Why Japan's Prosperity Stalled - Literature review Example

Why Japan’s Prosperity Stalled Name Course Tutor Date Why Japan’s Prosperity Stalled Introduction The world has made a big progress after several decades after the World War I and II (Ohno, 2006). However, the history and development of frontrunners of the world war cannot just be wished away. Schaede (2008) claims that today, if the people who lost their lives in the world wars resurrect, the world be surprised by development changes that have happened in Japan, US, Russia, Italy, UK, France and Germany since 1945. However, the path has never been smooth for some of these countries, especially Japan. After Japan had been defeated during the World War II, the US and its Allies led the rehabilitation of Japan. The U.S forces led by General Douglas MacArthur ratified extensive reforms touching on economic, social and political factors. It marked the start a long journey of economic development (Ohno, 2006). By the end of the 1980's, Japan had succeeded in creating one of the world's strongest and most stable economies. In 1990, everything changed and the economy stagnated in what came to be known as “the lost decade”. Based on the information, this essay will explain why Japan’s prosperity stalled and discuss what “the lost decade” means in details. Definition According to Fukao & Hyeog (2006, p.197), economic stagnation is an extended time of slow economic development which is often followed by a high unemployment or part-time employment. In most times, the growth remains between 2 and 3% and is measured in terms of GDP (Gary & Stern, 2004). Japan is one of the countries which have experienced four decades of prosperity which was succeeded by economic stagnation. On the other hand, the Lost Decade is the period following the collapse of Japanese asset price bubble within the economy of Japan (Etsuro, 2009). Overview of Japan’s economic development Japan has changed greatly today and is considered a large economic power and a developed country which holds the third largest economy in the world based on GDP (Kihara, 2012). Also the country is the fourth leading economy based on its purchasing power charity, exports and imports. According to Tsutomu & Hisa (2013, p.45) Japan is also ranked highly in prosperity metrics like Human Development Index. Japanese citizens hold that highest life expectancy in the world and the third lowest mortality rate across the globe (Tsutomu & Hisa, 2013, p.51). All these have taken place over the years. Japanese government started building its country when the war had just created unemployment, poverty and starvation (Ohno, 2006). To deal with unemployment and collapse of output, the government of Japan produced more money to fund subsidies whilst enforcing price controls on producers. However, such approach was not sustainable in the long term; it actually created inflation three times between 1946 and 1949 (Koo, 2009). Therefore, controlling inflation was one of the issues which needed to be addressed. In fact, it started immediately after World War II which had concluded in 1945 when the country embarked on economic reconstruction as a pacifist and democratic nation (Ohno, 2006). Since US never completely occupied the government, but indirectly had some influence in the governance. In a nutshell, the government and its people had the responsibility to build their country. Ohno (2006) contends that following the defeat, two officials known as Yonosuke Goto and Saburo Okita organized a meeting to discuss issues on how to reconstruct the economy of Japan after the damage caused by the war. The meeting discussed the report titled “The Basic Problems of Japan’s Economic Reconstruction,” which analyzed internal and external environmental situation of Japan and outlined various recommendations for building new Japan (Ohno, 2006). Key major aspects summarized in the report are; that economic vision of Japan ought to be improved by looking and evaluating the changing global trends (Etsuro, 2009). Secondly, a concrete and comprehensive approach recovery that is to be implemented must be directed towards industrialization, improvement of technology and flexible change of trade structure (Ohno 2006). Lastly, every critical sector was given priorities such as the skilled and labour-intensive industries. Several people were impressed by the report. Japan made a new start toward economic reconstruction as a democratic and pacifist state. According to Tokuo & Okada (2010), the government relied on it’s highly the report and educated people to provide labor in steel and electric power industries. After General Douglas MacArthur had laid the foundation, these groups of educated individuals succeeded in puling through following the ruins of war and realizing industrialization by 1950s (Ohno 2006). In the process, the adopted rationalization strategy in which they encouraged productivity by means of investment in new machinery, technology and restructuring management and production. Such reforms were the national economic objective of Japan in 1950s. Horioka (2008, p.38) posits that Price controls, loans and subsidies were later replaced by new policies such as capital control, foreign exchange budget, formation of Japan Development Bank, Preferential tax dealings for particular sectors, and promoting rationalization. The time of general real economic development took place in the period between 1960 and 1980s and has been referred to as the post war Economic miracle in Japan (Horioka, 2008, p.42). These new policies were supported by the new government of the Prime Minister Hayato Ikeda which emphasized economics and less politics. The government proposed “Income Doubling Plan” and projected in ten years. It came to manifest itself when the economy increased (Ohno, 2006). On average, it equaled to 7.5% between 60s and 80s, while became 3.2% in late 80s and early 90s (Caballero, Hoshi & Kashyap, 2008, p.1944). The higher economic development continued with the arrival of the emergence of mass-consumption society. Also, the technological invention encouraged the creation of several manufacturing plants and sales of consumer products such as automobiles, refrigerators, washing machines and television sets among others (Rene, Fukao & Iwasa, 2009, p.371). The industries, both public and private absorbed 10 percent jobless people who suffered the situation during the war. The economy portrayed some resilience particularly following the two oil shortages in the 70s which ultimately resulted to increase of fuel prices (Ohno, 2006). This led to the development of fuel efficient manufacturing processes and products. The industrial structure of Japan was changed from traditional based to electronic and high-tech sectors. The progress has made Japanese products to gain reputation across the globe due to high quality, efficiency and reasonable prices. The currency yen appreciated greatly in mid 80s, making Japan one of the major market player in financial market globally. However, the growth fell in the 1980s to 4 percent on average and further to almost zero in the 90s in what the government referred to as “stable growth” (Ohno, 2006). By the late 1980s, Japan had transformed from low-wage country to a high-wage country. Nevertheless, in the start of 90s, the economy and prosperity the country had made stalled and stock prices that have been higher collapsed leading the country into recession. Even though, the economy had established itself, the truth is that the economic slowdown in Japan started to be felt in late 1970s. The reason for that can be attributed to both domestic and global factors (Ohno, 2006). Economy experts claim that on the domestic perspective, the Japanese economy had matured and caught up with that of European countries and US. In that process, they selectively imported new systems and technology from other developed world while also producing its products to stop relying on others. On the global view, economic slowdown and inflation happened in all industrial nations, including US and Europe, hence slowing the pace of development (Ohno, 2006). Also, the price of oil increased from $2 to $11 a barrel while the currencies floated across the globe (Ohno, 2006). The situation led to less manufacturing hence reduced exports by 10% to others countries. The price of crude oil again increased to $30 a barrel further affecting exports between 1979 and 80 (Miyao, 2006). The Lost Decade and why prosperity stalled The period of 1990 became a challenge for Japanese government owing to stagnation in the economy which was accompanied by massive unemployment (Gak, Fukao & Makino, 2010). The period became long because it took up to 20 years. This period has come to be known as “the lost decade”. Gary & Stern (2004) claim the first lost decade took place from 1991 to 2000 and the second happened from 2001 to 2010. In this period, asset prices bubbles of Japan collapsed within Japan. The asset price bubble in Japan is the economic bubble which happened between 1986 and 1991 where prices of stock market and real estate were strongly increased (Tatsuya, 2009). The bubble incident was attributed by fast increase of asset prices, uncontrolled supply of money, credit expansion and overheated economic activity. More particularly, speculation and over-confidence over stock and asset prices has been linked to extreme monetary reduction policy during that period. According to Tatsuya (2009), nominal GDP dropped from $5.34 to $4.37 trillion, the real wages dropped to nearly 5 Percent whiles Japan went through price stagnation. Whereas the economics experts have continued to debate over the degree of effects it has caused the country, economic impacts of the lost decade continue to spur numerous consequences on the consumers of Japan. However, numerous causes of lost decade has also been derived to help scholars analyze and recommend measures to end it. Some of the causes that have been mentioned include financial deregulation, asset price deflation, non-performing loans and investment (Ohno, 2006). Financial deregulation Miyao (2006) pointed out that financial deregulation is one of the major factors which created a favorable platform for the land price bubble and making companies to heavily borrow in order to invest in real estate, private land and golf courses for families. Financial deregulation propelled for evaluating of various financing alternatives for the companies, reducing their reliance on the banks for financing (Koichi & Okada, 2009, p.202). In the 80s, banks in Japan changed their major target of the credit supply which comes from manufacturing companies to the non-traded products industries like, finance, real estate and other services which were not shaken by international competition (Jennifer, 2004, p.17). Asset Price Deflation Insufficient prudential regulations and financial liberalization played a crucial part in the rise of asset price rates. Kazuo (2009) asserts that in the early 80’s, capital movements controls were eliminated, rates of interest on deposits were deregulated while putting in place new financial institutions. Fukao & Hyeog (2006, p.199) stated that the banks were disserted by large companies which entered into domestic securities markets and global capital markets therefore, targeted the alternative by lending prospects to small and medium sized companies. These companies borrowed for low-returns and risky projects based on real estate collateral. The cozy correlation between these Japanese companies and banking system implied that credit was simple to get even if the firm had a low value investment. This is explained by the economist Paul Krugman (2009) when he said that "Japanese banks loaned more without consideration of borrower’s quality. By this means, they assisted increase the bubble economy to monstrous proportions. While attempting to deflate the speculation and control inflation, Bank of Japan significantly increased inter-bank rates of lending in 1989. This extreme policy resulted to bubble bursting and stalling of the Japanese stock market (Gak, Fukao & Makino, 2010, p.345). As a result, asset and equity prices dropped, leaving excessively leveraged insurance firms and banks with the bad debts. The government bailed out financial companies by means of capital combinations from the cheap credit and loans from the central bank, and capability to delay the loss detection, eventually making them appear like zombie banks (Krugman, 2009). In addition, monetary policy adopted in the late 80s also spurred inflation on asset price. The discount rate of Bank of Japan was reduced by half in numerous stages to 2.5% between 1985 and 1987 and stayed unadjusted for two years, in spite of the vigorous development of activity (Alan & Shinada, 2005, p.363). Consistent low rates of price inflation in the 1980s could have undermined the monetary tightening situation. In 1989, MOF had understood that stock prices and bubbles in the real estate and were unsustainable. However, they remained positive that levels of price would ultimately decline. In contrast to their confidence, the total assets of the banks decreased considerably from 507 trillion yen to 490 trillion yen between 1989 and 1990 (Fukao & Hyeog, 2006). From May 1989, the government controlled the monetary policy with the rate of discount being increased in numerous stages to 6% by 1990. Equity prices started to drop in early 90 when the Nikkei index had fallen by more than 65% from its maximum by the end of 1989 (Etsuro, 2009). MOF established guidelines controlling total lending of a bank by the real estate companies. The fall in the price of stock began in 1990 and happened up to 1992. Non-Performing Loans Land prices started to decline just after 1991 and continued to fall even in mid-98 resulting in deterioration of the quality of loans which went mean for real estate industry (Koichi & Okada, 2009, p.205). Furthermore, collateral value fallen before 1991, and borrowers could access loan of up to 90 percent of their collateral on real estate, which fell to 50 percent from 91 to 98, making 40 percent of the loans uncovered. According to Koichi & Okada (2009, p.205), loans to sectors which offered land as the collateral turned out to be non-performing resulting in the problem of bad-loan on Japanese banks. Loans that were directly meant for the activities in stock market also turned non-performing as the market declined. Additionally, loans meant for development of real estate on the basis of assumptions on potential value of the land also developed into non-performing (Miyao, 2006). To some extent, it became very hard to correctly determine the degree of non-performing loans in Japan owing to lax requirements for communicating the non-performing loans. Tokuo & Okada (2010) stated that in 1997, The Ministry of Finance reported that the banks were holding 29 trillion yen of non-performing loans. When put on a ration to that of GDP, this accumulates to 17% of the outstanding loans in private in the country. However, the Financial Supervisory Agency recomputed the non-performing loans and found out that it was worth 123 trillion yen hence increase the ratio of the bad-debt to GDP to be 24% when people gets loans and are not able to pay, the banks loses a huge amount of money which they could have lent others who have resourceful investment (Tokuo & Okada, 2010). Therefore, it denies others the opportunity to invest and help grow the economy. Investment Investment developed fast in the late 80s, making the ration of capital-output to increase considerably based on the upward trend with many high risk and low return projects being implemented (Kazuo, 2009). Therefore, investment spending in the late 1980s became excessive, stimulated by the collective impacts of asset price boom and policies on lax lending policies. The asset price bubble collapse was succeeded by a sharp drop in demand. The investment reduced especially with the returns to capital also dropping. Alan & Shinada (2005) contended that small and medium sized enterprise were also affected due to decrease on credit. In the late 90’s, most Japanese had developed saving culture and less investment. Less money in circulation obviously stalls growth. Conclusion This report has given a comprehensive coverage of the development progress and stagnation of Japanese economy, putting more emphasis on the bubble challenges in financial, real estate and labour sectors. It has stated and discussed why the Japanese economy stalled after prosperity. Several hypotheses were selected and integrated into the experience at the time of the Lost Decade. Before 1991, the country had enjoyed economic prosperity which its people had worked for immediately it was defeated. It is an exemplary example for many other countries which are affected by wars and calamities. However, the country has also suffered a long period of economic stagnation due to financial deregulation, asset price deflation, non-performing loans and poor investment. The situation sends a message to the government that change is actually needed in strategies and approach to economic issues. However, such change can only be achieved through the good will of both government and citizens when everybody accepts to adopt economic policies which beneficial to all. References Alan, A., & Shinada, N., (2005). Zombie Firms and Economic Stagnation in Japan. 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