Why Did the Japanese Economy Begin to Experience Major Difficulties in the 1990s?

Topics: Economy of Japan, Business cycle, Great Depression Pages: 5 (1439 words) Published: January 14, 2008
Table of contents

1, Introduction – Background of Japanese economy___________3

2, Collapse of the 'bubble' economy___________________________4

3, A breakdown of a major company financial institution_______5

4, Lost Main Bank _________________________________________5

5, Employment reduction___________________________________5

6, Conclusion______________________________________________6

7, Reference _______________________________________________7

Introduction – Background of Japanese economy

Industry of Japan received the destructive blow by World War II. Policies such as the prioritisation of production system which is tied to major industries. As a result, Japan was hit by serious inflation. Although Japan had faced a great financial burden by the Korean War and many sacrifices were paid, heavy industry of Japan increased tremendously at the time of Koreafs special procurements. Starting with the Jinbu business which started in 1955, high growth was attained centring on the manufacturing industry. Increase of purchasing power by the rise of wages of labourers who recognised the existence of a labour union increased the production by plant-and-equipment investment. This made a capital of foreign currency gained by export, and the economy of Japan accomplished a great expansion. The economic scale of Japan overtook West Germany in 1968 and became 2nd in the world with based on GDP.

The first oil crisis happened in 1973, and Japanese economy became chaotic; the economic growth rate in 1974 was in negative numbers for the first time after the war, and it signalled the end of high economic growth. From the second half of the 1970s, a current account surplus occurred in Japan as current account deficit of United States increased. Remarkable progress of export industries created trade friction between many foreign countries, especially with United States. Then, an economic depression due to yen appreciation occurred by the Plaza Accord, and the Bank of Japan maintained remarkable money market relaxation. In this money market relaxation, economic expansion [being domestic demand led] continued from the second half of the 1980s, and the stock price and the land price also rose sharply (bubble economy). In 1985, U.S. was worried about the trade deficit by the strong dollar and issued a joint statement with G5 countries to intervene, giving a sharp rise to the yen. The exchange rate which it was around $1 = 240 fell to 120 in one year. Consequently, the latent loss occurred to dollar-based property, such as U.S. Treasury bond, and it went to Japan where funds do not have an exchange risk. In addition, the export industry received a blow by the strong yen, money market relaxation was carried out, and superfluous mobility occurred.

Investment activities peaked around 1989, and it became an unprecedented prosperity (i.e. Heisei business). Since it was the bubble economy accompanied by a property price, boost in the economy could not be explained and was predicted to fall again soon. The point is that when speculation volition declines, properties such as stock and land, will be thrust down at the bottom of the debt by removal. The company and speculation house which brought about the big capital loss (latent loss), made latent profit reliance and was carrying out excessive investment. With property price rising sharply and earning rates (except for rise-in-price profit) such as land and stocks were falling remarkably, Japan lost sustainability in the end to money market relaxation.

Collapse of the 'bubble' economy

The phenomenon of collapse of the 'bubble' economy is not simply an economic recession in a business cycle. This is also a rapid decline of attractiveness to consumers which maintained the high price of land or a stock, and the error of a policy is involved.

In March 1990, the Ministry of Finance controlled the land related loan and slammed an artificial brake...
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