Japan from 1980 to 2007 - the Rise and Fall of Japans Economy - Case Study Example

Japan from 1980 to 2007 Name: Course: Lecturer: Date: Introduction Japan had been the second largest economy in the world after USA for the period starting 1968 to 2010, when it lost its position to China. In 1960s and 1970s, the economic growth rate for Japan was 10% in average followed by 5% in 1970s and lastly 4%in 1980s. 1970s saw the exports increase in the country’s industrial products resulting in an international friction from large Europe traders. For the first time, Japan adopted a system of floating exchange rate in February 1973, the country’s economy remained stable through 1973 October when war broke in Middle East resulting in a serious oil crisis. For the first time, a negative economic growth was registered. This recurred in 1978 resulting in a second global oil crisis. It prompted the Japanese to change their industries form depending too much on oil to saving energy. This was a solution to inflation on the country. (Alchian, and Benjamin, 1973, p. 180) The country industries expanding in 1980s, this was in connection with the yen appreciating; trade was destabilized in advanced industrial countries. To reinforce this, Nippon Telegraph, Japan National Railway and Telephone Public Corporation were converted to Private Corporation. These saw economic growths resulting from domestic demand succeed. The Rise and fall of Japan’s Economy Bubble economy in Japan exploded toward the end of 1980s marked the end of the Japan’s thriving economy as well as stoppage of growth in foreign trade. During late 1980s, the country’s economy was thriving, it was enjoying favourable condition, this was characterised by the high employment rates and good wholesale prices. The revenue and profits made by corporation were also highest during this time with very low corporate failures being registered. At this point, manufacturers like those making the semiconductors were at the optimal level in their activities. There were high rates of appreciation in value for land and stock. Stock and land prices continued to rise rapidly, and large-scale urban development’s and resort facility developments in rural areas progressed at a very fast pace. (Noguchi, 1994, pp. 301-330) However, excessive funds flowed into the stock and real estate markets, causing abnormal increases in capital asset values. The change of Japan's net worth has reflected the status of its economy well. At the end of 1980, Japan's national wealth stood at 1,363 trillion yen, 5.6 times its GDP. It then increased, reaching 3,531 trillion yen, 8.0 times GDP, at the end of 1990; this was largely attributed to increasing land and stock prices. The subsequent collapse of the bubble economy resulted in Japan's national wealth dropping to 2,712 trillion yen by the end of 2009. The land was the highest appreciating with Tokyo affected the most. Japan managed to balance high growth rate together with high inflation rate for assets. This can be attributed to the central bank, which was operated based on bureaucracy that resisted the political party influence. (Alchian, and Benjamin, 1973, p. 180) Upon realizing the problem, the ruling party was up against the ministry of finance and the ministry of finance shifted the blame back to the government for too much power granted to the central bank. The Japanese yen had always fluctuated in value but also appreciated in value for the last twenty five year; this was good on the side of the currency monitory policy in Japan. At the beginning of 1990, stock prices plummeted, followed by sharp declines in land prices. This marked the start of major economic recession. Japan's financial and economic systems, which were excessively dependent on land, consequently approached collapse. Massive bad debts were created in financial institutions' loan portfolios, as corporate borrowers suffered serious losses due to declining land prices. As a result, shareholders' equity in financial institutions shrank. In 1997, large banks began to fail. In 1998 and 1999, the government injected public money into the banking sector to stabilize the financial system. The Japanese economy began to make a moderate recovery in April 1999. It was however temporary since investments in plant and equipment were weak and the economy was depending on foreign demand and ICT. During the last phase of 1980s raised land and stock prices caused Japanese asset price bubble. In 1990 to 1992, Tokyo Stock Exchange market crashed while real estate prices reached its peak in 1991. Japan witnessed a growth of 1.5% throughout 1990s the slowest in comparison with all major developed economies, this was tagged the ‘Lost Decade’. The might have been exacerbated by Japanese government policies with the aim wring speculative overflows from land and stock markets. Junichiro Koizumi tried to promote exports so that the GDP could be raised by an average of 2.1 % per year for the next four years starting in 2003 but were met by the global economic recession which saw the exports shrink. When the demand for IT declined in 2000 its exports to Asia came down hence the need to adjust production rose. It was further pulled back by a down turn in 2001 as a result of terrorism attack in the same year in USA which could not overlook Japan for its economic size. Slower export growth caused the second soft owing to surplus inventory of ICT. Demand for ICT related products declined in 2004 and beyond. When Japan economy was recovering, there was a similarity in export which reflected some positive growth starting in 2002, at this period, the world economy was also undergoing recovery as well. In 1980s, the secondary industry's share of employed persons against GDP decline gradually, in 2005, the corresponding shares of these three sectors were 4.8 %, 26.1 % and 67.2 %, respectively. As for GDP by type of economic activity, in 1970, the primary, secondary, and tertiary industries accounted for 5.9 %, 43.1 % and 50.9 %, respectively. In 2005, these figures were 1.5%, 26.8 %, and 71.7 %, respectively. Domestic sources supplied between 25% and 30 % of the nation's timber needs. Agriculture and fishing were the best developed resources, but only through years of painstaking investment and toil. The nation therefore built up the manufacturing and processing industries to convert imports. This strategy of economic development necessitated the establishment of a strong economic infrastructure to provide the needed energy, transportation, communications, and technology. Deposit of gold, magnesium, silver meet current industrial demand, but Japan is dependent on foreign sources for many of the minerals essential to modern industry. Iron ore, copper, bauxite, and alumina must be imported, as well as many forest products. (Blanchard and Watson, 1994, P. 103) . As from 1992, Japan has had a constant economic growth of less than 1% and above -2% GDP in average. Statistics show that fuel consumption in the country in 2005, 46% comes from petroleum, 19% s from coal and natural gas made up to 13%, nuclear electricity generates 22 % of the total power usage. The government of Japan has the most powerful organ as the ministry of finance. This ministry has always been the cause of retarded natural development of financial market in the country. Corruption in the ministry is at its height level with the capital allocation being based on friendship (who knows who) and economic effectiveness is no longer a priority in the country. These banks depend on the advices from the ministry of finance hence cannot make independent judgements and decisions resulting in less ability to handle financial difficult ties. Until 1985, banks were not allowed to pay interests for deposits, deregulation of interest rates begun in 1985 for deposits was prohibited and this prompted competition between banks for deposits and hence raising interests. Japanese banks did not raise interest rates they charged borrowers and thus did not offset the effect of the higher costs of their funds. They made up for the drop in their profits by selling the shares of stock they owned for a long time and counted the realized capital gains as profits. But because of the obligation of cross-holding of stock among the members of a keiretsu they immediately bought back the shares at a new higher price. Thus were able to count the capital gains as a profit, and had to pay tax on the capital gains and yet were back again with the assets they started with. They thus experienced a net loss of cash flow on the operation. Furthermore any decline in the stock market then would mean a disguised capital loss. The other buyers of the subordinated debt were the finance subsidiaries of companies in the banks' own financial keiretsu groups. The banks lent money to these traditional customers at cheap rates and the companies then turned around and lent the banks their own money back at a slightly higher interest rate, contrary to the spirit of BIS. During the "Bubble Economy" Japanese banks borrowed extensively in the Euro-dollar markets, 186 trillion Yen by June of 1990. Despite being the largest banks in the world these Japanese banks had to pay a premium in their borrowing, the so-called "Japanese rate". From the borrowed funds Japanese banks lent extensively. They lent out 69 trillion Yen. They provided $30 to $40 billion to finance American leveraged buyouts, including $10 billion of the $25 billion LBO of RJR Nabisco. Japanese banks opened American branches which earned very low rates of return, about 2 percent on equity. (Shimizu and Shigenori, 2003,pp. 6-34) The collapse of the Tokyo stock market and the decline of property values adversely affected the Japanese Banks. In 1990 they held about 22 percent of the mortgages in Japan. There were other financial intermediaries in the property-backed loan market. The Housing Loan Corporation, a government agency, provides interest rate subsidized mortgages. In addition to the above financial institutions there are also secondary regional banks called sogo banks and shinkin banks. In Japan banks are not only required to establish reserves for bad loans, they are effectively penalized for not doing so. Setting aside funds to cover bad loans would reduce the tax liability of the bank and so the banks have to obtain permission from taxing authorities to create bad loan reserves. Consequently in 1991 Japanese banks had reserves of only 3 trillion Yen for total loans of 450 trillion Yen. The accounting profits therefore hide the fact that some loans have not paid interest for as long as a year. Banks pressure the borrowers to come up with 30 percent of the interest owed because this allows them to avoid reporting their loans as being bad. (Nikami, 1990, pp. 40-69) The Bank of Japan has admonished banks to recognize the size of their problems and to start creating loan-loss reserves, but the bank seemed to have adopted a strategy, as Wood says, of "keeping their fingers crossed." The land market in Japan is heavily influenced by tax rules. Years ago, the Japanese government established high taxes on capital gains on land to discourage speculation. For any land held less than two years after purchase the capital gain is multiplied by 150 percent and this amount added to current income in computing the seller’s income tax. If land is sold two to five years after its purchase then 100 percent of the capital gain is added to income for tax purposes. Effectively this is a 90 percent tax rate on property held less than two years, a 75 percent tax rate on property held two to five years, and a 50 percent tax rate on property held more than five years. This tax system discourages people from marketing land and consequently those who need land for some project find they have to pay exorbitant prices. This artificial valuation of land would not be of much significance if it were not for the fact that people borrow money based upon their holdings of land. This begins to qualify for the term "astronomical." In November of 1991 the Ministry of Construction reported that houses and apartments in metropolitan Tokyo had in the preceding year lost 37 percent of their value and plots of land in the suburb of Saitama had lost 41 percent. The bubble in property values would not have been significant except for the fact that the use of land as collateral for loans and the fact that the taxing authorities tend to use those peak prices in valuing property subject to the inheritance tax. Conclusion The financial stability of the banks largely depends on over valuation of assets at the current economy. The major weakness of Japan financial resulted from precarious balancing act. While in the process, the banks are added more shares to further the increase in their stock in bulls market. This was highest between 1987 and 1989 when 6 trillion yen was given to city bank for balancing its equity securities. Tokyo market crashed in 1990, banks could hardly maintain BIS requirement of 8% capital ratio. All the banks literally could not maintain except the Kyowa Bank, which could maintain without any further support. There were also some regional banks that could maintain the same ratio; they started at 8 and dropped to 4 in the course of the year. Ministry of finance permitted the banks to sell their debts which facilitated the raising of two trillion yen. This salvaged the bank’s situation temporarily but later worsens the situation in the capital market. References 1. Ohno, K. 2002. Nihon Keizai, Micro karano Saisei o (Renewal of Japan's Economy Begins from Microeconomic Cleanup), [in text citation: Ohno, 2002] 2. Alchian, A. A., and Benjamin K., 1973. On A Correct Measure of Inflation, Journal of Money, Credit, and Banking [in textual citation: Alchian, and Benjamin, 1973, p. 180]. 3. Blanchard, O. J., and Watson, M., 1994. Economic and Financial Structure, Fluctuations across Countries: Measurement, Determinants and Monetary Policy Implications, [in textual citation: Blanchard, and Watson, 1994. P. 103] 4. Craig, F, and Philip, P. 2001. Procyclicality of the Financial System and Financial Stability: Issues and Policy Options, in Marrying the Macro- and Micro prudential Dimensions of Financial Stability, BIS Papers, [in textual citation: Craig, and Philip, 2001. pp. 8-54]. 5. Kindleberger, C. P., 1995. Asset Inflation and Monetary Policy: BNL Quarterly Review No. 192, [in textual citation: Kindleberger, 1995, pp. 19-47]. 6. Shimizu, Tokiko, and Shigenori Shiratsuka, “The Credit Risk of Japanese Banks during the Bubble Period: A Pilot Study of Macro Stress Simulation,” IMES Discussion Paper, No. 2000-E-31, Institute for Monetary and Economic Studies, Bank of Japan, 2000. [ in textual citation: Shimizu and Shigenori, 2003,pp. 6-34] 7. Miyazaki, Y.1990. The Dollar and the Yen Japanese Economic Studies Journal Fall 1990 Vol 19, No 1[in textual citation: Miyazaki, 1990, pp. 6-34] 8. Nikami, K (1990) Management of Japan's Securities Companies Japanese Economic Studies Journal Fall 1990 Vol 19, No 1[in textual citation: Nikami, 1990, pp. 40-69] 9. Noguchi, Y. 1994. The "Bubble" and Economic policies in the 1980s Journal of Japanese Studies Summer 1994 Vol 20 No 2 [in textual citation: Noguchi, 1994, pp. 301-330] Read More