Regressing Japans economic growth - Literature review Example

? Regressing Japan’s economic growth Regressing japan’s economic growth on the rate of inflation, Nikkei index, yen/$ exchange rate and change in property prices (1980-2012) Introduction Even though Japan went through a crisis especially the worldwide recession in 2008, its present depression can be traced back to late 1980s and early 1990s as well as the collapse of the Equity markets and its housing. Many economists have researched on the “lost decade”, developing arguments about the causes and suitable policy responses that explain the issue. This paper will look at the way Japan’s lost decade and low economic growth was and its unstable nature between 1980 and 2012. The conditions prevailed because of factors such as the rate of inflation, Nikkei index, yen/$ exchange rate, and change in property prices. Most importantly, the paper reviews some key books and journals that explain Japan’s economic growth in relation to the lost decade, using some theories such as Keynes’s liquidity trap and Krugman’s analysis. Of importance also is the issue of asset bubbles and the unprecedented stagnation from 1992 to 2002. The economic growth may have had many effects and the monetary policy will be discussed in connection to this. A review of the key literature books and journals in the context Journal of the Japanese and International Economics, volume 23, Issues 2, June 2009, pg 200-219. This journal talks about the international and monetary factors that caused Japan’s lost decade. The journal focuses on the “lost decade” particularly on the real and domestic issues like factory productivity, governance, growth decline, and non-reforming loans. It is evident in the paper that international and monetary factors plaid a significant role in the same way that the domestic and non-monetary factors in creating the prolonged stagnation in Japan.. For instance, the article mentions the Piaza accord of 1985 that managed to change the key exchange rates specifically by verbal promises together with synchronized monetary policies and activated the trend for the powerful actual exchange rate of the Yen. Monetary exchange policies that followed this trend kept the actual exchange deeply overvalued. In general, the journal tries to show how Japan endured a serious burden during this era. This article is therefore relevant because it addresses the key points related to the yen/$ exchange rate and points to the prolonged stagnation in Japan. Hamada and Okada, in this article argue that in the 1980s, Japanese economy was marked by a phase of a speculative bubble. In the course of the 1980s, the state had a large commercial surplus with the U.S, exporting far much than its imports. Japan gained from a devalued currency, meaning that its exports became cheaper for the United States. Japans exports really flourished during this era till the leading American policy elites got concerned about the “disruptive force” of Japan in American economic living. To get a solution to this commercial imbalance, the Japanese regime permitted the yen to appreciate alongside the dollar in early 1986. This shortly led to an economic contraction and a decrease in the export-based electronics, automobile, and steel industry. The Central Bank of Japan made an effort to alleviate a weakening economy by lowering the official interest, which resulted in the historical documentation of high stock prices that were at the peak in 1989. The article further suggests that the large commercial surpluses, the low interest rates, and the strong yen swelled Japan’s monetary supply. The auto industry, which was the countries stronghold in industrial economy had dominated the markets, and wanted speculative outlets for their huge savings. On the other hand, banks were enthusiastic to lend money to people to purchase real estates. In 1987, when the gross national product (GNP) in Japan was 345 trillion yen, monetary assets went up by 382 trillion yen, as the land assets increased at 374 trillion yen. In addition, the banks were dedicated to a policy of lending cash to firms that were no longer making profits. The journal concludes that the ensuing defaults resulted into big bank difficulties, necessitating the a government bailout. This called for the State to intervene and save the banks, but unfortunately, it assumed the debt from the private monetary sector, raising the public debt to approximately 581 trillion yen in early 2010. Powell, B. (2002). Explaining Japan’s recession. Quarterly Journal of Austrian Economics, 5(2), 35-50. The journal gives an overview of the economy of Japan between 1982 and 2000. It is a very critical journal on this topic because it gives an analysis of what happened in this period and gives an overview of matters around the Nikkei index and the stagnation of the 1990s, then finally addresses the Keynesian theory. The Nikkei index Powell states that the Nikkei stock market index dropped more than 60% from as high as 40,000 towards the end of 1989 to less than 15,000 in 1992. In the mid 1990s, it rose and gave Japanese the hope that the economy was soon to recover. However, as the economic outlook worsened with time, share prices dropped again. This indicates that the Nikkei dropped below 12,000 in March 2001. Further, real estate prices also fell during the recession in 1991-1998 by 80%. Change in property prices Japan is still picking up from the great asset bubble dated in the 1980s. During this period, there was an increase of 61.6% nationally and 196.4% rise in land price in six key cities in Japan. However, in 2012, economic policies (abenomics) were set up and included devaluation of the yen, increase in public infrastructure expenditure, and aggressive quantitative easing to help the house and land prices to stabilize. A decade of unprecedented stagnation from 1992-2002 This journal continues to present that during the 1990s, the real GDP stagnated, increasing merely from 428,826 billion yen to 469,480 billion yen between 1992 to the end of 2000. Since the year 1998, growth was negative, unemployment rate heightened from 2.1% in 1991 to 4.7% in 2000. Even though the international standards may rank the unemployment rate as low, the rise of 4.7% is vital in Japan with the reason being the historical and cultural precedent of life-long employment and because it was never above 2.8% in the mid 1980s. The executive unemployment rate is also prejudiced downward since the Japanese government gives “employment adjustment subsidies” to firms that maintain workers as “window sitters.” With this regard, the author goes ahead to discuss how the Keynesian theory is applicable to Japan’s economy. The Keynesian explanation The Quarterly Journal of Austrian Economics puts forward that the Keynesian macroeconomic theory provides that commercial cycle fluctuations are often brought about by aggregate demand collapsing. In this theory, consumption is viewed as relatively stable, meaning that the weakening in average demand is because of declining investment. According to Powell, 2002, Keynes failed to clearly explain why investment collapsed, but rather associated it to the “animal spirits” within a business environment. If the 1980s asset bubble is disregarded, Japans stock market is studied between 1989 and 1992, where a huge withdrawal of trust occurred in the investment and business setting fell, causing the Nikkei Index to drop more than 60%. In Keynesian approach, prices are rigid or “sticky” in the downward view, so they fail to adjust at a faster rate to restore equilibrium. The economy might finally re-establish it equilibrium, but equilibrium has never been inevitable, a process, which Keynes believes, requires too much time to establish. As per Keynesian’s view, to recuperate from recession, the State must put in place active fiscal policies by rising spending and lowering taxes to raise collective demand and offset the drop in investment. In this sense, many of Japan’s policies fit in this theory but they never brought the economy out of recession (Dekle & Kletzer, 2003). A liquidity trap is permitted by the Keynesian theory in which the LM curve does not affect the aggregate demand. The failed attempts therefore, by the Bank of Japan to re-inflate so that it can revive its economic growth are a proof supporting this theory. The solution given by Keynesian policy at a time when the financial system is in liquidity trap is to make the government lend to businesses directly as opposed to creating liquidity in the banking sector. Japan has its FIPL (Fiscal Investment and Loan Program, an off-budget branch of its government of close to 70% of the expenditure in the overall budget that can be allocated to borrowers. The Book, “Economics: European Edition” by Paul Krugman, Robin Wells, and Kathryn Graddy, 2007 The book is an ideal one for this topic because it introduces economics, combining an international scope of economic theories using actual world examples. The Krugman analysis is quite relevant in Japan’s economic overview with respect to production capacity. The Krugman analysis Krugman, in his real examples states that the postal savings of Japan that channels funds into public projects with little social payoff is not sufficient, just like the idea of rolling over the company debts that will never recover profits and the keeping capital employment generating what is not needed. He argues that this is not an issue so long as Japan has failed to produce at capacity. According to him, to assert otherwise is wrong because the focus on supply disregards the actual problem. Production of goods and services that are of no demand cannot help nay economy in the world. Krugman recommends that unconventional financial expansion should be put in place, where the Bank of Japan would buy dollars, long-term bonds, and Euros. In addition, in would involve accepting and endorsing mild inflation as well as a weak yen. Schaltegger, C. A., & Weder, M. (2013). Will Europe Face A Lost Decade? A Comparison With Japan's Economic Crisis (No. 2013-03). Center for Research in Economics, Management and the Arts (CREMA). This document analyzes the economic effects and policy of Japan in the decade context and compares it with those in Europe. It looks at the causes and impacts of the burst bubble in Japan as well as the monetary and fiscal policy responses following the outbreak of the disaster. The article is vital in the discussion of this topic because it outlines the impacts of monetary policy in Japan in comparison to other countries. Monetary policy Japan in comparison with the US and Europe According to Schaltegger, C. A., & Weder, M, 2013, the monetary policy of the Bank of Japan at the end of 1980s is similar to the Federal Reserve’s strategy before the global financial catastrophe. Interest rates had been maintained at uniquely low levels for some good time even though the economic growth was strong and robust price increases in a number of financial assets were present. Interest rates then went up decisively and repeatedly from 2.5% to 6% in a period of 16 months. In the same way, the US learned the most important lessons as a result of the great depression; that monetary policy was too procyclical and restrictive, resulting to a downward spiral and deflation in economic activity. The federal reserve in America has committed itself to maintain interest rates close to zero till it reaches mid 2015 even if it means economic activities might be stronger than it is expected at present. On the other hand, Japan reduced interest rates more gradually from six to three percent within the foremost 15 months of the crisis. In connection to this, the impact was that persistent problems in the monetary field, slow growth, and deflation led Japans bank to lessen interest rates further to approximately 0.5% in September 1995. However, it was not until mid 2001, over ten years after the crisis outbreak that it went as low as 0.1% (Schaltegger & Weder, 2013). In Europe, the European Central Bank, the Bank of England, and the Swiss National Bank involved in concerted operations after the Lehman Brothers collapsed in 2008. They lowered interest rates frequently and provided huge amounts of liquidity to poor financial institutions simultaneously. By may 2009, all executive short term interest rates linked to big Central banks were as low as 1%. While the Bank of Japan failed to start buying government bonds, shares, and mortgages until the end of 1990s, the readiness to unconventional methods called quantitative easing was in the crisis. Eventually, the Bank of Japan continued to find an essential exit measure from the liberal monetary policy, vending government bonds, but expanding the bank’s balance sheet more against the basis of persistent fragility in the monetary sector and fragile economic prospects. References Akram, T, 2012, The Economics of Japan’s Lost Decades. Bayoumi, T, 2001, The morning after: explaining the slowdown in Japanese growth in the 1990s. Journal of International Economics, 53(2), 241-259. Dekle, R., & Kletzer, K, 2003, The Japanese banking crisis and economic growth: Theoretical and empirical implications of deposit guarantees and weak financial regulation. Journal of the Japanese and international economies, 17(3), 305-335. Foster, J. B., & McChesney, R. W, 2012, The Endless Crisis: How Monopoly-finance Capital Produces Stagnation and Upheaval from the USA to China. NYU Press. Hamada, K., & Okada, Y, 2009, Monetary and international factors behind Japan's lost decade. Journal of the Japanese and International Economies, 23(2), 200-219. Horioka, C. Y, 2006, The causes of Japan's ‘lost decade’: The role of household consumption. Japan and the World Economy, 18(4), 378-400. Kersting, E. K, 2008, The 1980s recession in the UK: A business cycle accounting perspective. Review of Economic Dynamics, 11(1), 179-191. Krugman, P, 2012, End this depression now!. WW Norton & Company. Krugman, P. Wells, R., Graddy K, 2007, Economics :European edition. (Vol. 2). London: McGraw-Hill. Kuttner, K. N., & Posen, A. S, 2001, The great recession: lessons for macroeconomic policy from Japan. Brookings Papers on Economic Activity, 2001(2), 93-185. Powell, B, 2002, Explaining Japan’s recession. Quarterly Journal of Austrian Economics, 5(2), 35-50. Saxonhouse, G. R., & Stern, R. M, 2003, The bubble and the lost decade. The World Economy, 26(3), 267-281. Schaltegger, C. A., & Weder, M, 2013, Will Europe Face A Lost Decade? A Comparison With Japan's Economic Crisis (No. 2013-03). Center for Research in Economics, Management and the Arts (CREMA). Read More