Over the past centuries, Japan’s economy has witnessed not only one but several severe economic crises. The latest however –and probably the most ferocious one– was the one that occurred in the 1990s and lasted around ten successive years. This essay will shed some light on the background, the progression as well as the implications of Japan’s lost decade. Thus, the essay will first provide a brief overview of the Japan’s post-WW II economy before it dwells on the most severe crisis in the 1990s, followed by the watershed in 2003. Last but not least, the essay will draw on today’s Japanese economic situation. It will thereby become apparent that Japanese economic history has led to the more than justified question as to whether Japan is a “Phoenix or Quagmire” in respect of its economy. Thus, the conclusion will round off this essay by attempting to answer this question and hence, the title of this paper.
Contents
1. Introduction
2. Japan’s Post-WW II Economic Development
3. Japan’s Economic Crisis in the 1990s
4. Japan’s Economic Rebound in 2003
5. Japan’s Economic Situation in 2007/08
6. Conclusion
7. Appendix
8. Bibliography
1. Introduction
Over the past centuries, Japan’s economy has witnessed not only one but several severe economic crises. The latest however -and probably the most ferocious one- was the one that occurred in the 1990s and lasted around ten successive years. This essay will shed some light on the background, the progression as well as the implications of Japan’s lost decade. Thus, the essay will first provide a brief overview of the Japan’s post-WW II economy before it dwells on the most severe crisis in the 1990s, followed by the watershed in 2003. Last but not least, the essay will draw on today’s Japanese economic situation. It will thereby become apparent that Japanese economic history has led to the more than justified question as to whether Japan is a “Phoenix or Quagmire” in respect of its economy. Thus, the conclusion will round off this essay by attempting to answer this question and hence, the title of this paper.
2. Japan’s Post-WW II Economic Development
The post-World War II era of Japanese economy was (of necessity) a period characterized by openness to the outside world.[1] Until the early 1990s Japan continued its striking growth as a highly modern and mature industrial economy which had begun to expand in the 1950s.[2] This growth had its roots in the American hegemony which created a highly beneficial global environment for investment, trade and technology transmission.[3] At the end of World War II, Japan’s economy was utterly shattered and its people were utterly defeated and subject to the American occupation. However, thanks to diverse economic initiatives such as the Dodge Plan which aimed at putting a lid on inflation and fostering export growth[4], the Japanese economy managed to restore its economic prewar levels by 1953.[5] For approximately two decades, until the early 1970s, the Japanese economy displayed an annual growth rate of 10% on average. This boom was not least facilitated by an imposing personal savings rate.[6] At the same time, exports grew to the same extent whereas imports (mainly those of consumer goods that were also produced in Japan) were restricted. Japan rather put an emphasis on importing technologies which it did not have at its disposal itself and producing consumer goods in mass production for export.[7] This development is in accordance with the late Kaname Akamatsu’s first Flying Geese (FG) analogy which was based on “[...] his empirical findings of the sequential pattern of ‘importing^domestic production^exporting (M^P^E)’ [,..]”.[8] The oil price shock in the mid-1970s constituted a watershed event in Japan’s industry. Due to its enormous dependency on imports for natural resources such as oil (for which the price had skyrocketed) Japan set out to devote its economy to the production of goods that required intellectual resources and technological know-how to a high degree.[9] This progression, again, designated the second FG pattern by Akamatsu. This pattern represents a sequence of product development from “[...] crude and simple goods to complex and refined goods [...]”.[10] Not least thanks to the close state-bank- industry relationships, one-party domination and the bureaucracy’s ‘administrative guidance’[11] Japan had ultimately become an economic superpower by the 1980s,[12] notwithstanding the slackening growth rate in the mid-1970s afflicted by the two oil price shocks in 1973/74 and 1979, an appreciating yen, increased labor costs as well as a less buoyant world market.[13]
A further crucial aspect of Japan’s economy is that up to the early 1970s, Japan’s financial system was highly regulated and highly compartmentalized. The import as well as the outward flow of capital was under government control. The financial institutions were rigidly subdivided. Due to the lack of a securities market, open market operations did not constitute a vital policy instrument. The monetary authorities rather relied on the banks to deal in credits related to the corporate sector. At this time, the monetary authorities’ expectations were justified, since the continuous substantial deficit of the corporate sector ensured the credit demand on the one side whereas the enormous private savings mostly held with the banking sector, in turn, secured the bank lending. Due to the fact that Japan lacked an active capital market there was an excess demand for credit. Moreover, the banks gravitated towards being ‘overloaned’; i.e. their reserve positions were negative.[14] However, in the mid-1970s, the Japanese government embarked upon issuing bonds in great quantities “[...] which promoted the development of open financial markets. The strengthening of open markets naturally enabled open market operations to become a practical technique of monetary control. [...]”[15] Moreover, large firms commenced increasingly to meet their financial requirements by issuing shares. This tendency in concurrent with the waxing bond market stimulated security transactions and a securities market that called for new financial instruments and a more permissive framework; i.e. the deregulation of various controls. Thus, the controls on outward capital flows were relaxed and the exchange control was formally dismantled by 1980.[16]
3. Japan’s Economic Crisis in the 1990s
The Plaza Accord or Plaza Agreement can be said to have been the catalytic event that triggered the tremendous economic crisis in Japan during the 1990s. The agreement was signed in the New York Plaza Hotel on September 22, 1985, by France, West-Germany, the United States, the United Kingdom and last but not least Japan. In the early 1980s, the exchange rate of the yen versus the U.S. dollar had declined continuously. This circumstance was rooted in two basic developments.[17] First of all, Japan had developed something described by Philip G. Cerny as an ‘export fetish’.[18] Due to the Americans’ initial acceptance of these Japanese exports, Japan was capable of supplying the American market with their goods in a reasonably priced and successful manner.[19] However, in addition to this export fetish, Japan developed ‘a fetish about hoarding reserves’.[20] Eventually, these two facts led to a skyrocketing exchange rate of the US Dollar versus the Yen which, in turn, alarmed the Americans in respect of their competing power. Thus, the Americans urged their trading partners to correct this development. Under the pressure of the United States the G5 states signed the Plaza Accord agreeing on the appreciation of the yen and the Deutschmark. Within nine months succeeding the signing of the agreement the dollar price plummeted from 240 to 150 yen. This subsequent appreciation of the yen was fatal for the Japanese economy which still relied heavily on exports. Due to its inability to redenominate into domestic sales Japan continued its export strategy which led to domestic companies operating in the red. The endaka-phase (the phase in which the appreciation of the yen reached its peak) challenged Japan’s export orientation profoundly not least due to its trading partners pressuring Japan to redirect its sales to its domestic market.[21] Another crucial incidence came about in 1987. The formerly state-owned telecommunication carrier Nippon Telephone & Telegraph (NTT) accomplished a partial initial public offering. The price of the shares peaked briskly and swept along other shares. Low-cost credits as well as the boom in stocks enticed an increasing number of companies to speculation on the securities market instead of investing in their primal business. Most notably those companies that operated in industries that became constantly less vital to the economy such as the heavy industry for example regarded this as an opportunity to compensate for the losses they experienced. Especially these companies were not infrequently endowed with expansive property they lend on mortgage in order to be able to speculate on the securities market. What benefited them was the fact that real estate prices increased commensurate to the equity prices. The price increase was at such tearing pace and the belief in the continued economic growth was so pronounced that property owners received a credit for their property exceeding its original value by 20% due to the fact that the gap would be closed within a matter of just a few months. The hyper speculation was of such dimension that the land surrounding the Imperial Palace in Tokyo was said to be worth more than California.[22] In 1987, capital gains from securities and real-estate transactions surpassed the GDP by a staggering 40%. In order to mitigate this wave of speculation, the Bank of Japan (BoJ) embarked upon elevating interest rates beginning in May 1989 (also refer to appendix 4). At the same time Japanese banks came under pressure to put into practice the 1988 Basel Capital Accord that required them to retain an eight per cent reserve on risk-adjusted assets in order to display capital adequacy. In 1990, lending regulations for real estate were eventually launched, and a new land-tax was pronounced. All these developments combined aided to accelerate the burst of what has come to be known as the Japanese ‘bubble economy’.[23] Thus, at the end of 1989 and in the early 1990s, things came eventually crushing down when the Nikkei average plunged from almost 40,000 yen on December 29, 1989, to just above 14,000 yen in August 1992. This constituted a 62.3% drop that was even more dramatic for Japan and hit the country even harder than the 44% drop that had been witnessed during the Securities Depression of 1972. The 1972 Securities Depression had hitherto embodied the most fatal fall of Japan’s stock prices after World War II.[24] According to OECD estimations, this collapse induced a wealth decline corresponding two years of GDP.[25] From 1991, the growth of Japanese economy had stagnated and was even negative in some years (also refer to appendix 3); not only domestic industries but even diverse export industries had become sluggish and unprofitable; property prices had fallen by 80% and the stock market by around 75%. Banks faced utmost severe crises brought about amongst others by non-performing loans which were estimated as at least US$1 trillion in early 2004.[26] This circumstance led to the fact that several banks were teetering on the brink of bankruptcy. Some banks were absorbed by larger ones and others merged with rescue companies.[27] State-bank-industry-relations and industrial organization had come under enormous pressure to restructure. Moreover, Japanese outward investment had pulled back while foreign investors had begun to play an increasingly vital role in the restructuring of Japan’s economy. Key elements of the bureaucracy such as the Ministry of Finance had lost much of their authority. In addition, the dominant Liberal Democratic Party (LDP) had first lost its power in the early 1990s, but then regained power through coalition politics.[28] Moreover, in the early 1990s, the Japanese government omitted the opportunity to pursue an aggressive monetary policy. It is often argued, that such a policy could have prevented Japan from being caught in the liquidity trap. The financial crisis also conduced to the prolonged deflationary pressure in the economy (see also appendix 2). Furthermore, the crisis was exacerbated by the appreciation of the yen by about 50% during the period 199295. It obstructed an export-led recovery as it made the country less competitive.[29] After several years in the doldrums, Japan only revealed a feeble recovery in 1996. The streamlining process of enterprises had led to higher profits. However, it had also brought about a hitherto record high in the unemployment rate.[30] Thus, in 1996, Japan’s unemployment rate reached 3.3%. Yet, it was not to reach its final peak until six years later, in 2002, when it reached a -in Japanese terms- staggering 5.4% after a continuous increase over more than ten consecutive years (see also appendix 1).[31] This incipient recovery, however, was stopped dead in its tracks by a premature tightening as well as the Asian crisis in 1997-98. During 1998, Japanese exports to Asian countries that account for more than a third of Japan’s total exports decreased by more than 25%. There was a second advent for a recovery that occurred in 2000, but it was curtailed by the bursting of the IT bubble and the recession in the USA in conjunction with a momentary abandonment of the zero-interest rate policy in the month of August of the same year.[32] The crisis climaxed in 1998, when GDP nosedived by 2.8% (also refer to appendix 3).
Japan’s interest rates ran parallel to US rates with a negative differential. When the US rates were coming down the Japanese rates were pushed towards zero.[33] Consequently, in February 1999, the zero-interest-rate policy was introduced (also refer to appendix 4), and Japan was thus, caught in the liquidity trap. The zero interest rate was said to be a
[...]
[1] cf. Fuller, Mark B. and Beck, John C. Japan’s Business Renaissance. pp. 25, 27
[2] cf. Encyclopedia of the Nations. “Japan -Overview of economy”. 2008. November 8, 2008. Encyclopedia of the Nations. <http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Japan-OVERVIEW-OF- ECONOMY.html>
[3] cf. Ozawa, T. Institutions, Industrial Upgrading, and Economic Performance in Japan The ,Flying Geese’ Paradigm of Catch-up Growth. p. 3
[4] cf. Argy, Victor and Stein, Leslie. The Japanese Economy. p. 15
[5] cf. Fuller, Mark B. and Beck, John C. Japan’s Business Renaissance. p. 27
[6] cf. Argy, Victor and Stein, Leslie. The Japanese Economy. p. 18
[7] cf. Bosse, Friederike. “Wirtschaftliche Strukturen”, Informationen zur politischen Bildung -Japan. pp. 32 et seq., translated by the author
[8] see Ozawa, T. Institutions, Industrial Upgrading, and Economic Performance in Japan The ,Flying-Geese’ Paradigm of Catch-up Growth. p. 9
[9] cf. Bosse, Friederike. “Wirtschaftliche Strukturen”, Informationen zur politischen Bildung -Japan. pp. 33 et seq., translated by the author
[10] see Ozawa, T. Institutions, Industrial Upgrading, and Economic Performance in Japan The ,Flying-Geese’ Paradigm of Catch-up Growth. p. 9
[11] cf. Cerny, Philip G. „Political Economy and the Japanese Model in Flux: Phoenix or Quagmire“, New Political Economy. p. 104
[12] cf. Fuller, Mark B. and Beck, John C. Japan’s Business Renaissance. pp. 8; 28
[13] cf. Argy, Victor and Stein, Leslie. The Japanese Economy. p. 19
[14] ibid. pp.20 et seq.
[15] see Argy, Victor and Stein, Leslie. The Japanese Economy. p. 22
[16] ibid. p.22
[17] cf. Bosse, Friederike. “Wirtschaftliche Strukturen”, Informationen zur politischen Bildung -Japan. p. 35, translated by the author
[18] cf. Cerny, Philip G. „Political Economy and the Japanese Model in Flux: Phoenix or Quagmire“, New Political Economy. p. 109
[19] cf. Bosse, Friederike. “Wirtschaftliche Strukturen”, Informationen zur politischen Bildung -Japan. p. 35, translated by the author
[20] see. Cerny, Philip G. „Political Economy and the Japanese Model in Flux: Phoenix or Quagmire“, New Political Economy. p. 109
[21] cf. Bosse, Friederike. “Wirtschaftliche Strukturen”, Informationen zur politischen Bildung -Japan. p. 35, translated by the author
[22] ibid. p.36, translated by the author; Fuller, Mark B. and Beck, John C. Japan’s Business Renaissance. p. 29
[23] cf. Bigsten, Arne. “Can Japan Make A Comeback?”, The World Economy. pp. 596 et seq.
[24] cf. Argy, Victor and Stein, Leslie. The Japanese Economy. p. 46
[25] cf. Bigsten, Arne. “Can Japan Make A Comeback?”, The World Economy. p. 597
[26] cf. Cerny, Philip G. „Political Economy and the Japanese Model in Flux: Phoenix or Quagmire“, New Political Economy. p. 102
[27] cf. Bosse, Friederike. “Wirtschaftliche Strukturen”, Informationen zur politischen Bildung -Japan. p. 36, translated by the author
[28] cf. Cerny, Philip G. „Political Economy and the Japanese Model in Flux: Phoenix or Quagmire“, New Political Economy. p. 102
[29] cf. Bigsten, Arne. “Can Japan Make A Comeback?”, The World Economy. pp. 597 et seq.
[30] cf. Bosse, Friederike. “Wirtschaftliche Strukturen”, Informationen zur politischen Bildung -Japan. p. 37, translated by the author
[31] cf. International Monetary Fund. “Press Information Notice”. August 13, 1999. November 8, 2008. International Monetary Fund. <http://www.imf.org/external/np/sec/pn/1999/pn9975.htm>; International Monetary Fund. “Press Information Notice”. September 5, 2003. November 8, 2008. International Monetary Fund. <http://www.imf.org/external/np/sec/pn/2003/pn03112.htm>
[32] cf. Bigsten, Arne. “Can Japan Make A Comeback?”, The World Economy. 28 (2005):595-606, p. 598
[33] cf. Bigsten, Arne. “Can Japan Make A Comeback?”, The World Economy. 28 (2005):595-606, p. 600
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