Japanese Government in the Period 1980-2007 - Literature review Example

Running Header: Japanese Government in the Period 1980-2007 Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Introduction Japan experienced a remarkable economic growth from 1980 to 1990s and this was due to efficient policies that were adopted by the government. However, from 1990-1998 the Japanese economy experienced slow economic growth and this was attributed to the deterioration of banking sector and due to poor policies that were implemented by the Japanese government. According to IMF (2000) the deregulation of the banking sector by the government allowed the banks to offer loans to the risky sectors of the economy and this led to financial crises due to the existence of large numbers of non-performing loans. The Japanese government was unable to come up with adequate controls in order to regulate the financial market. This paper is going to explore the special roles played by the government, banks and corporations in the experiences of Japan in the Period 1980 to 2007. The Japanese Government The exceptional growth and success of the Japanese economy from 1980 to 2007 can be attributed to the government role in creating financial and macroeconomic environment that facilitated rapid economic growth and industrialization. According to Saxonhouse, at el (2009) the ministry of finance concentrated on making the Japanese banking system to become a financial power during the 20th century. The Japanese ministry of finance facilitated the development of indicative and active banking sector policies in order to ensure order in the Japanese banking industry. The ministry noted that the complicated pressures and politics in the intra-bank relationships could influence the resource allocation and this could affect other established industries in the market hence the need to come up with new policies. During the 20th century the Japanese government raised its share of resources which were devoted to the formation of capital (Morck and Yeung, 2009). Additionally, the government played a role of coordinating the banking sector in order to overcome the problems that could result as a result of market failures. Through this, the Japanese government was assured that there would be a free flow of capital from the banks to other sectors in the economy. The Japanese government undertook financial deregulation in 1980s and this allowed firms in Japan to draw large and diversified financial resources. The deregulation expanded the banks business scope and allowed for interest rate linearization and at the same time it allowed non- banking institutions to enter into the leading business. This enabled firms to have a diverse sources of funds through which they could use in order to enhance their investment activities. Moreover, the deregulation facilitated the integration of the Japanese domestic market with the global financial markets. Furthermore, the deregulation of the financial sector eliminated the need for the Japanese government to intervene in the financial marketr. Nonetheless, the government of Japan sold its temporary nationalized credit bank with an intention of opening the banking industry to foreign interests. Additionally, the government opened the Japanese financial market to foreign financial institutions hence this led to an increase in competition. According to Liu and Hsu (2006) firms that needed to start new industries were not required to establish alliances with the government in order to request the banks to offer them with finances. According to Lincoln (2007) Japan experienced economic slump from 1992 and this was attributed to deflation and large numbers of non-performing loans which had restricted the lending power of the banks. Adams (2007) argues that the economic slump occurred because the Japanese government lacked the appropriate industrial policies that could foster economic growth. The deregulation of the banking sector allowed firms to concentrate on acquiring funds rather than earning profits and this had a great negative consequence on the Japanese economy. Moreover, the deregulation by the government led to the creation of a monetary system that was liquidity based. The monetary policy caused the interest rates to fall and this meant that the banks were making insignificant amounts of revenues. Furthermore, the government failed to adequately regulate the Japanese banking system and at the same time the government hesitated in consolidating the banks that were insolvent hence this led to the financial crises. The Japanese government tried to overcome the economic slump by introducing new fiscal policies in 1996. The government adopted a strategy of increasing it’s spending on the public works and reducing consumption taxes. At the same time the Japanese government undertook banking reforms and restructuring in order to promote economic recovery. According to Suzuki (2006) the financial reforms by the government in 1996 were aimed at revamping the financial industry and markets which had been adversely affected by the economic slump. The Japanese financial liberalization was focused at converting the Japanese financial market into an international financial market. To do this, the government expanded the activities in which the securities companies and the banks engaged in and promoted mutual entries among different financial institutions. The government also came up with new legal systems that allowed the introduction of new financial products in the Japanese market. In addition, the government revised the accounting standards on depository institutions in order to ensure adequate regulation of the financial market. The reforms enhanced competition in the Japanese financial markets and at the same time they motivated individuals to shift from maintaining bank deposits to investing in securities. Nonetheless, the reforms promoted capital outflow from Japan to other international financial markets. According to Stenberg (2008) in the 21st century the Japanese government has invested heavily in research and development in order to avoid and at the same time to prevent the reoccurrence of the economic slump. The Japanese government holds the perception that investing in science and technology will assist the country to return to stable economic growth. In addition, the Japanese government undertook extensive administration reforms in order to increase its efficiency and at the same time to reduce its expenses. According to Chiang, Raftery and Anson (2005) the Japanese government eliminated the policies that were restricting economic growth and it did this was by deregulating the measures that restricted the provision of large amounts of cash to the short term financial markets. Furthermore, the Japanese government came up with fiscal and economic management policies which were aimed at ensuring full economic revival. The fiscal and economic management policy allowed the government to make unusual expenditures by allocating more funds to seven sectors of the economy which significantly affected customer demand. These sectors included the urban development, public works, environment, information technologies and supporting local governments. Moreover, the policy placed a limit on the maximum amount the government could issue in relation to bonds so as to keep the financial market healthy. Likewise the Japanese government undertook social reforms in order to ensure continuous supply of human capital and at the same time to avoid and eliminate unemployment (Adams, 2007). Japanese Banks According to Flath (2005), banks have played an important role in the Japanese monetary system by acting as financial intermediaries and collecting deposits from government and businesses as well as from the household. The financial deregulation by the government allowed the financial institutions in Japan to undertake foreign investments in more developed countries. The Japanese banks were able to undertake large scale acquisition of banks in U.S and this promoted the size of foreign investments made by the Japanese firms. Furthermore, the deregulation enabled the large companies in Japan to source for international debt and this meant that the banks were left to lend to small and medium sized enterprises based on their real estates. The increased use of real estate’s as collateral enhanced investments in the country hence this was important in improving the Japanese economic growth. Farewell (2008) notes that banks played a critical role of financing Japanese firms who were undertaking overseas investments in the late 1980s. The banks provided over 60% of the funds that were required by the Japanese firm in order to enable them to successfully invest in the overseas countries. At this period, the banks performed their primary role of funding Japanese corporation so as to assist them to accomplish their foreign investment initiatives. A review of the Japanese investments in Europe indicated that approximately half of the funding for the foreign direct investments came from the subsidiaries of the Japanese banks in Europe (Adams 2007). Moreover, the subsidiaries of the Japanese banks in the foreign countries had a considerable impact on the international property and financial markets. The Japanese banking industry was able to establish global influence in relation to assets in 1994. This allowed the banks to generate considerable amounts of revenues and thus they were able to promote the Japanese economy. The Japanese banks expanded in the overseas financial markets with an aim of partly serving the Japanese customers who had undertaken foreign investments. Additionally, the banks targeted to offer their services to corporate borrowers and more specifically to the corporate and financial markets of the U.S and the U.K (Farewell, 2008). This enabled the bank to increase their returns hence they were able to create a positive impact on the Japanese economy. However, IMF (2000) notes that the Japanese banks contributed to the economic slump that were experienced by the country in the 1990s. The fact that the banks had a dominant role in funding Japanese corporations meant that the financial crises that they suffered from had a great implication to the Japanese economy as well as the global economy. The relaxation of the banking restrictions by the Japanese government made the banks to adopt price competition strategies and this began to place a downward pressure on risk adjusted interest rates. Additionally, the increased competition forced the banks to extend their loan portfolios to the risky market segments. The banks offered large amounts of loans to individual customers as well as the small and medium sized enterprises and this was based on their collaterals rather than their cash flows. The slowdown in economic growth and the subsequent decline in real estate and stock prices made it difficult for the lenders to service their loans hence this made the banks and other financial institutions to experience economic crises. This in turn contributed towards making the Japanese economy to experience negative growth. However, the restructuring of the banks in 1999 enabled them to continue to support other sectors in the economy. Moreover, the restructuring allowed the banks to merge with each in order to reduce overcapacity in the Japanese financial markets. Japanese Corporations Morck and Yeung (2006) note that the growth of the Japanese economy depended by a large extent on growth of the businesses in the private sector. In 1983-1988 Japanese firms were able to increase their exports to the foreign markets and this increased the Japanese gross income by 42%. From 1988 to 1992 the income from the Japanese exports increased by 2% to 44% as compared to the previous period. During this period there was a general rise in the Japanese firms’ managerial and technological capabilities and this encouraged the corporations to undertake FDI (Ito & Krueger, 2010). The overseas investment by the Japanese corporations enabled the Japanese economy to experience a positive economic growth. However, the economic slump in the 1990s caused a reduction in FDI by the Japanese corporations and this was due to the decline in the value of the Yen. This in turn contributed to the slow economic growth that the country was experiencing at this period. According to Das (2008) from late1990s Japanese corporations have increased their investments in China because the country offers substantial advantages in labour and operating cost. Moreover, China offers a growing marker and this has made the Japanese corporations to regard it as a short-term boom market. In the 21st century the Japanese corporations have been able to transfer their technology into their international subsidiaries and this has played a key role in enhancing their growth as well as improving the Japanese economy. The transfer of technology has enabled the firms to become more competitive hence increasing their incomes. Conclusions In conclusion, the deregulation of the financial sector by the Japanese government allowed foreign firms to enter into the Japanese market and this lead to an increase in competition. The deregulation also allowed the banks in Japan to undertake foreign direct investment in foreign countries. However, the deregulation made the banks to lower their lending standards and this made the country to experience financial crisis and slow economic growth. Nevertheless, the Japanese government was able to restructure the banking sector by adopting policies that ensured sufficient control of the financial sector. References Adams, G.(2007). Accelerating Japans Economic Growth. London: Routledge. Chianf, Y., Raftery, J., & Anson, M.(2005). The Asian Economies. London: Taylor & Francis. Das, D.(2008). China and India: A TaLe of Two Economies. Mason: Cengage Learning. Farrell, R. (2008). Japanese Investment in the World Economy. Edward Elgar Publishing Limited: Cheltenham. Flath, D.(2005). The Japanese Economy. Melbourne: Oxford University Press. International Monetary Fund.(2000, January). The Japan Banking Crisis of 1990s. International Monetary Fund Working Papers, 1-47. Liu, W., & Hsu, C.(2006). The Role of Financial Development in Economic Growth: The Experiences of Taiwan, Korea and Japan. Journal of Asian Economics, 17(1), 667-690. Morck, R., & Yeung, B .(2009). Japanese Economic Success. Journal of International Business Studies, 14(1), 11-29. Saxonhouse, G., Wright, G., Stern, R., & Patrick, H (2009). The Japanese Economy in Restrospect. London: World Scientific Publishing Company Ltd. Stenberg, L. (2008). Innovation Policies in Japan. Research and Innovations, 3(1), 50-80. Suzuki, Y.(2006). The Industrial Bank of Japan. Asian Studies, 3(1), 1-12. Read More