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Is the fiscal stimulus worked during the Japanese Stagnation in early 1990 crisis - Research Paper Example

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Your Name Your Prof Name University Name Did the fiscal stimulus work during the Japanese Stagnation in early 1990 crisis? Introduction Following strong economic growth in the eighties extending until 1991, the Japanese economy began its long run of stagnation so much so that during the entire decade from 1992 to 2002, Japan saw its real GDP growth rise more than 2% in only 2 of the 10 years…
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Is the fiscal stimulus worked during the Japanese Stagnation in early 1990 crisis
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Is the fiscal stimulus worked during the Japanese Stagnation in early 1990 crisis

Download file to see previous pages... Indeed, the government introduced several fiscal stimuli, they were, however, not effective enough to bring back the growth that the Japanese economy had earlier witnessed. Opinions on the effectiveness of the fiscal stimulus abound in literature written by economists with some arguing that the fiscal stimulus was not successful and actually degraded the economic growth due to the crowding out effect; while others arguing that the fiscal stimulus prevented worsening of the economy and should therefore be considered “successful”. In my opinion, however, the fiscal stimulus did not work and the reason for this, in part, is due to the fact that most fiscal stimulus when actually implemented/applied by the Japanese government was seldom close to what the government actually promised to implement/apply. Therefore, the fiscal stimulus failed to work because whatever stimulus was actually applied was never enough. Following the September 1985 Plaza Accord, the Japanese Yen started to appreciate which led to Japan’s export sector getting badly hit. To counter this appreciation of the Yen, the Bank of Japan drastically eased its monetary policy reducing the interest rate from 5% in January 1986 to 2.5% in February 1987. Soon, the real estate and financial markets began to expand rapidly as a result of this monetary easing, creating a huge financial asset bubble. In response to this, the government increased its interest rate to 6% in 1989-90. The sudden tightening of the money supply led the markets to collapse and thus began the onset of a long period of stagnant economic growth in Japan. The real GDP increased from 428,826 billion Yen in 1990 was to a mere 469,480 billion Yen by the end of 2000 (Powell). Statistical evidence of poor performance of fiscal stimulus The discussion about fiscal stimulus and the Japanese 1990s crisis finds root in the Keynesian economic principles. Keynesian economists preach that during a cyclical trough, discretionary fiscal policies can help the economy emerge from the trough. That is, when the economy goes down due to cyclical factors, the government by introducing fiscal expansionary policy (applying fiscal stimulus) can help the economy maintain emerge from the downturn faster. The Japanese economy in the 1980s saw rapid expansion and large building up of asset bubbles. Accordingly and cyclically, when the bubbles burst, the economy started to cool down. However, this time the trough was not due to a business cyclical downturn; the economy had lost steam due to asset bubble burst. Keynesians argue that by applying large fiscal stimulus under such situations, the government can reinvigorate growth. The Japanese government did apply several fiscal stimulus programs but was unsuccessful in spurring growth or controlling other macroeconomic indicators either. Figure 1 below puts into perspective the state of the Japanese economy during the crisis. It shows the real GDP growth rates for Japan and for the US from 1985 to 2002. Figure 1: Comparison of Real GDP growth in Japan and US from 1985 to 2002 From Figure 1, we see that Japan enjoyed high economic growth from 1985 to 1991 where after the economy was more or less stagnant until 2002 except in 1996 (2.6%) and in 2000 (2.9%) where the economic growth was >2% but still well below that of ...Download file to see next pagesRead More
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