The Heisei Recession in Japan - Essay Example

Hensei Recession Introduction Financial and economic recessions have characterized global economies in the 21st century with majority of them recovering from them only to be stricken again although in different parts of an economy’s history. For instance, the 2008 global financial recession was likened to the 1930s Great Depression. Financial and economic recessions are linked with massive rates of unemployment and job cuts, high rates of inflation, crashing stock and share prices, high levels of fluctuations in the international exchange rates, rising interest rates and rising prices on energy and other consumer goods such as food as indicated by Shibata (2004, p.86). In Japan, the impact of the 1990s Heisei recession still remain to date as Japan has not fully recovered from the after effects of the downturn as highlighted by Kuttner & Posen (2001, p.93). The Heisei recession saw stock prices drop to very low margins, property values declining rapidly with the growth of the economy that had been ignited by importation of international technology and increased population growth rates stagnated and eventually regressed as discussed by Shirakawa (2010, p.487). With falling land values to more than seventy percent, the value of assets nosedived to more than ten trillion US dollars (Millward & Morrison, 1997, p.8). Many contributing factors and elements have been cited to culminate to the crisis. The impact was severely, felt in all sectors of the economy including Japanese banks at the time. This report seeks to critically, discuss the statement, “Every major industrialized country has had one, or more than one, disastrous financial crisis, usually following from a period of deregulation and adjustment to free market forces. The difference in Japan is that for far too long the authorities did nothing about it. This failure to act was a major contributor to the depth of the Heisei Recession”. Causes of the Heisei Recession and its prolonged effects in Japan As earlier mentioned, there are varied underlying factors and elements that facilitated the Heisei recession in Japan, which was accompanied by the collapse of the Bubble economy. It is true that occasionally major economies undergo a severe financial meltdown more often than not, after a period of deregulation and adjustment to free market paradigms. Nevertheless, the impact of the Heisei recession in Japan has progressed to more than a decade. Among the cited causes of the Heisei recession includes a global recession, international competition in export markets, revolution of the industrial relations, institutional elements such as tax systems and the welfare systems among others and the high rates of the aging population as highlighted by Shibata (2004, p.85). The main contributing factor to the prolonged after effects of the recession was the incapacity by the Japanese government to safeguard the low performing banks and business firms from globalization and their failure to develop and implement strategies and policies as remedies or mechanisms for protecting the institutions and stimulating the economy as mentioned by Uematsu (1999, p.19). The fact that property values and stock prices inflated during the bubble economy and the Bank of Japan had set the discount rates too low, which culminated to easy money and money generated during the boom economy were not effectively and efficiently, managed, made the recession had to resolve (Hamada, 2003 p.86). The poor management of the high flow of cash was associated with the perception that the good luck or success will last. The authorities did not respond effectively and efficiently in closing down troubled banks while the Bank of Japan from continued to raise the interest rates and did not minimize the rates until more than one year later since the recession had already started (Suwanakul, 2005, p.143). The Japanese Heisei recession compares with the United States 1929-1933 Great depression in that both recessions occurred immediately after the collapse of a bubble economy and the second similarity is that the recession could only survive with developing and implementing drastic measures of transformation as noted by Koo (2008 p.155). Both recessions occurred in historical transition eras, that is, the 1930s and the 1990s. The Japanese banks coupled with the actions taken by the Bank of Japan are to blame for the depth of the Heisei recession and not necessarily the authorities. It is important to note that although the American Great depression compares greatly to the Japanese Heisei recession, they greatly differed. The stock prices and the value of the real estate in Japan declined extensively and simultaneously for a long time, which contrasts with the stock prices in the US, which declined for almost two years, but their decline was partly, offset by the increasing values of the real estate (Amyx, 2004, p.107). In comparison to the 2008, US recession and the 1990s Japanese recession, the two differs in that non-fiscal corporations in US are still healthy while those in Japan had debts amounting to several times more than their net worth. The corporate debt in US after the 2008 recession totals to 50% of the net worth of corporations after the recession (Koo, 2008, p.70). The impact on the Japanese banks was felt owing to meltdown of the property values that is conventionally depended on by banks as collateral and security for loans (Uematsu, 1999, p.20). When the property values therefore dropped, banks were unwilling to call in the loans since the value of the collateral, that is property, was substantially lower than it was initially, which resulted in banks losing financial resources (Suwanakul, 2005, p.144). Japanese banks absorbed more than one trillion dollars in bad loans and in a bid to limit the recession from spiraling out of control, the Japanese authorities barred the International Monetary Fund from probing the banking systems in Japan (MacLean, 2006, p.85). Since banks could not call in their loans, they loaned their debtors more money increasing the amount of bad loans and to generate money for their survival, the banks took risky measures that did not pay off eventually (Kuttner & Posen, 2001, p.102). To foster public confidence, Japanese banks hid the bad loans in their subsidiaries that were thought off-balance-sheet entities by indicating the loans were profits when they were not and posting the loss, years into the future with the prospects things would get better as discussed by Uematsu (1999, p.20). In addition, the monetary and fiscal policies developed and adopted by the Bank of Japan that inflated the interest rates in early 1990, dropping them to zero margins by mid 1990s and its engagement in safe policies generated the prolonged after effects of the recession and a decade of economic and financial stagnancy (Shirakawa, 2010, p.486). This was not the fault of the authorities but of the banks. There are other underlying determinants for the prolonged impact of the recession, which includes massive corruption and bribery cases that were exposed in 1991. For instance, the Recruit Affair, where senior politicians and high-ranking bureaucrats of the central government and managers in large enterprises purchased stocks at relatively low prices before the shares were floated, which generated massive profits for the politicians and others (Uematsu, 1999, p.20). The political turmoil which developed at the time, resulted from the instability of the Liberal Democratic party, whose vice president Shin Kanemaru had to resign for receiving half a million yen from the Tokyo Sagawa Express Affair as a bribe (Uematsu, 1999, p.21). Among other corruption cases was a corruption case where political elites and bureaucrats in the Japanese government accepted bribes from the Ay Group Affair, who needed permission to construct new facilities (Uematsu, 1999, p.21). There were also cases of illegal compensation cases for stock dealing losses that were exposed immediately after the recession kicked (Uematsu, 1999, p.21). Nevertheless, the Japanese government/ authorities can be, put to blame for the depth of the recession by failing to do a thorough analysis of the recession and its possible solutions, which led to increased fear of the market participants and the public that led them to spend less and save more (Suwanakul, 2005, p.145). This minimized the demand for products and services, which greatly aggravated the deflationary pressure of the economy and made the recession worse. The inaction of the authorities stemmed from the fact that the situation seemed manageable as the economic growth rate in 1990 stood slightly over 5% and in 1991 at 3% (Uematsu, 1999, p.22). Although there were clear signs that there were considerable amounts of non-performing loans in Japanese banks in the 90s, the government of Japan was rather slow if not reluctant to take the necessary steps to counter the challenge until eight years later in 1998 (Hamada, 2003 p.158). The government inaction to safeguard and react to the crisis in the banking sector can be attributed to the inability of the government to challenge bureaucracy since they did not have sufficient information about the crisis. It may be because the suppression and misinformation offered by the financial institutions in coalition with the Ministry of Finance (MOF) to the Parliament about the situation (Muramatsu, 2007 p. 39). In addition, the Ministry of Health over depended on their model of regulating banks that ensured fiscal stability devoid of bail outs using public finance and firms getting loans without offering large deposits as insurance for loans in return (Muramatsu, 2007 p.198). This meant when the property values nosedived during and after the recession, the banks had no option but to suppress the losses, obscure their losses as profits to foster public confidence and increased their lending to the large corporations with the hope the property values would increasingly eventually, which it never did. The first action the authority took was a 10.7 trillion-stimulus package that was initiated two years after the recession had started, which indicates a slow reaction time to encourage consumption (Hamada, 2003 p.118). However, the question that begs answers is why then after the stimulus economic policies were implemented, did the Heisei recession not recede? Among probable explanations is that the political climate was so volatile and the cabinet changes were too rapid and done within short periods, so that they cabinets could not effectively generate good solutions for stimulating the economy (Millward & Morrison, 1997, p.137). The second explanation for the failure of the economic stimuli is that the Japanese government implemented the Keynesian policies that included renovation and development of social infrastructures such as making fishing ports, repairing roads among others, which did not serve to solve the core challenge of the recession (Uematsu, 1999 p.91). The core challenge of the recession was financial predicament initiated by the sharp decline in property and stock values and the increased levels of bad loans for the banks (Savage, 2000, p.58). The solution would have been development and implementation of monetary and fiscal policies that would counter the effect of declining stock and property values and stimulating consumption to improve the GDP and growth of the economy. This entails implementing policies that enhances government spending to keep the Gross Domestic Product from declining, which will enable financial institutions and households to have enough revenues to repair and maintain their balance sheets as concluded by (Koo, 2008, p.71). Banks on the other hand, they did not require capital to assume risks and continue lending, but they required liquidity (Koo, 2008, p.71). The Keysian policies although they did not have the anticipated results to counter the recession, the impact it had was far worse as it caused a rise in fiscal deficits of the local and central governments , which increased borrowing and a rise in the actual bond-dependency rate (Uematsu, 1999 p.186). Additionally, the Keysian counter cyclical policy measures initiated poor performance of banks, which forced some of the major banks into insolvency. The insolvency caused panicked as the public rushed in to withdraw their money fearing insolvency in all banks (Uematsu, 1999, p.24). It is partially relevant and correct to mention that the Japanese authorities were slow to react in formulating and implementing structural reforms that would have propelled the economy from the recession and minimize the depth and extensiveness of the Heisei recession by boosting the potential economic growth rate. The obsession by the Bank of Japan under the Ministry of finance to control and stabilize the rates of inflation from spiraling in order to foster long-term economic growth had the impact of deflation that disrupted the operation and processes of the economy (Shirakawa, 2010, p.489). The solution to the problem would have been an increase of the interest rates by the Bank of Japan earlier in the 1980s by a larger margin and for a longer duration of time. Additionally, increasing the interests at the time at it did but more rapidly, reducing the discount rates, formulating, and implementing unconventional fiscal monetary measures as implied by Ihori et al. (2003 p.325). The ministry of finance and the Bank of Japan under the Japanese government were unwilling to make bold moves in making structural and fiscal policy reforms that would have effectively and efficiently, moved the Japanese economy out of the recession and rectifying if not safeguarding financial institutions from the problem of non-performing loans as mentioned by Amyx (2004, p.62). This would have cushioned the banks from making unnecessarily risky money lending practices to large corporations that led to increased amounts of bad loans as supported by (Kuttner & Posen, 2001 p.143). In addition, the unconventional measures would have given the Bank of Japan, the autonomy it needed to regulate banks, monitor prices and increase or decrease the interest rates and the rates of inflation accordingly without political, economic and social interference that were dominant at the time. If earlier on, the money that flowed in during the bubble economy would have effectively, been managed and investors would have been a bit more critical and skeptical of the good luck, while the banks would not have relied to heavily on speculating the property values, the recession would have been managed easily (Uematsu, 1999 p.28). In addition, structural reforms would have made it easy to reduce the risk of lending and it would have cushioned the banks against the problem of non-performing loans (Hamada, 2003 p.192). The impact of the slow adoption of reforms on policies by the government and the Bank of Japan lead to deflation, increase in prices for consumer, other household goods, and a decline in stock prices as discussed by Amyx (2004 p.128). In addition, it resulted in reduction in property value, reduction of confidence of the Japanese people about the proficiency and ability of the Bank of Japan and the government in general to help the Japanese economy to recover (Koo, 2008 p.69). Worse still, is the impact the slow reaction to the crisis had on the Japanese population in terms of increased rates of unemployment and abandonment of the deep rooted employment culture where layoffs during financial crises are avoided and promotions and compensation are determined by seniority. Companies had no option but to lay-off workers and they were unable to pay them retirement benefits. Conclusion The Heisei recession in Japan is closely, linked to the 1929-1930 Great Depression in the United States and the 2008, Global financial recession. The similarity between the Heisei recession and the Great Depression is that both crises occurred in historical transition periods, there was a feeling of over-confidence on the economic growth before the recessions began and both occurred immediately after a bubble economy. Even through major industrialized economies have had a recession, they are able to effectively and efficiently recover, which contrasts the Japanese case, where the recession developed roots and prolonged for more than a decade. Among underling causes of the Heisei recession are the volatility of the global monetary systems, change of financial systems from regulation and relief to deregulation and relief, revolution of the industrial relations and lack of sufficient structural policies to cushion the economy incase of a crisis. The Government of Japan and the Bank of Japan under the Ministry of Finance are blamed for delays in implementing counter policy measures to safeguard the economy and even moving the economy from the recession. When they eventually acted, the actions were late, as the effects had already taken root. The statement “Every major industrialized country has had one, or more than one, disastrous financial crisis, usually following from a period of deregulation and adjustment to free market forces. The difference in Japan is that for far too long the authorities did nothing about it. This failure to act was a major contributor to the depth of the Heisei Recession” is partially true as highlighted in the report. References Amyx, J. A.  2004.  Japan’s Financial Crisis:  Institutional Rigidity and Reluctant Change.  Princeton:  Princeton University Press.  Hamada, K. 2003. The Heisei recession: an overview. The ESRI international Forum. Savage, J.D. 2000. 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