BY YUGAL KAROL
Japan, known for its high technological advances and a strong economy, has a nominal GDP of $4.9 trillion, making it the third-largest economy in the world. It has the largest electronic goods industry, an unemployment rate of 2.9%, and an inflation rate of 0.3% as of right now. Now, knowing the good things about the Japanese Economy, let’s go back into time:
The Lost Decade refers to any ten year period of economic stagnation for any entity. It is used to describe the Japanese Economy. Japan’s lost decade refers to the period between 1991 and 2001. So, what caused it?
The answer is, ‘Collapse of a Massive Real Estate Bubble’
During the late ’80s and the early ’90s, asset prices increased massively under long-lasting economic growth. The Plaza Accord doubled the exchange rate value of the US Dollar and Yen fueling a massive speculative asset price bubble ( it is a situation in which asset prices appear to be based on implausible or inconsistent views about the future). Moreover, the Bank of Japan dictated excessive loan growth quotas. Japan’s banks lent more, with less regard for the quality of the borrower than anyone else’s. In doing so they helped inflate the bubble.
BUBBLE BURST :
To keep inflation in check, the central bank raised inter-banking lending rates which caused the stock market to crash, and Equity, as well as Asset prices, fell drastically, which led to the Japanese banks left with loads and loads of bad debts. The government offered cheap credit through central banks to fill the debts but it leads to the formation of Zombie Banks (banks with a net worth less than zero but still continue to operate because of the ability to repay government debt through govt support). These banks started to lend money to firms that were destined to fail. Because of these failing firms, a wave of consolidation took place, resulting in four national banks. Many Japanese firms as a result had heavy debt but no loan sources. Therefore these firms turned to SARAKIN’s ( Japanese lenders who made unsecured loans at a high rate of interest). This lead to a start of long stagnation.
The bubble burst had many long-lasting effects. To begin with,
‘Deflation’ As a result of the bubble burst, the country experienced a decrease in prices. And in the long run, it reduced companies’ profits and caused the unemployment rate to increase. The economy wasn’t able to expand as people were hesitant to spend due to expectations of non-existent growth.
Secondly, ‘GDP’ Growth Rates ‘showed stagnation. It decreased from 5.6% in 1991 to 2.4% in 1991 and 0.7% in 1999. Japan’s GDP is four times lesser than what was predicted for the future.
In response to chronic deflation and low growth, Japan has attempted economic stimulus and thereby run a fiscal deficit since 1991. These economic stimuli have had at best nebulous effects on the Japanese economy and have contributed to the huge debt burden on the Japanese government. Expressed as a percentage of GDP, at ~240% Japan had the highest level of debt of any nation on earth.
So, What’s the solution that Japan searched for?
It’s ‘ABENOMICS’
To combat this long-lasting problem, the Japanese Ex-Prime Minister in Shinzo Abe in 2012 introduced a reform known as Abenomics.
Abe’s program started in 2013 and consists of three main arrows:
(1) Print more currency and make Japanese exports more attractive
(2) Initiate new government spending programs to stimulate demand
(3) Making Japanese industries more competitive with new reforms
Not just that, but Abenomics also dealt with Japan’s problem of working population due to an increase in the percentage of older citizens.
The next question that arises is, ‘DID IT WORK’?
The answer is, both ‘Yes’ and ‘No’. The unemployment rates have fallen and the GDP per capita has risen from 37,000 USD to 41,000 USD. However, Japan’s national Debt has surpassed 245% of its GDP and the IMF warns such high levels of debt are unsustainable!
AUTHOR
Yugal is a first-year student of B.Com Hons course of Kirori Mal College, University of Delhi. He has a keen interest in world politics and affairs and is a cricket freak. He always tries to broaden his knowledge and improve himself. Apart from this he likes to share and grab some financial knowledge wherever possible and is actively investing in the stock market.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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