In the 1970s Japan had one of the world’s most-admired economies. Economists believed it would achieve the highest living standards and continue to develop the best technologies. At that time, Japan boosted he world’s second largest gross national product and eventually reached number one by the late 1980s However, everything changed in the early 1990s, and Japan entered what has been described as its first lost decade (Kuepper, n.d.).
Economists and historians have studied the causes for Japan’s stagnation over the past twenty years, but there are significantly different opinions regarding the issue. Most agree that the huge asset ‘bubble’ was the cause for the initial stagnation, but they disagree as to the reasons for why this persists. Some are of the opinion that the domestic sector’s lack of dynamism and an aging population are to blame because they hinder domestic spending (Samuelson, 2010). Other economists, such as Paul Krugman, believe that consumers and companies’ excessive savings are the root causes (Kuepper, n.d.).
Very low interest rates drove stock market and real estate speculation in the 1980s. All the speculation during the boom cycle caused the beginning of the crisis. Property and public company valuations tripled during the period, and land in Tokyo became extremely expensive (Kuepper, n.d.). The asset price bubble burst in 1992 and, in the beginning, it was just a decline following the stock market crash (Posen, 1998). However, the economy has not recovered since.
Shortly after the 1992 crash, stocks had dropped 57 percent when compared to the 1989 level. Banks had problems; some even became insolvent, because they had lent on the collateral of inflated land values. The economy continued growing at a 1.5 percent rate, but much slower than the 4.4 percent rate it had been growing prior to the crash (Samuelson, 2010).
In my opinion, there are four main causes for the continuing stagnation. The first and most important one is the weak and inconsistent policies of the government. The Japanese government experimented with several fiscal policies right after the stock market crash. This led to poor supervision and allowed bad debts to continue in the financial system (Posen, 1998). The lack of effective leadership led to serious policy mismanagements and aggravated the problem. In 1997, the government issued a 2% consumption tax increase and the government also contracted spending on government projects. People became even more insecure and started saving more outside the private banking system (Posen, 1998). In this case, a government policy made the crisis even worse.
Another example of policy mismanagement is he dependence on interest rate cuts from 1985 to 1987. The government did this to try to counter the deflationary impact of the yen appreciation relative to the dollar after the Plaza Accord The yen appreciation has become an enduring problem because it has restricted the success of certain policy gears that...