Financial Policies in Japan - Assignment Example

Financial Policies In Japan Student’s Name Subject Professor University/Institution Location Date Before 1970s the financial market in Japan was greatly regulated by the government through the ministry of finance. Foreign exchange was tightly controlled and the interest rates closely monitored and controlled by the ministry of Finance. The entire financial instrument in the economy was highly limited and was under the approval of the ministry. The government had the power to influence the allocation of credit to the industries by the commercial banks. In other words, its hand was very heavy on controlling the choices of the private sector (Cusumano, 2013). The control over the loan rates, deposit and a strict regulatory authority over Japanese banks meant that the government determined the profitability of the banks. The security market just played a highly speculative and peripheral game as it never had impact on or corporate behavior or control. At the same time, insurance companies had the ability extend loans to the same sectors that banks were directing theirs. This limited the competiveness of commercial banks (Carlile and Tilton, 1998). Before mid 1970’s,the corporations in Japan did not have other source of funding as loans from abroad were not allowed and the domestic security market had had not fully developed.1970s,the future growth expectation greatly reduced causing corporations to reduce their rate of borrowing. A big number of them started channeling the surplus they attained into the newly created open market and started demanding high interest rates on the deposits. The corporate world in this sense created a need for the financial deregulation in the country (Suzuki, Ishida, Nihei, Maruyama, 2010) The city banks demand to raise funds reduced as loans demand greatly declined. The reliance of funds from the Bank of Japan by the city banks greatly reduced. Japanese government emerged as a heavy borrower in the economy financial market and created a high deficiency to stimulate the economy following the oil crisis. The deregulation of Japan economy took a long process and was from internal and external forces. The international capital flows were highly deregulated .With the adoption of a floating exchange rate, the central bank did not have to buy foreign exchange. The private sector at this time was able to borrow from abroad and accumulate foreign claim. Japan was still under a great pressure to open up the economy to its financial market. Being a country with such a high growth rate, it attracted many foreign investors (Rosenbluth, 1999 Following this, there was a great change in Japanese economic policy. The consequences of the oil crises made it clear that the country’s high economic growth would land it into resource constrains. The Japanese government felt that the investment oriented and export oriented growth which were financed through indirect financing and over borrowing had to be automatically modified. New targets like the pollution control and conservation of energy were created (Broadbridge, 2013) It was between 1973 -1974 that the Japanese rapid growth rate came to a halt. The average growth rate dropped from 10% to 5%.Among the factors leading to the slowdown was the fall of the investment levels due to downward forecast for the future economic growth. The other factor was the issue of pessimism concerning the resources available to the country because of OPEC’s monopoly power (Altunbas, Liu, Molyneux, & Seth, 2000). Further deregulation of the economy is inevitable and irreversible for an attainment of an efficient and a stable economy. The deregulation agenda in the economy currently entail various proposed measures. The government o Japan seems to have embraced the deregulation of the economy in a number of ways through the ministry of finance .The advisory council in the ministry of finance gave a detailed report on deregulation on what was the ‘big bang (Toya, 2006). One of the changes mentioned in the report is deregulation of various foreign exchange rules that include easing various limitations associated with individuals engaging in overseas investments, lightening rules pertaining to non financial businesses that net out their exchanges work internally and easing limitations to foreign exchange firms. The other changes mentioned included the security transaction tax reduction, legalization of holding companies and asset backed securities, lowering barriers that separate banking and securities and removal of limitations on derivatives ( Carnoy & Carnoy, 2009 As Eggertsson,(2011) explains, zero interest rate is a policy applied by a central bank if .The bank of Japan had maintained a zero interest rate from the year 1999.Through the quantitative easing, BOJ flooded the commercial banks in the country with a very high degree of liquidity. That was in a bid to promote a high private lending, giving them a chance to have an excess reserve and have a low risk of liquidity shortages. Another reason for the zero interest rate policy by the bank of Japan was to dispel the deflationary concern raised in the economy as well as the stabilization of the interest rates.The bank did this through buying more bonds than the limit required level in order to set the interest rate at a zero. The bank was able to raise the account of commercial banks from ¥5 trillion in 2001 to ¥35 trillion four years later. These policies have later been borrowed by other countries like USA, Euro zone and UK especially when it came to the financial crises of the year 2007 According to Eggertsson (2011),even at time when the short term interest rate are close to zero, the central bank has other wider scope of expanding bank credit .Even if the bank system is not effective in the case and the long term interest rate nears zero, there are other alternatives that can be used for the policy stimulus. As was seen in Japan and Sarthe problem was not the zero bound interest but a weak banking system that hindered monetary policy effectiveness Monetary policies can be effective through other unconventional policies like liquidity support, asset purchase programmes, and forward guidance. So long as the long term rates remain the most relevant in economic decision making than the overnight rates, any step by the central bank to influence the interest rates can be a potentially suitable tool even if the short term rates are at the lowest level (Hamilton, 2012) However, the zero interest rate policy does not give a central bank a very easy time in doing this as the zero interest rate act as a constraint. The stabilization process is very costly in the case where there is such a constraint in the economy. This is due to the fact that it takes long for the inflation rate to get back to a steady state as compared to the case where there is no such (Blanchard, Dell’Ariccia & Mauro, P. (2010). Question c The zero interest rate aided the BOJ in boosting the economy of Japan as well as stabilizing the interest rates. A great lesson has been learning from the Japan policy of the zero rate interest rate. It has heavily been borrowed by many economies in the world. In the 2007/2008 global economic crises, developed countries like USA and UK adopted zero rate interest to boost their ailing economies. Most of these industrialised countries CB’s were able to reduce to a range of 0-3 %( Warnock & Warnock, 2009) Question d There are a number of steps that have been taken by the bank of Japan to protect the economy from any fallout from GFC. Right from the year 2003, measurable steps have been taken by the government to ensure stability in the time of the financial crises times and even afterward. The government through the Bank of Japan has encouraged different forms of structuring where Capital improvement and non performing loans have been removed. There are other policy responses that have been put to place like monetary easing and liquidity injection by the BOJ. These and other stimulus policies have enabled the financial system to withstand the serious output contraction that faced the G-7 countries (Flath, 2014) According to Ando Kimura (2012), Japan was one of the worst hit nations by the global crisis but its recovery surprised many economists. The collapse of the exports reduced the popularity of the Liberal Democratic Party, a party that had been in power for most of the55 years. The GOJ has proved its commitment to save the financial system of the country through a number of ways. Internationally, it was well represented in the2009 G7 meeting where a number of things were agreed. One, the developed nations agreed to take accommodative monetary policy as well as well as expansionary fiscal policy. Some of these included the use of well coordinated unconventional measures. It was also agreed that these economies would be taking simultaneous actions in a number of ways as opposed to expansionary measures that are taken by separate states. The commitment by the Japan government to these resolutions in the economy has contributed to the stability of the economy of Japan. It was also agreed that developed nations would see to it that there are enough resources for the operations of the IMF the Japanese government loaned IMF about US$100 billion. This is just a tip to show the commitment of the government to the recommendations .Implementation of these resolutions has enabled this great economy get on its feet again As Broadbridge (2013) explains in an effort to curb the impacts of the GFC that originated from the United States of America, the government of Japan together with its coalition parties came up with measure to counter the financial hardships to people and financial institutions in Japan. Some of these measures included: Facilitation of corporate financing for both small and medium enterprises through utilization of the act of special measures in order to strengthen financial functions The Bank of Japan had to do the following; reduction of the interest rates, supplying money to the available short term money markets, suspension of the sale of shares owned by the Bank OF, Japan and addition of the current deposits held by the bank of Japan. A law was enforced in the year 2009 that stated that the financial institutions can change the terms of a loan if a customer so requested In conclusion, the stabilization the financial system of Japan is out of combined efforts between the government, the BOJ and the financial sector as a whole. Trade partners and international organizations have been equally important. The origin of the Great financial crises was USA a key Japan trade partner. Cooperation with international financial institutions like IMF has greatly helped. 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