- How is the economy of Japan currently growing, and what are the underlying weaknesses of this economy
- What are the macroeconomic reforms needed for this country and what are the political obstacles facing their implementation.
Bubble and recession.
Many of the problems that the Japanese economy faces today are the consequence of past economic events and policies. During the postwar period and until 1990 the main objective of Japan's economic policy makers was to maintain a strong and stable rate of growth.
During the late 80s, the Yen had experienced significant appreciation, as a consequence of the Plaza Accord. This appreciation impacted the traditionally important Japanese manufacturing sector, as it made it less competitive in the international market. In the period between 1985 and 1986 the growth rate of the economy reduced from 4.4% to 2.9% (EIU 2000).
The Bank of Japan quickly changed it’s policies and implemented measures to compensate for the slowdown in the economy and between 1986 and 1987 reduced the official discount rate to 2.5%. The government also implemented a large spending package with the intention of accelerating the economy (EIU 2000). With the implementation of these measures the economy successfully restarted, but in turn introduced a cycle of high inflation that ultimately created a bubble in asset prices. In the period between 1991 and 2002, Japan will suffer three recessions that will be considered as a single episode: a "great depression" (Flath 2005).
Since 1990 and through to the end of the century, high unemployment and deflation were the main symptoms of Japans economy. Short term rates were lowered from 8.3% in early 1991 to 0.48% in mid 1999. This created the effect usually known as the “liquidity trap”, where nominal interest rates can’t be lowered anymore... [continues]
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