Describe what occurred to japan economy during the "lost ten years" (facts - provide data, desks, graphs that summarize economical conditions). Explain what brought on the crisis (examination). Why was deflation such issues for Japan? Summarize and measure the government's fiscal insurance policy. Suggest choice fiscal policies that may have worked better.
Summarize and evaluate the Loan company of Japan's economic policy. Suggest choice monetary policy that might have worked better.
In what ways is the existing U. S. economic crisis similar to the Japanese crisis and how could it be different? What are the lessons for current U. S. macroeconomic policy?
Executive Brief summary: 4
Part I: The Lost Ten years 6
Part II: Fiscal Insurance policy 7
Fiscal Policy Instruments 7
Fiscal Stimulus in the "lost 10 years" 7
Consumption Taxes Hike 12
What would have probably worked 13
Monetary Insurance policy 15
Comparison of U. S. economical crisis to japan crisis 16
Fiscal Plan 16
Monetary Policy 17
Causes and Effects 17
Fiscal Insurance policy 18
Monetary Coverage 19
Lessons Learned 21
Understanding Japan's overall economy and the lost decade of Japan is similar to trying to resolve a jigsaw puzzle prior to the complete picture emerges. There are lots of explanations and articles written about what took place to Japan to go from being one of the top most economies on the globe to becoming an almost irrelevant market. It has now become a guide point for countries to learn from to avoid a potential future such as the one Japan is in currently.
To understand Japan's current state, we start by understanding a small amount of Japan's ascent to being the dominating country it is at the latter half days gone by century. Quickly, we can focus on two phases of Japan's financial rise segregated by a brief recession in between. The first phase is at the post World Battle II period and the second was after the world oil turmoil in the latter part of 1970s. The primary aspects that stick out in the explosive growth of Japan's market in the first stage are high investment in education system and targeted heavy professional growth like making, infrastructure, development, and mining. Through the second period Japan concentrated more on new business like semi conductors and personal computers, focusing on progress in the scientific sector.
As growth sustained and the worthiness of Yen grew, there is an effort by japan Government to focus more on home demand. As the investment in Corporates increased, it led to an exponential rise of the currency markets combined with a genuine estate boom. The stock market rise was closely interlinked with the real estate increase as stock market speculators used real real estate as a means of security.
The most important event that was in charge of the start of the downslide of Japan's market was the contractionary monetary coverage that was enacted by japan Authorities in the past due 1980s (May 1989, to be exact), to counter the high prices in the true estate marketplaces. This upsurge in interest rates influenced the currency markets mailing it crashing and since it was so directly interlinked with real house, it pulled the true house market along with it. Japan slid into heavy recession in the first 1990s.
The fiscal plan analysis locates that there have been a series of fiscal stimulus spending initiatives in the lost 10 years accompanied by a consumption taxes hike in the second option one half of the ten years in 1997. Predicated on the facts accumulated, the conclusion for Japan not responding effectively to the fiscal polices during this time period is due to the inconsistent and diluted execution of the guidelines. We assess this and discover that the spending was at bursts over the time period accompanied by concentrating on projects which possessed no long term growth leads for the market. Furthermore, trying to balance the budget due to the concern with growing deficits seemed to contradict and negate the fiscal spending in the same period. The GDP growth fluctuated and the economy did not retrieve. Hence it helped form the overall notion that fiscal plan failed to help Japan's fight recession. Our suggestion is the fact that Japan must have been focused on the fiscal spending with targeted long-term growth projects and also worked on some structural reforms, which when reinforced by the momentum gained due to fiscal spending would have lifted the market towards a confident GDP growth.
We also measure the similarities and distinctions of Japan's lost decade with the recent US financial crisis. There are numerous common factors between the two crises in how it began with like real property boom, banking problems and how the recession was dealt with with the application of Keynesian rules. We place these in framework with focusing on how US is managing the economic crisis. Based on the comparison it appears that US has been more in charge over its response which is not in the danger of developing a lost decade of its.
Everything we've read and recognized up to now shows us that the key facts characterizing the lost decade were decrease in aggregate demand, unemployment, deflation, asset devaluation, high savings, loss of assurance in banking institutions and aversion to risk taking by the populace. These appear to be the same factors that are typical of any recession, albeit here it is intensified indicating a severe recession.
Fiscal insurance policies are enacted by the federal government. The macroeconomic tool pack shows us some tools to counter a few of the effects of recession. Of the, Government spending, participating in open public infrastructure or other key general public work projects like energy, to increase aggregate demand and offering tax cuts to increase spending habits in the populace and capital investment in the private areas are the tools which have shown clear leads to raising US out of recessions it faced before century, specifically once we got from the great depression in the 1930s. They are the short-term Keynesian solutions that ought to help lift the economy out of tough economy.
The graph below from the IS-LM model demonstrates expansionary fiscal plans can cause a sizable positive impact on the GDP with very little increase in interest rates during recessions as the LM curve is commonly flat.
Based upon this, we first look into the stimulus programs enacted by Japan to counter the recession. Unlike the recent US economical turmoil where we find distinct targeted fiscal functions enacted, the information about the fiscal regulations enacted in Japan is much less concrete. The conditions used to spell it out the fiscal spending through the lost decade range between "series of stimulus" to "insufficient stimulus" as cited in various references.
We collect that the major fiscal acts during the lost decade were mainly:
1) Key stimulus initiatives and,
2) A usage taxes hike in 1997.
Below is some helping information about real stimulus deals including both fiscal and financial procedures enacted by the Japanese Government during the 1990s.
The claim is that there was from 65 to 75 trillion yen spent during the tough economy ten years of the 1990s targeted to activate the economy. Yet, in reality this amount might have been exaggerated as it seems there was obviously only 33% (approx 23 trillion) of this amount actually put in by the federal government, as it also shows up from the table above. The distribution of this was mainly thought to be between public work initiatives and subsidies directed at prop up a few of the faltering businesses.
The data stand 2. 5 below shows the budget blueprints Japan framed during the lost decade. The plan shows that the initial budget plan was supplemented with additional budget that was really the stimulus being forced into the current economic climate.
We notice that the most important allocation was at simple fact in the "Open public Works" category which saw ~5 trillion and 1. 6 trillion rises in 1995 and 1996 respectively but seemed to taper off in 1997.
The prevalent opinion on this is usually that the spending was thrown away on unimportant public works tasks and subsidies were given to business essentially delaying the eventual demise of the weakened companies.
A handful of samples seen on some major open public work tasks in this time around include the Sea Bridge and sunlight Village sports centre in the sparsely populated, with mainly an aging population, city of Hamada in the western region of Japan. Shimane, another region near Hamada experienced towns each with its own athletic centers that have been unused. There was also the Nima Sand Museum that was a a glass pyramid housing a giant hourglass which was built using the fiscal stimulus.
Dr. Ihori of University of Tokyo concurs with this view above, that the fiscal spending done by Japan in regions of building industry in rural areas and projects as above did not provide any gain to the overall economy in total.
However, we see that the fiscal spending did prop up the market as was reflected in the increase seen in the GDP in Fig 1. 1. Inspecting the graph, we see an increase in the GDP around 1996. This does seem to correlate with the stimulus package deal announced in 1995 in Desk 2. 4 which is by far the greatest of the stimulus deals announced thus far.
The margin of development however, was very small. For every 1 trillion yen Japan allocated to various infrastructure jobs in this time yielded only 37% growth in GDP. A study done by a non profit group, Japan Institute of MUNICIPALITY, found that buying social services or education would deliver 64 - 74% development in GDP instead of infrastructure projects. This appears to be substantiated by the actual fact that, some tasks in Hamada which included a new School and an aquarium which housed beluga whales were feasible long term progress projects given that they provided many long lasting jobs and also allowed for younger population growth in Hamada which got mostly turn into a place with aging population.
However, the economy regressed when the spending ceased. The GDP graph because of this period is shown below3:
There are actually two very different points of view on why Japan didn't respond to the fiscal policy. The first, lends itself to the view that Japan's fiscal plan was insufficient and vulnerable. The other which stands by the Japan's fiscal stimulus makes an attempt but says there is something fundamentally broken in Japan's overall economy and there has to be a structural reform before it can respond to any stimulus.
The first viewpoint is represented by the reference article by Adam S. Posen, which talks about in length wanting to see if there is anything fundamentally shattered in the financial system in Japan which includes prolonged the space and severeness of the recession and involves the conclusion that since there is a window for some structural reform, there exists little or nothing to contra indicate that Japan wouldn't normally react to the known macroeconomic solutions.
The article by Michael Cox and Jahyeong Koo, argues that the long stagnation in Japan's economy is indicative of something beyond the standard business cycle recessions that are normally targeted by the fiscal and financial policies. It involves the conclusion that it is actually the structural problems in Japan's current economic climate which has made it immune system to any fiscal stimulus programs.
The first perspective indicates that when fiscal guidelines are enacted they should be fast, strong, purposeful and devoted. This was probably a factor lacking in the fiscal response began by Japan. We don't see much proof a solid fiscal stimulus in the first parts of the 1990s, where in fact the bubble burst and the overall economy started slipping. Japan didn't intervene enough to counter the original start of recession. The fiscal response came up later and here it looks like Japan's fiscal plan was pumping up the economy intermittently in dosages and stepping back again when it saw some positive response rather than simply maintaining the stimulus heading till there was a clear indicator that the recession got stopped. Further as much of the recommendations indicate there is more of wasteful spending rather than targeted spending.
On the other hands, the converse view will try to clarify that Japan and the finance institutions did not take part in the procedure called "creative devastation" where one helps to keep on continually improving, but thought we would support the staid market sectors from the earlier decades. This prevented new enterprises to enter the market and slowed up productivity affecting the overall GDP. Additionally it also points out several key areas of Japan's financial restrictions and laws that are not conducive to pushing or reviving financial growth.
It appears that this is very the combo of factors shown by both these views which could make clear the lackluster response of Japan's market to the fiscal stimulus.
To complicate issues further, Japan was growing uneasy with the deficits and personal debt situation caused due to the fiscal spending during this recession period. There have been internal pressures that it was more very important to Japan to focus on long-term restructuring rather than short term Keynesian fixes.
The chart to the left shows how Japan's arrears had began ballooning in accordance with its GDP progress in comparison with US.
By around 1997 Japan's personal debt to GDP percentage had come to ~ 120% and was still rising. This was creating a great deal of security alarm in Japan.
Yielding in to the pressures, Japan enacted a problematic fiscal insurance plan, a consumption taxes hike in 1997 which acted contrary to the signs of restoration that were seen in response to the federal government spending. So we had an expansionary and a contractionary fiscal coverage happening around once. Whether this was due to policy mismanagement or politics pressures as the article states, the stopping perception is usually that the fiscal policy did not work.
The question to ask here's that, is fiscal policy a "one size works with all"? Will it work whatever the culture and natural framework and constructions of countries? Is making use of fiscal insurance policy without some structural reform a myopic view of aiming to lift up Japan out of recession?
To answer these questions it's important to tell apart the short-term and permanent intended policies. There is a trend to collapse both of these into one view while aiming to explain why fiscal plan functioned or not in Japan. The short term Keynesian fixes are indeed relevant in every economies. That is analogous to stating, when there is a rest in the dam we need to have a short-term fix to stem the movement of water before we can analyze and strengthen the dam for future. To let the water movement and think of rebuilding the dam later is establishing for a long and difficult repair cycle.
The reason that the GDP increase was not sustained can be attributed to the fact that the fiscal response came up in increments and had not been purposeful as pointed out already. In conjunction, it also means that these short term stimulus could have never worked since the economy was caught up in an obsolete mode. JAPAN Government didn't aim for the spending programs on new areas with long term growth leads. And there was the taxes hike to cope with combined with the weakened fiscal spending. Therefore the economy basically dipped back into a recession which it had not quite obtained out in the first place.
Hindsight is usually 20/20. There is absolutely no way to predict what would have happened had there been no fiscal spending insurance plan initiatives in Japan during the lost decade. However there still seems to be some obvious policy mistakes that might have been avoided.
Everything we have learned so far indicates that balancing budget or concentrating on deficits during recession is merely going to make the recession worse. However the intense politics pressure with give attention to deficits led Japan to try to balance the budget through the recession period. So the fiscal stimulus on one hand, which in itself was not offering the intended final result, combined with taxes hike on the other was providing an inconsistent subject matter to help the overall economy recover.
We also learned that there are really two tools in the fiscal tool pack, an example may be the fiscal spending and the other is taxes cuts. It is not clear everywhere whether Japan tried providing tax slashes rather than resorting to fiscal spending. This might have boosted the swing in GDP as well as sustained it.
Finally, it looks like the timing of all these aspects were not in sync. When Japan designed the fiscal stimulus, if there were additional steps used at the same time for structural reform which would speak to the marketplaces that as the short-term fix was working there is a more long term solution in process, it could have boosted the assurance of the marketplace and probably suffered the GDP development observed in the middle 1990s. The short term fixes should have been prolonged with a concentrate to strengthen the economy to be capable of responding to a permanent solution.
In an excellent world, the fiscal insurance policies would work as we have learnt in the models in the course. However in reality, there are extensive tangential forces, politics or structural, that can action against the other person diluting the perfect character of the insurance policies, finally concluding with some compromised inputs into the economy. While we can not say that the fiscal coverage failed, what could have did the trick better was probably a blend of the fiscal expansionary plan which included federal government spending and duty slashes with some political and structural reforms to ensure these policies received the intended result, along with delaying any effort to balance the budget.
The recent indicators of recovery show that is most likely finally taking place in Japan. There exists some politics will and reform which is wanting to form the recovery of Japan from recession.
There are particular similarities between your recent US economic crises to Japan's monetary crisis that were only available in the 1990s. However, there's also marked dissimilarities.
Both of the crises began with a stock market and real real estate melt down that were precipitated by the activities of the financial institutions in the united states, which included, reducing interest rates combined with many financial deregulations.
Below is the summarization of the similarities :
Boom of the property prices leading to an explosion of risky debt levels accompanied by the bust of the same
Banks left retaining bad debts because of the collapse of the real estate marketplaces.
Collapse of financial institutions: In Japan, it was the Yamaichi followed by other long term credit banks, while in the US it was the Lehman brothers which began the domino impact accompanied by other highly leveraged finance institutions.
Reduced aggregate demand leading to reduced GDP leading to recession
Deflation ( though this was for an extremely fleeting period in the case of US)
Increase in unemployment
The similarity in both US and Japan fiscal responses to the economical recession was the fact that they were predicated on Keynesian ideas of short-term fixes to the economy.
US came out with some concrete functions to counter the recession. The first three functions below were under the presidency of Bush while the last one was under Chief executive Obama.
Economic Stimulus Act of 2008, that was essentially a $150 billion tax cut given back to the visitors to induce spending, in both consumer and capital arenas.
The Real estate and Economic Recovery Work of 2008. This was a fairly complicated act which included wanting to free the finance institutions from the mortgage loans so they would not freeze through to providing lending options to the public. A second part of the take action was to provide a duty credit to first time home buyers. This is done to boost the support and also increase demand in the housing market which was very seriously affected.
Economic Stabilization Function of 2008: That is more popularly known as the TARP (Stressed Asset Alleviation Program) that was again a form of fiscal stimulus. The intent here was also to free the finance institutions of toxic resources and release the credit market segments.
American Recovery and Reinvestment Action 2009: This is essentially government spending in the regions of renewable energy and infrastructure jobs across the US. The intention was to create careers in areas which would preserve long term expansion of the current economic climate. There have been also other areas of this function which included directly stimulating the public spending like providing incentives for buying new cars, first-time home potential buyers etc. ,
While the info on Japan's fiscal initiatives are not as clearly mentioned, it acquired similarities in the federal government spending aspect, where Japan started out many infrastructure, general public works jobs.
The similarities of the economic policy include minimizing the nominal interest levels to close zero to allow borrowing and spending. However this only applies to a go for period within the recession age in Japan, towards the center of the 1990 decade. US also have strived to keep the rates of interest low to permit for the market to recover.
The differences between the US and Japan crises are very nicely summarized in table below:
The banking problems in Japan was precipitated by both corporate loans which were guaranteed by real house resources as well as the collapse of the currency markets. In US the problems started generally with the mortgage loan crisis.
The Japan turmoil was home as pointed out above, however in US since the home loans were all split up into different parts which went into different securities, the crisis flipped global.
In Japan it seems like the banks possessed important issues in their strategy planning and advantage management, with most of the lending options being in market sectors which were underperforming and real estate markets, thus departing little margin to invest in their domestic market. Yet, in US, as the mortgage crisis was brought on by sub best loans, nov a few of the finance institutions occurred scheduled to lax rules in loaning.
The other essential aspect was regarding the accounting systems. While there are downsides in both of the accounting systems followed by Japan and US, it fundamentally boils down to which caused lesser harm to the economy. It appears that the US is on the greater conservative side of accounting with clear disclosures and much more up to date accounting procedures. This may have aided in handling the crisis sooner than later as it became noticeable where the inability of regulations happened. Japan's accounting system allowed the problems to become profound rooted and therefore more difficult to handle.
In terms of the Fiscal Plan differences, it is clear that US Federal government has addressed the turmoil and intervened quickly as the crisis began. In Japan this isn't evident. The facts gathered indicate that the fiscal stimulus arrived in smaller bursts and did not have any targeted segments of growth. These were clearly designed to simply pump up the economy in the short term.
In addition to the, US have been constant in keeping up the fiscal initiatives with no contradictory policies. Quite simply, though there is much media and political pressure about the rising deficits, there's been no move towards controlling the budget or getting rid of the Bush duty cuts which are going to expire by the finish of the entire year. These actions if implemented might lead to a backlash in the economy. This is one of the main element differences as compared to Japan's fiscal plan which created an sick timed tax ingestion hike in the same way there were symptoms of restoration.
The main distinction we see between Japan and US with regards to the monetary plan was the well-timed way in which US acted. The graphs below indicate that Japan reacted rather slowly at the onset of the problems in 1990
Source: Trading Economics Web Site
While both countries have targeted the interest rates and reduced it to near zero, the true interest rate in Japan was still higher due to deflation. This may make clear why the reduced amount of the rates of interest didn't impact Japan's economy as expected.
It appears that Japan did not check out the process of quantitative easing during the lost decade and simply focused on interest levels. It was only post the lost ten years that it shifted its plan to focus on monetary base growth to deal with deflation, which appears to have received a huge positive response in the restoration of the overall economy. Whereas the united states has already began this process within an aggressive manner with the Government Reserve announcing that there will be quantitative easing to the tune of $600B in the near future.
Overall it shows that while Japan expected that the market would restore with limited drive given by the fiscal and economic work, US has been very focused on its expansionary policies till up to now endeavoring to ensure that the market is on its restoration.
There appears to be a general belief that US often will recover out of the recession in a much better way than Japan since the Government has acted and continuing to act fast with some key fiscal and economic initiatives. However, this is also countered with fear inducing views of growing deficits and harmful banking property with the notion that the US crisis is worse than Japan's which US is within denial over this. The guide article provides us some data which helps us understand these view factors better.
The above charts show that the GDP slow down in Japan was suggested way before the actual crisis took place. Whereas, in US GDP sometimes appears held at a reliable rate. That is further backed by the other aspects of economic development like the labor force, productivity and investment rates that leads one to think that the fundamental economic infrastructure in US is better equipped to take care of the problems.
Going back again to the procedure termed "creative damage" by economist Joseph Schumpeter; we can see how this correlates with the charts above. The decrease in Japan's production in the years 1971 onwards implies that there is no evidence of a continual process of advancement which would underlie the progress in productivity. That is good idea of capital deepening.
While these are some positive inferences, US should focus on long term fixes to restore the current economic climate. The fiscal and financial response to the economic crisis in US has been competitive thus far countering the significant negative political responses. However these by itself will not carry the recovery much as we know these are short-term fixes. We have now look into what lessons US might use in with regards to Japan to impact our recovery phase.
Overall from the macroeconomic perspective, the main element lessons discovered from the Japan problems,
Recognizing early signs or symptoms on how a strong economy can lead to the creation of a bubble. THE FEDERAL GOVERNMENT must have an perception in the way the fiscal and financial policies could play a role in assets generating markets and hence making the financial systems susceptible to these property.
Prioritizing the mending of the bank systems as this is the backbone of the financial systems. It is very important that there are better regulations that can prevent such problems happening in the financial institutions. And currently, for those finance institutions which are stressed, strengthening the system by removing harmful belongings, allowing the banking companies to re-establish their health and start loaning again to the public are key to the restoration of the current economic climate.
Delay balancing the budget till the overall economy is firmly again on its restoration. That is an important lesson for any current economic climate in recession, that no matter how much the pressure for controlling the budget, this might create more instability in the economy during a recession.
If in a deflationary overall economy:
Observe nominal GDP progress rather than real GDP growth which will be boosted artificially credited to deflation.
Watch real interest rates somewhat than nominal interest rates. While Japan's nominal interest rate was practically zero, the true interest was still restrictive due to the deflation.
Target inflation (deflation) by money source than simply reduced nominal interest rates.
Finally to lift an current economic climate out of recession, both expansionary fiscal and expansionary economic policies will be required. It's important these are managed with time and enacted in a manner to complement each other producing a put together positive influence on the market.