Japan's Economic Crisis Term Paper

Pages: 10 (3251 words)  ·  Bibliography Sources: 0  ·  Level: College Senior  ·  Topic: Economics

SAMPLE EXCERPT:

[. . .] " After each attempt to lower the value of the Japanese yen inflation failed to pick up and the country stumbled closer to crisis.

Retirement is a huge demographic challenge facing Japan. By 2010, twenty-one percent its population will be over sixty five, the highest of any country. Pension expenditures will be a walloping ten percent of GDP, almost two times the level of the U.S., while Japan's dependency ratio will be seventy percent higher than the United States. The Japanese people are unable to count on the government to make good on pension promises, so their behavior in not responding to fiscal stimuli. Japanese consumers are earning a near zero rate of return on their assets, especially the several trillion dollars locked up in the postal savings system. Thus, the only way they can accumulate additional wealth is to save more out of current income. This is in stark contrast to the U.S., where the personal savings rate has declined, but people are wealthier because of returns on real and financial assets.

3.0 Analysis and Recommendations

Japan's first and major priority should be to raise the nominal GDP growth rate, which can best be achieved by increasing the monetary base. Given the current condition of the Japanese economy, it should accelerate the growth rate of the monetary base substantially at least for several years to have an intended effect on money supply and nominal GDP growth.

In its efforts to increase its monetary base, Japan should be as diversified as possible and explore purchasing long-term government bonds, foreign government bonds, and even private securities if necessary.

Given the length of Japan's more than ten-year long economic turmoil, it's more likely that many of Japan's economic problems are structural rather than cyclical. Continuing to put capital into to banks to make up for past losses is unless underlying corporate problems are addressed. A variety of factors have contributed to the delay in confronting the problems. The first is government's unwillingness to force the restructuring that will be necessary to create a profitable banking sector. The restructuring will lead to business closures and job losses in the banking sector. The second is the lack of political will to shut down or restructure the popular, but unprofitable government sponsored financial agencies. These organizations are especially problematic since they further impair the competitiveness of the private sector. As much pain as restructuring will bring, Japan must be willing to suffer the short-term consequences to achieve long-term economic stability.

Deflation should also be a major issue for Japan to tackle. As prices fall for goods, services, stocks and real estate, workers get hit with pay cuts and businesses watch their incomes and profits shrivel, making it harder for them to pay off debt. Seeing a steady stream of discounting, consumers put off making purchases to wait for even better deals. Business, meanwhile, cope with the situation by cutting back production and cutting jobs, wages and capital spending, providing yet another blow to the economy. Economists view deflation as a far more serious threat than inflation because the primary tool for boosting economic activity -- a reduction in interest rates -- has only a limited impact on consumers and businesses once a deflationary spiral takes hold.

Recently, economists have called on the Bank of Japan to commit to inflation targets, to be held accountable for achieving it; and to choose the means for doing so. If Japan adopts this plan, it will be the first case ever of inflation targeting aimed at overcoming deflation. However, inflation targeting is probably the only appropriate policy for Japan to escape from its liquidity trap. The Japanese government should try to ensure the flow of money into its market by supporting commercial banks' management system as soon as possible. The cooperation between the Bank of Japan and the Japanese government should enhance the inflation targeting effect.

A return to more normal interest rates would be unwise until there are signs that the economy has definitely pulled out of the stagnation it has experienced since 1992 and there are clear signs of self-sustaining growth.

Finally, Japan should put the distressed real estate and other foreclosed collateral on the market. As long as the Japanese real estate market knows that there are a vast number of unevaluated properties waiting to come onto the market, no one will be willing to buy or sell. And, as long as businesses and individuals cannot take their losses and get out of old positions, uncertainty and illiquidity will hang over the entire Japanese financial system. The Japanese government should encourage securitization and sale of distressed assets through the resolution arm of the Financial Reconstruction Commission.

Bibliography

Arnold, James. "Japan Pins Hopes on Weak Yen.," BBC News 9 Jan 2002. 30 Nov. 2003. http://news.bbc.co.uk/1/hi/business/1750379.stm.

Belt, Bradley. "Japan's Economic Crisis: Obuchi's Opportunity and Challenge." 24 Jul 1999. Center for Strategic and International Studies. 30 Nov. 2003. http://www.csis.org/html/cm072498.html..

Buckner, Diane, "Japan's Golden Recession." CBC Corporate Radio, Canada. 30 Nov. 2003. http://www.cbc.ca/business/indepth/japan.html.

Chepesiuk, Ron. "The Japanese Financial Crisis." Asian Week. 6 Apr. 2001. AsianWeek.com 30 Nov. 2003. http://www.asianweek.com/2001_04_06/biz1_japaneseeconomy.html.

Drummond, Don and Levesque, Marc. "The Fallout From the Terroist Attack" What Policy Response?," TD Economics 5 Oct. 2001.TD Bank Financial Group. 30 Nov. 2003. http://www.td.com/economics/special/policy01.html.

Japan." The World Factbook. CIA. 30 Nov. 2003. http://www.cia.gov/cia/publications/factbook/geos/ja.html#Intro.

Economists Worry About Deflation." The Charleston Gazette 16 May 2003. Truthout. 30 Nov. 2003. http://www.truthout.org/docs_03/051703I.shtml.

Kashyap, Anil. "Sorting Out Japan's Financial Crisis." 10 Oct. 2002. University of Chicago. 30 Nov. 2003. http://66.102.11.104/search?q=cache:31ha-mWyIfQJ:gsbwww.uchicago.edu/fac/anil.kashyap/research/AK_Oct10WP.pdf+Japan+and+%22financial+crisis%22&hl=en&start=3&ie=UTF-8.

Noah, Davis. "Japan Vs. USA: The Raw (Sushi) Facts on Deflation Demystified." The Commentator Vol 67 Iss 5-25 Nov. 2002. 30 Nov. 2003. http://yuweb.addr.com/v67i5/exchange/sushi.html.

Onodera, Fumihiko, Sagawa, Junk, Ikemachi, Madoka, and Degirmencioglu, Yavuz. "The Biggest Gamble of the Bank of Japan." 16 Apr. 2003. University of Michigan. 30 Nov. 2003. http://216.239.37.104/search?q=cache:_Pb-_F8iDEoJ:www-personal.umich.edu/~kathrynd/Japanproject.w03.pdf+Japan+and+%22interest+rate%22+and+zero+and+%22not+working%22&hl=en&ie=UTF-8.

Patrick, Hugh. The Causes of Japan's Financial Crisis. 24 Aug 1998. Columbia University. 30 Nov. 2003. http://66.102.11.104/search?q=cache:pM6_gTug2tEJ:www-1.gsb.columbia.edu/japan/pdf/wp146.pdf+Japan+and+%22financial+crisis%22&hl=en&ie=UTF-8.

Pesek, William. "Why Deflation in HK and Japan Isn't All Bad." The Business Times 31 Jan 2003. 30 Nov. 2003. http://business-times.asiaone.com.sg/sub/views/story/0,4574,71395,00.html.

Posen, Adam. "Resolving the Japanese Financial Crisis." 25 Oct. 2003. Institute for International Economics. 30 Nov. 2003. http://www.iie.com/publications/newsreleases/sr13pr.htm.

Ramonet, Ignacio, "Japan in Danger," Le Monde diplomatique. Oct. 1998. MondeDiplo.com. 30 Nov. 2003. http://mondediplo.com/1998/10/01leader.

Shinpo, Seiji. "Further Quantitative Easing Needed to Stop Deflation." 07 Jul. 2003. Japanese Institute of Global Communications. 30 Nov. 2003. http://www.glocom.org/opinions/essays/20030707_shinpo_further/.

Buckner, Diane, "Japan's Golden Recession." CBC Corporate Radio, Canada. 30 Nov. 2003. http://www.cbc.ca/business/indepth/japan.html.

Japan." The World Factbook. CIA. 30 Nov. 2003. http://www.cia.gov/cia/publications/factbook/geos/ja.html#Intro.

Ramonet, Ignacio, "Japan in Danger," Le Monde diplomatique. Oct. 1998. MondeDiplo.com. 30 Nov. 2003. http://mondediplo.com/1998/10/01leader.

Kashyap, Anil. "Sorting Out Japan's Financial Crisis." 10 Oct. 2002. University of Chicago. 30 Nov. 2003. http://66.102.11.104/search?q=cache:31ha-mWyIfQJ:gsbwww.uchicago.edu/fac/anil.kashyap/research/AK_Oct10WP.pdf+Japan+and+%22financial+crisis%22&hl=en&start=3&ie=UTF-8.

Chepesiuk, Ron. "The Japanese Financial Crisis." Asian Week. 6 Apr. 2001. AsianWeek.com 30 Nov. 2003. http://www.asianweek.com/2001_04_06/biz1_japaneseeconomy.html.

Patrick, Hugh. The Causes of Japan's Financial Crisis. 24 Aug 1998. Columbia University. 30 Nov. 2003. http://66.102.11.104/search?q=cache:pM6_gTug2tEJ:www-1.gsb.columbia.edu/japan/pdf/wp146.pdf+Japan+and+%22financial+crisis%22&hl=en&ie=UTF-8.

Chepesiuk, Ron. "The Japanese Financial Crisis." Asian Week. 6 Apr. 2001. AsianWeek.com 30 Nov. 2003. http://www.asianweek.com/2001_04_06/biz1_japaneseeconomy.html.

Drummond, Don and Levesque, Marc. "The Fallout From the Terroist Attack" What Policy Response?," TD Economics 5 Oct. 2001.TD Bank Financial Group. 30 Nov. 2003. http://www.td.com/economics/special/policy01.html.

Noah, Davis. "Japan Vs. USA: The Raw (Sushi) Facts on Deflation Demystified." The Commentator Vol 67 Iss 5-25 Nov. 2002. 30 Nov. 2003. http://yuweb.addr.com/v67i5/exchange/sushi.html.

Patrick, Hugh. The Causes of Japan's Financial Crisis. 24 Aug 1998. Columbia University. 30 Nov. 2003. http://66.102.11.104/search?q=cache:pM6_gTug2tEJ:www-1.gsb.columbia.edu/japan/pdf/wp146.pdf+Japan+and+%22financial+crisis%22&hl=en&ie=UTF-8.

Onodera, Fumihiko, Sagawa, Junk, Ikemachi, Madoka, and Degirmencioglu, Yavuz. "The Biggest Gamble of the Bank of Japan." 16 Apr. 2003. University of Michigan. 30 Nov. 2003. http://216.239.37.104/search?q=cache:_Pb-_F8iDEoJ:www-personal.umich.edu/~kathrynd/Japanproject.w03.pdf+Japan+and+%22interest+rate%22+and+zero+and+%22not+working%22&hl=en&ie=UTF-8.

Pesek, William. "Why Deflation in HK and Japan Isn't All Bad." The Business Times 31 Jan 2003. 30 Nov. 2003. http://business-times.asiaone.com.sg/sub/views/story/0,4574,71395,00.html.

Onodera, Fumihiko, Sagawa, Junk, Ikemachi, Madoka, and Degirmencioglu, Yavuz. "The Biggest Gamble of the Bank of Japan." 16 Apr. 2003. University of Michigan. 30 Nov. 2003. http://216.239.37.104/search?q=cache:_Pb-_F8iDEoJ:www-personal.umich.edu/~kathrynd/Japanproject.w03.pdf+Japan+and+%22interest+rate%22+and+zero+and+%22not+working%22&hl=en&ie=UTF-8.

Arnold, James. "Japan Pins Hopes on Weak Yen.," BBC News 9 Jan 2002. 30 Nov. 2003. http://news.bbc.co.uk/1/hi/business/1750379.stm.

Belt, Bradley. "Japan's Economic Crisis: Obuchi's Opportunity and Challenge." 24 Jul 1999. Center for Strategic and International Studies. 30 Nov. 2003. http://www.csis.org/html/cm072498.html..

Shinpo, Seiji. "Further Quantitative Easing Needed to Stop Deflation." 07 Jul. 2003. Japanese Institute of Global Communications. 30 Nov. 2003. http://www.glocom.org/opinions/essays/20030707_shinpo_further/.

Kashyap, Anil. "Sorting Out Japan's Financial Crisis." 10 Oct. 2002. University of Chicago. 30 Nov. 2003. http://66.102.11.104/search?q=cache:31ha-mWyIfQJ:gsbwww.uchicago.edu/fac/anil.kashyap/research/AK_Oct10WP.pdf+Japan+and+%22financial+crisis%22&hl=en&start=3&ie=UTF-8.

Economists Worry About Deflation." The Charleston Gazette 16 May 2003. Truthout. 30 Nov. 2003. http://www.truthout.org/docs_03/051703I.shtml.

Onodera, Fumihiko, Sagawa, Junk, Ikemachi, Madoka, and Degirmencioglu, Yavuz. "The Biggest Gamble of the Bank of Japan." 16 Apr. 2003. University of Michigan. 30 Nov. 2003. http://216.239.37.104/search?q=cache:_Pb-_F8iDEoJ:www-personal.umich.edu/~kathrynd/Japanproject.w03.pdf+Japan+and+%22interest+rate%22+and+zero+and+%22not+working%22&hl=en&ie=UTF-8.

Posen, Adam. "Resolving the Japanese Financial Crisis." 25 Oct. 2003. Institute for International Economics. 30 Nov. 2003. http://www.iie.com/publications/newsreleases/sr13pr.htm. [END OF PREVIEW]

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