The Japanese Economy: From high growth to recession
Abstract
This paper describes the formation of key components of the post-war Japanese
economy and their role in causing the bubble economy and Japan's current economic
recession. The paper begins by examining the so-called "Japanese capitalism" a market
economy without capitalists. This type of economic structure which originated as the
pre-war zaibatsu, exists in its present form today as the keiretsu industrial groups
organized around a main bank. An examination of the industrial group structure follows.
These industrial groups provide certain advantages for Japanese firms such as stability,
monitoring, and emergency financial support. The firms within the industrial group often
pay for these benefits in the form of decreased profits for firms within the industrial
group. The paper also notes the factors of high growth: technology transfers and the
allocation of funds to export industries through manipulation of the banking system by
the "window guidance" of the Ministry of Finance. The origins of the present -day bank
monitoring system is also discuss in this paper.
The second section of this paper discusses the creation of the bubble economy due
to a shift from capital investment to asset investment in both stocks and real estate. The
paper argues that the bubble economy was created by increased amounts in speculative
investment that was the result of an easy money policy by the Bank of Japan and a
history of long-term growth in the real estate and equity markets. The paper continues
with a discussion of the collapse of the asset bubble, and the attempts of the Japanese
government to engineer a recovery to the economic crisis.
The third section of the paper explores the state of the Japanese economy in the
post -bubble era. One of the largest problems facing this economy today is the amount of
bad loans that banks face due to a collapse in the markets for speculative investment.
The magnitude of the bad loan problem forced the Japanese government to try new
methods of dealing with failed banks. The abandonment of the "no-failure" policy in
1995, demonstrated the weakness of the Japanese banking system, and brought about the
"Japan premium," an interest rate mark-up that Japanese banks must offer to compensate
for the increased risk of bank failure. This section continues with an examination of the
"Big Bang" bank reforms and their impact on economic recovery. The low return on
private sector investment is also an important issue for the Japanese economy today, with
the aging of the Japanese population, increases in return on household investment will
help to eliminate the large pension burden on the Japanese government.
The final section concludes that the Japanese economy has outgrown its current
form, that is the non-capitalist market economy. The current economic recession is a
testament to this fact. The collapse of the stock and real estate bubble in the early 1990s
created a large financial crisis, from which the economy has yet to recover. The bad loan
situation is not Japan's only economic problem, however. The economy also faces
deflation, reduced consumer spending, and a low return on household savings.