, is not appropriate for long-term growth. Weakness in the stock-market, massive bad debt, and slowing demand for Japanese exports led Economic Minister Taro Aso to say that a recession is possible in the months ahead.