Key Features of the Economic Development of East Asia - Assignment Example

of the of the Submitted East Asian Economic Development Question What went wrong with Japan’s macroeconomic policies during the two-decade-long recession? Discuss the ineffectiveness of Japan’s macroeconomic policies, both fiscal and monetary, implemented during the 1990s. Why were they ineffective in jumpstarting the economy? Looking at the Japanese economy during the last two decades, it is evident that something went wrong with their macroeconomic policies. Emerging out of the shadows of World War II, Japan worked hard to recoup its losses after the defeat to the Allied forces. It can be imagined that the major part of the mid-40s to the 1950s were spent in picking up the ashes of Hiroshima and Nagasaki, and only later did Japan try to start off as a producer of small and medium sized goods in electronics and household appliances. The commitment of the people and the Government was nothing short of legendary and this enabled an economic miracle in Japan. Right from the 1960s, Japan has experienced consistent growth. In fact the average growth rate of GNP was estimated at a whopping 10 percent in the decade of the 1960s, which reduced to 5 percent in the 1970s and further to 4 percent in the 1980s. It was unfortunate that the growth rate was reduced due to the overheating of the Japanese economy. As often happens in the case of a lengthy period of economic prosperity, it was thought that the good times would never end and this precipitated an unprecedented rise in the prices of both real estate and shares in the stock markets. Historical records indicate that a similar situation was witnessed in the USA in the Roaring Twenties (1920s), a decade of unbridled euphoria and prosperity and then it all came down in a shocking way on 24th October 1929, when the stock market tumbled. The resulting panic in the days that followed led to the Great Depression and it took the rest of the decade for America to find its feet again under President Roosevelt. The Japanese economy in the early 1990s was experiencing the same kind of economic situation when the real estate prices were at an all time high in 1991 and this was followed by the crash of the Tokyo Stock Exchange in 1992. By the late 1980s, Japanese workers were being paid really well and this added purchasing power and affluence to a lot of families. But it would result in higher prices of goods and services which would limit the effects of prosperity. With the growth rates stagnated at 1.5 percent in the 1990s, it would be termed the Lost Decade by locals as well as the world at large. Although the Bank of Japan lowered interest rates, there was no appreciable change in investment, the major part of it having already occurred in the second half of the 1980s. Like the USA after the recent banking and financial crisis, the Japanese Government was forced to give stimulus packages to the major sectors of the economy. All this has increased Japan’s debt to $10.5 trillion, the world’s highest level of sovereign debt for a single nation. Notwithstanding its efforts to revive the economy through privatization and other stimulus packages, the Koizumi Government only managed to revive the economy a slight bit, up to 2.1 percent. The beneficial effects of this were however impacted by the worldwide recession caused by the US banking crisis having a domino effect on the markets of many developed nations. Economists generally agree that Japan had entered a liquidity trap in these two decades. Rather than increase the rate of inflation by printing more money, Japan chose the path of stimulating the economy through speculation and market expectations. This has been termed as ‘quantitative easing’ and consists of internally increasing the money supply through credit for example. Despite having a low tax rate on personal incomes, the zero percent interest rate policy did not provide the results expected and it was withdrawn in 2008. It can be seen that the major part of economic activity has come from local spending. It has been further recommended that a lowering of long term interest rates might stimulate consumer spending but this has not been experimented with. In consequence Japan’s central bank has been charged with causing deflation. Japan’s export policies are helping bring some measure of revival to its economy, while it has also been targeted for exports by some trading nations. This is plausible because only 12 percent of the land mass of Japan is cultivable, and it has to depend on outside sources for food and other necessities. At the same time, the lackluster growth scenario still persists, with the Nikkei 225 having diminished in value by over 50 percent between 2007 and 2008. It has been suggested that further changes to legislation and policies that encourage consumer spending should be adopted but in the light of Japan’s previous failed experiments along this pathway, it is doubtful if this will be implemented. With the world and the USA seemingly on the brink of another recession, the best option is to wait and see. On a healthier note, the Yen had appreciated to hit a 15 year high against the US Dollar, but much still needs to be done to stimulate growth to previous levels. Unemployment lies at 5.7 percent or thereabout. Question 2: Some nationalistic Japanese people may say: Japan has been in a long recession because the U.S. created the ‘Bubble economy’. Discuss what this statement is referring to while referring to the economic situations and policies of the U.S. and Japan as well as their bilateral economic relationship during the 1980s. In contrast to peaks and troughs which are seen as a normal and recurring phenomenon relating to trade cycles, the issue of bubbles is another matter altogether. Illustrative of bubbles from a historical perspective are the South Sea Bubble of the 1780s and also the economic situation that sparked a demand for tulips in Holland. Bubbles may thus be viewed as short and concentrated periods of a frenzy of economic activity, the majority of which is based on rumor or sentiment which seizes the public imagination. Actually there are very good historical and economic reasons behind the US and Japanese bubbles of the 1980s and the 1990s, one following the other and being inexorably related to each other. It does not matter that one preceded the other or whether indeed one bubble led to another, but the important point is that the prescriptions for recovery have not worked either in Japan or in the USA. The consequence is that both these world class economies are on the brink of failure as they pick themselves up and their beleaguered populations time and again, wondering what they are doing wrong or why the prescriptions, despite having a historical basis, are not working this time around. Could it be that the common citizens are not convinced, or just tired of being played for fools? After all they stand to lose every time this happens, and it has been happening too often for anyone’s liking. The result is a disparagement against the prevailing system and Occupy Wall Street type Protests all across the world. The present state of the economy has a lot to do with these job losses and resulting homelessness. It was Japan’s planned investment in science and technology with a view to achieve worldwide dominance and thus displace the USA as the top destination for research and technology that most likely led to this situation. They sought to use all unutilized resources in this initiative, which overheated their economy (Thornton, 1). There was a deregulation of interest rates in Japan beginning in 1985. However Japanese banks did not choose to raise borrowing rates, rather they sought to reduce their profits by disinvesting shares they had in their investment portfolios for a very long time and used these capital gains to mask their cost of funds. But eventually they repurchased these shares from the market and re-strengthened their portfolios. As one can imagine, they were not able to carry on this state of affairs indefinitely. There was generally a bullish trend witnessed in stock markets in Japan from 1987 to 1989, and before the Tokyo market crash of the 1990s, the banks had invested as much as $6 trillion in equity based securities. They also paid a premium on such investments despite being some of the largest banks in the world, so ravenous was their appetite. Japanese banks opened branches in the USA and sought to lend to American borrowers, but could not recover their funds when the economy went bad and the securities were sold at a loss. With the collapse of the Tokyo stock market in 1992, they had no place to borrow money from and suffered losses and bankruptcy. Then real estate prices in Japan also began to decline, exacerbating their problems as typically 80 percent of a bank’s worth was based on real estate holdings and securities. The banks were cautioned time and again to create reserves for losses but the general feeling was that the downturn would be short-lived and the economy would stage a recovery, enabling them to recoup their losses. Most banks insisted on ‘keeping their fingers crossed’ as a strategy- a rather ominous sign of things to come. Even the life insurance companies owned a sizeable chunk of the stock market floatation- in fact being 13 percent compared to the banks holdings of just 9 percent. In the end it all came down when the property and stock market bubble burst and a variety of these financial institutions suffered losses. Most of the lending was incredibly risky- made on name basis rather than balance sheet strength (Wood, 2004, 12). Comparing the events in the USA and Japan, it is refreshing to note that because most of the world’s securities are still denominated in US dollars, this currency has a lot of resilience compared to the Euro or Yen (Shaw, 2010, 3) .This enables the US economy to recover at a faster pace than any other. At present the Japanese economy has the second highest deficit of any country in the world after the USA and that could be a cause of worry to the economic and financial think-tanks that are beset with Japan’s economic revival (Wood, 2005, 17). If America has been plagued by the War on Terror and tax cuts in the Bush era, Japan has been affected by recent natural calamities such as the earthquake that caused such massive and widespread destruction earlier this year. The important point is to find a workable formula that will enable both countries to get back on their feet. Works Cited Shaw, Jonathan. After Our Bubble. The Harvard Business Review, Jul-Aug 2010. Thornton, Mark. The Japanese Bubble Economy. Accessed on 27 Oct 2011 at www.leerockwell.com Wood, Christopher. End of Japan, Inc. and How the New Japan Will Look. Simon & Schuster, 2004. Wood, Christopher. The Bubble Economy: Japans Extraordinary Speculative Boom of the 80s and the Dramatic Bust of the 90s. Solstice Publishing, 2005. Read More