Japanese Recession

The country of Japan has been facing a recession due to many occurring circumstances that have caused Japan's economy to slowly spiral down, such as many other countries are facing today. On December 8, 2009; Japan's government reached an agreement regarding the financial crisis that the country is facing and has chosen to put a stimulus package into action. The stimulus package that Japan has put together will have a budget of 7.2 trillion yen (82 billion dollars) to help stimulate the country's decreased employment rate, give incentives for energy efficient products, and help give loans to business owners.^[1]

In May 2009, the Japanese government approved a 2 trillion yen stimulus package for weaker and less stable Japanese corporations.^[2] In Japan, it is common for the government to assist weaker companies, versus less-common systems such as the American corporate bailouts.^[2]

Cause

Though Japan's recent recession can not be tied to one single event, analysts believe that one of the leading causes is linked to a 14-year high for the yen compared to the U.S. dollar.^[3]

After the September 1985 Plaza Accord, the yen's appreciation hit the export sector hard, reducing economic growth from 4.4 percent in 1985 to 2.9 percent in 1986.^[4] The government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987. During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed.

The Nikkei stock market index fell more than 60 percent—from a high of 40,000 at the end of 1989 to under 15,000 by 1992. It rose somewhat during the mid-1990s on hopes that the economy would soon recover, but as the economic outlook continued to worsen, share prices again fell. The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession—by 80 percent from 1991 to 1998.^[4]

Effect

The effect that Japan's recession has had on its country has greatly changed their market values on almost all goods as well as their real estate market. However, Japan is not the only country feeling the effect of their recession; some countries such as the United States of America and Britain have lost a large amount of exports being sold to Japan, as well as many imports. Also, many Japanese stocks sold in foreign markets have plummeted due to fear of a total loss to those who have invested in Japan's stock market.

Steps towards improvement

In addition to the money being organized for Japan's stimulus package, the Japanese government is setting up a system of guidelines to help ensure that the money is being used effectively.^[5] The Japanese government has spoken on how they are planning to help those who are being effected by the recession by offering a number of different steps to bring the economy back to normal national standards, these steps include:
- Low-interest mortgage rates
- Decrease requirements for businesses applying for subsidies
- Extend subsidies for energy-efficient cars by six months
- Extend incentives for energy-efficient appliances
- Expand government backed protection for companies that require government funding
- Incentives for newly built houses and houses that are renovated with energy-efficient appliances

The 1985 discount-rate reduction began the central bank-induced boom. Following this reduction, the Bank of Japan expanded the money stock by an average of 10.5 percent per year from 1986 until 1990. Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs have done, however, is put Japan's government in poor fiscal shape. The "on-budget" government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the "off-budget" sector is included.^[6]

Japan's expansionary monetary policy failed to achieve recovery. From a high of 6 percent, the discount rate has been lowered to 4.5 percent in 1991, 3.25 percent in 1992, 1.75 percent during 1993–1994, and 0.5 percent during 1995–2000. This dramatic easing of interest rates has not stimulated Japan's economy, but the failure of interest-rate easing is not necessarily a failure of monetary theory. Japan's banking system is widely regarded as in need of restructuring. Much of the stimulus that reduced rates could provide has not been realized because the banking community has been increasing its liquidity instead of increasing its lending. Many banks have bad loans with collateral now worth only 60–80 percent of their value when the loans were made. Some banks are merging, and others have been nationalized. Such problems have contributed to the ineffectiveness of monetary policy.^[4]

References