The Japanese economy.

THE JAPANESE ECONOMY

Japan, the World’s second-largest national economy and fundamentally strong, has been suffering from an economic and political malaise for a decade . This is mainly due to the persistent reluctance of political, bureaucratic and business leaders to make and implement policy reforms required bringing about renewed economic growth in a world of rapid technological change and competitive market forces. ()

What Went Wrong?

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It was ten years ago since the asset-price bubble burst, but the Japanese economy is still struggling with its aftermath. In October 1998, the Nikkei average index was down to one-third its peak level recorded in late 1989. Prices of land for commercial and residential use have dropped 70 and 45% since 1991. As a result, most financial institutions were left holding very large volumes of bad debts, forcing them to take a much more cautious stance in extending new loans. A number of major financial institutions actually became insolvent in the second half of the 1990s, pushing the economy to the brink of a crisis. Households and companies also suffered immense capital losses, prompting them to cut spending in an attempt to repair their balance sheets. The government has tried to boost the economy by implementing fiscal packages totalling more than $1 trillion since 1992. Also, the Bank Of Japan has decreased the interest rates to 0%. Still , the overall impact on economic growth has been disappointing, with GDP at only 1.0 percent between 1992-1999.

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The government was forced to spend billions of yen in bailing out the banking sector, which had made many bad loans, especially in the property sector, where prices became vastly over-inflated. Two of the biggest banks had to be taken over by the government and were eventually sold off. As well as the banking crisis, the government has been attempting to kick-start the economy by spending billions more on public works projects. This has led to a huge increase in public sector debts, which is the highest among developed countries. At $6.3 trillion, it ...

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In 1997 Japan raised taxes and interest rates in the mistaken belief that the recovery was on the way - a mistake that plunged the country back into slowdown and cost Ryutaro Hashimoto his job as prime minister.

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As the Japanese government makes new efforts to restore economic growth through fiscal and monetary expansion , it has realised that there are structural factors as well, which reduce the growth rate. Japan’s growth rate has been on the downfall since the 1970’s , it had a growth rate of 10.7% in the 60’s, to 5.2% in the 70’s , to 3.8% in the 80’s and to 1.7% in the 90’s. Since investment (as measured by gross capital formation) as a percentage of GDP was about the same (at about 30 percent) in both the 1980s and the 1990s, the decline in the growth rate in recent years can be attributed to a decline in investment efficiency. Investment efficiency in Japan is much lower than in the USA.

Japanese companies, although highly successful at exporting, are increasingly shifting their production overseas, pushing unemployment up to post-war record levels of nearly 5%. This has led to a collapse of consumer confidence, as workers lack the same level of unemployment benefits available in the West. Japan has one of the world's highest saving rate, with up to 35% of household income going into private savings. But people get a very poor return on their money, as the Japanese central bank has kept interest rates near zero to help finance the government's huge borrowings.The slow deregulation of the financial sector has meant that relatively little of those savings are channelled into the stock market, compared to other developed countries.

TODAY

Japan’s economic situation today is unprecedented. Aggregate demand is inadequate despite virtually frozen interest rates and huge government budget deficits. The weakened banking system is burdened by enormous bad-debt loans to insolvent companies. Now, the economy is sliding back into recession after only a brief and limited recovery. Exports fell for fourth straight month in September, largely because of slow growth in the US economy. Factory output fell for the first time in three months in September because of the falling exports. Foreign demand for Japanese goods, which fuelled the economic recovery earlier this year, rose just 0.5% compared with a 5.9% in the June quarter. (Figures from ). Also, lack of investor confidence is reflected in the stock market , the Nikkei is at an 18 year low and 75% below its peak.

Following information is from ( ). The present Japanese government of Junichiro Koizumi was expected to be much more reform oriented than the outgoing government. But they too have only promised and not delivered. One of the biggest difficulties in Japan is that it takes the Japanese government far too long to respond. Also the Japanese leadership have continuously engaged in wishful thinking , believing that the economy would inevitably soon recover, as it did in the post-war past. The government is under the illusion that economic growth would solve all problems, therefore major structural reforms would not be necessary.

Another major problem is that political process has been deeply influenced by vested interests opposed to reform. Earlier some of the benefits of rapid growth , high productivity sectors could be transferred through government expenditure, tax and pricing policies to these interests.

Just a few weeks back the goverment announced another set of measures . These included a move by the central bank to loosen monetary policy , some new ideas for tax and spending , and that a new entity will be set up to rehabilitate some borrowers once their loans have been taken off the banks books. The package is not expected to lead to any fiscal expansion or repair any broken banks. Unemployment is a big problem, going up to post-war levels.

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Despite all this, Japan’s economy is not in crisis. It will not collapse. Rather, the issue is whether Japan will continue to slouch along , or whether its political leaders will get their act together. Indeed the sense of crisis is more political than economic. The Japanese public has become increasingly frustrated, and confidence in Japan’s leadership has seriously eroded.

Conclusion : Japan’s economy faces a very uncertain near-term future, with politics dominating economics. Economic policy is on a very uncertain course. It is for the Japanese public to see if this government’s reforms are efficient and if confidence is high, consumer spending should increase enough to jump-start the economy.