Japanese Economy The Japanese economy is the second largest in the world, behind only the American economy. As such, its decade long downward slide has many lessons the American economy can learn from. The difference between the economies is one of degree, not type. Our own economy has been faltering of late, bringing fear of recession. The Japanese have been on that road for over ten years, and of late have been making aggressive moves towards a restructuring.
This paper will look at the types of reforms planned in the Japanese economy, and more importantly if these reforms will be enough to pull a modern economy from the doldrums. The current state of the Japanese economy has much to do with a failure to adjust. In post-WWII Japan the country’s economy experienced a bubble economy. This era of high growth is very similar to that which the American economy experienced after WWII. A booming population and a new focus on industry were mostly responsible for the unprecedented growth in both countries.
In the mid-1980’s, Japan’s central bank reduced prime interest rates in response to what was then considered a moderate slowing. This lowering wasn’t enough to give the economy a chance at sustained growth, as it wasn’t combined with robust reform. Japanese banks took advantage of the low rates, and began taking on massive debt. The slowdown never truly stopped, though there were quarters of greater growth. Though the economy grew by one percent on average, the combination of out of control debt and little population growth led the economy down a path of ever slowing growth.
Today this debt, coupled with distrust of banks by depositors, has held back even the most well though out and well intentioned reform. Simply put, no restructuring can lead to real gains if the banks continue to fall behind on debt payments. In April, the normally optimistic Central Bank of Japan issued a report downgrading its forecast for the Japanese economy, the third straight month it has done so. This was also the first report since September 1995 that the admitted that the economy is in a state of deflation. Deflation is the lowering of prices, and leads to lower corporate profits across the board.
Deflation has a crippling effect on an economy, and demands an immediate and strong response. The report attributed this most recent downturn to lower industrial output and corporate investment (AP, April 13). Though this report was an improvement to the normally unrealistic forecasts from the bank, the Central Bank’s response to the downturn is anything but realistic. The bank lowered already low interest rates to an effective rate of zero percent. In a familiar scenario, this has led to Japanese banks stampeding to get even more loans.
The Central Bank of Japan sees this as but one step in their new, more aggressive stance. They are to be applauded for this, as it involves coupling the lower rate with economic packages designed to give Japanese firms a way to upgrade their devalued equipment, thus boosting industrial output. One package set a two-year deadline for major banks to dispose of their riskiest bad loans. These loans were taken out by the banks during the easy lending period of the mid-1980’s. In the view of many economists, these loans are the very thing crippling the Japanese economy and holding the country back from a successful turn-around (The 21st Century Public Policy Institute, 1998).
It seems that it would have been more appropriate for the Central Bank to hold prime rates at the previous level. This, combined with the deadline for repayment of the riskiest debt, may have been just what the economy needed to attain serious growth. As it stands, however, there exists no plan to hike the rate back up. The rate lowering has already had negative effects. The Nikkei, Japan’s main indicator of investment health is in danger of falling to a 16 year low.
It appears that even the banks and investors know that the rate, though inviting, is not appropriate for long-term growth. Weakness in the stock-market, massive bad debt, and slowing demand for Japanese exports led Economic Minister Taro Aso to say that a recession is possible in the months ahead. He then asked the government to consider spending even more in an attempt to boost growth. This seems an obvious tactic, and one that cannot compete with ever growing bank debt. Again, this package holds promise if implemented with a decrease in debt.
Last week, the Central Bank governor, Masaru Hayami, said growth has come to a standstill because of slowing exports (Reuters, April 10). This is in major part because of the weakness in the stockmarket, which stems from reaction to the lowering of the prime interest rates. It seems no economic entity, from investors to depositors to the banks themselves see positive results coming from giving free money to the major banks. The Japanese economy needs overhauls, and the Economic Ministry has acknowleged this by taking steps towards robust recovery packages. But why would they couple these reforms with a zero percent interest rate.
They see this a way to rebuild firms by allowing those firms to invest in new machinery and new industries. They believe firms will be able to jump into these new industries without fears of lack of funding. Though an important facet of recovery, these reasons pale in importance to simply reducing bad debt. All the new industries in the world cannot make up for bad debt. Even through the 1990’s, with perhaps the most important new economy – software – being heavily invested in, Japan was unable to maintain growth. The same will happen now if banks are not pushed into repaying their bad debt.
There is no substitute. Bibliography April 13 TOKYO (AP) – The Japanese economy is weakening, dimming prospects for recovery from the nation’s worst slowdown since World War II. The government on Friday lowered its assessment of the economy in its monthly report for April. It was the third consecutive month that Japanese authorities have downgraded its economic outlook and the first time since September 1995 that it has said in a monthly report that the economy is weakening. The report from the Cabinet Office said slowing output at factories and mines and shrinking corporate investments are hurting the chances of a rebound.
It said the economy suffers from moderate deflation — or continuing price declines. It was the second straight month the government warned of deflation, which can lead to a downward spiral of corporate profits and income. Economic Minister Taro Aso said that a recession is possible in the months ahead. He urged the government to consider an extra budget to boost growth. Last week, the central bank governor, Masaru Hayami, said growth has come to a standstill because of slowing exports. Worried about the stagnant economy, the Bank of Japan moved to push interest rates to zero last month. It decided to keep such monetary policy unchanged at a meeting Friday.
Exports have long been the driving force behind Japan’s economic growth. But the cooling U.S. economy has dampened demand for Japanese exports. Japan unveiled an emergency package earlier this month that set a two-year deadline for major banks to dispose of their riskiest bad loans estimated at $104 billion. The non-performing loans — a leftover from the collapse of Japan’s easy-lending conditions of the late 1980s and early 1990s — have crippled the nation’s economy.
The April report pointed to five key areas of the economy that remain troubled — industrial output, corporate profitability, business sentiment, employment and housing construction. Late last year, Japan set a target of 1.7 percent growth for fiscal 2001 through the end of next March. But some economists believe the forecast is too optimistic. For the fiscal year ended last month, the government has set a target of 1.2 percent growth. Japan nears economy plan Policymakers working to combat bad bank loans, stock weakness April 3, 2001: 8:09 a.m.
ET TOKYO (Reuters) – Japanese policymakers drew closer Tuesday to an agreement on measures to remove two long-standing obstacles to an economic recovery — banks’ mountainous bad loans and stock market weakness. The ruling coalition government is expected to finalize by Wednesday a package centering on steps to help banks dispose of their non-performing loans and a special fund to absorb sales of shares held by banks. While the deadline was self-imposed and officials have been reluctant to guarantee it would be met, at stake is the credibility of political and financial leaders who have been unable to pull the nation out of economic doldrums for a decade. The country’s benchmark Nikkei share price average, which shot up more than 3 percent at one point Tuesday on optimism about the economic package, risks a retreat towards last month’s 16-year lows if no credible deal is reached. One key point of contention has been whether taxpayers’ money should be used by a proposed fund to buy shares from banks.
The Financial Services Agency (FSA), Japan’s financial regulator, had been reluctant to channel public funds into the body, saying government intervention in the market should be as limited as possible. But a member of the coalition panel studying the issue said the gap was narrowing. The FSA seemed to have leaned closer toward us, although there are still some differences, he told reporters. The coalition has changed the name of the proposed body to a fund to acquire banks’ shareholdings from a more crude stock-buying fund, specifying that the aim was to help banks unload massive shareholdings, losses in which are squeezing their capital adequacy ratios and throttling lending. The banks have built up huge portfolios of shares in group companies and their clients as a means to cement business ties, but the drop in Japanese share prices over the last decade has brought calls to limit banks’ shareholdings.
The Nihon Keizai Shimbun financial daily reported earlier this week that 15 trillion, or $119 billion, of funds from the state-backed banking safety net, the Deposit Insurance Corp., could be channeled to the proposed stock-buying body. The government is scheduled to hold a meeting of its emergency task force on economic measures Wednesday morning if agreement can be reached with the ruling coalition parties on Tuesday, an LDP official said. Copyright 2001, CNN America, INC. ALL RIGHTS RESERVED April 16, 2001 Web posted at: 3:11 PM HKT (0711 GMT) TOKYO, Japan — Japan’s central bank said Monday that declining exports and production have further weakened the economy. The Bank of Japan has been gradually downgrading its monthly report since late last year.
In last month’s report, it said the recovery had come to a pause. In this month’s report, the bank said the economy had entered a state of adjustment as production declines and exports fall. Japan has been fighting a slowdown for more than 10 years. The Japanese government acknowledged last month that the nation was in a state of deflation for the first time since the end of World War II. Deflation, or continuous falling prices, can set off a dangerous downward spiral of declining profits and income likely to further damage economic activity.
There is also a political hiatus following the announcement by prime minister Yoshiro Mori that he will step down this month. Several candidates, including former prime minister Ryutaro Hashimoto, are bidding to succeed him at a vote for the Liberal Democratic Party presidency on April 24. Business confidence in decline Earlier this month, the Bank of Japan’s separate tankan report showed that business sentiment deteriorated in the January-March quarter as companies hurt by plunging demand both at home and abroad were forced to slash spending. It was the first time in four quarters that the survey’s key indicator was negative. Last week, the government downgraded its official assessment of the economy for the third straight month, saying it is weakening. It was the first time since September 1995 that the government used the word weakening in such a report.
Recent forecasts by the World Bank and the United Nations suggest Japan’s economy will grow at about 1 percent this year and stay flat in 2002. The central bank lowered interest rates effectively to zero last month to try to revive economic growth. The economy has been sluggish partly because of the massive bad debts remaining at Japan’s banks. The U.S. slowdown has also hurt efforts at recovery by reducing demand for Japanese imports.
Japanese consumer spending also has been lagging as people grow increasingly worried about job security and opt to save rather than spend. The Bank of Japan said the U.S. and other economies were expected to begin a gradual recovery from the second half of 2001. If this happened, exports were expected to underpin the Japanese economy once again, helped by the depreciation of the yen. But it warned there remained the possibility these other economies would undergo a prolonged slowdown, with negative effects on Japan.
A Prescription for the Revitalization of the Japanese Economy October 23, 1998 The 21st Century Public Policy Institute The current state of the Japanese economy The history of capitalism in the world spans over two and a half centuries, and during this time, the question has arisen time and again of what blockages occur when the main constituents of society and the economy fall into a state of mutual distrust. As the Japanese economy generally enjoyed buoyant growth after the Second World War, it was widely believed that distrust between financial institutions, distrust of banks by depositors and of businesses by banks, and distrust between businesses concerning settlements and payments could never arise. Nevertheless, since last November just such a blockage caused by mutual distrust has been observed and eating away from within at the Japanese economy, engulfing the economy’s main constituents one after another. As a result almost unlimited liquidity preference prevails in the Japanese economy for the first time in the past half century of so of economic history of which we have direct knowledge. The measures to boost the economy with which we have become familiar were designed to stimulate the aggregate demand.
As the economic slump has dragged on since 1992, economic policies picked out and packaged by piecemeal from one category of demand push measures after another have been successively adopted. However, these economic policy packages has remained to be powerless and the ineffectiveness has led to it being said abroad that Japan is suffering from package fatigue. The policy packages introduced up to now in 1998 have swollen to the size as large as 16 trillion, but the continued fall of the yen and share prices is indicative of how strong distrust of such packages has grown. A common thread running throughout our recommendations is the advocacy of a policy package aimed at diminishing the liquidity preference of the main constituents of the economy. At the same time, we also propose that incrementalism which governs the government budget compilation for the half century, that only the increments are subject to review, and the Hegelian view that that which exists is rational should be done away with, to be replaced by a public policy framework which accords with the wishes of the Japanese people and restores the nation’s economic vitality as we approach to the 21st century.
In order to simultaneously pursue these objectives, a wide variety of public policy measures must be put in place. If we are to leave an economic legacy for future generations of which we can be proud, we should be thinking three years ahead. Now is the time for us to decide what visions Japan should pursue in the 21st century. Policy recommendations Injection of public funds in accordance with market principles The injection of public funds into banks to boost their capital under the Financial Recapitalization Law should not be implemented on a compulsory basis by the Government, but should instead be conducted in accordance with market principles. Banks seeking to engage in international banking should be required first to raise capital in the market by such an amount that is required to maintain their BIS based capital adequacy ratio at least as high as 10%. Injections of public funds equal to around five times the sum of the capital increase should be then conducted unconditionally to banks which successfully increase their capital stock.
As new shareholders will inevitably play an important role in disciplining the bank managers (including the pursuit of managerial responsibility) in that process, the government should not become involved. Share purchases by the state A special account should be established for the purpose of purchasing shares to maintain transparency and accountability, and a committee of financial experts set up as its decision-making body. (The committee chairman should be a minister of state.) Subsequent to formulating purchasing plans, the committee should consign the purchasing and management of shares to an operator selected by tender. Purchases should total 30 trillion. The monthly target for share purchases should be 1 trillion, and the total amount of purchased shares should not exceed approximately 10% of the total market capitalization. The funds for share purchases shall be raised through government bonds.
Purchases of shares should be regarded as an emergency measure to cope with exceptional circumstances refereed to as market failure, which are caused by mutual distrust. New purchases should be concluded by the end of March 2001, and the balance not subsequently increased. In the interests of taxpayers, the committee should report its operating status and the financial results of the special account to the Diet. Diet approval should be required for appropriation of profits, etc. Development of an entrepreneur-friendly tax system We should accept that in the coming economic recovery phase employment might not increase proportionately.
In order to cope with such a new type of recovery, the tax system needs to be reformed to encourage animal spirits of entrepreneurs more aggressively to establish new businesses. Reforms should include reducing taxation on capital gains …