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.