Crisis Japonesa 1990 - 2000

Deliverable II: Japan’s Crisis and the US 2008 Recession

Introduction

Entering 1990, Japan’s economy was ranked first among the major industrial countries in per capita GDP, their market capitalization was larger than that of the Unite States, which had twice Japan’s population and twice his domestic product . But during the last part of the 1980s a bubble was being created while credit was easily available, interest rates were low and borrowing massive, heightening liquidity in the market. It led to high levels of lending for high risk investment mostly in domestic and foreign stocks and securities . Speculation created real estate prices that were extremely over-valued , quintuplicating the value of commercial land in the main cities of Japan between 1982 and 1990 (see Figure 1).

Figure 1: Commercial Land Value Index

Japan's stock market index, the Nikkei, reached a dizzying height of 37,189 in January, 1990, up from 10,000 in 1984 .

Figure 2: Nikkei 1985-2002

From its height in January 1990 the Nikkei plunged, and by July 1992 the Nikkei was down around 16,000 – a 57 percent fall. It was to be a tough decade financially and a decade of economic decline for the Japanese, that ended up known as the “lost decade”.

Fiscal policies

In 1989, concerned about speculative excess and recognizing that this housing and credit bubble was unsustainable; the Bank of Japan started raising the interest rates (see figure 3) in an effort to let some of the air out of the baloon, this caused the bubble to burst and the market crashed.

Figure 3: BOJ Discount Rate 1998-2002

This market crash generated a debt crisis, credit tighten and originated a recession. In response to this recession, the Bank of Japan started sharply reducing the discount rate and, after falling into a liquidity trap, starts borrowing money to finance a series of government economic stimulus programs to increase consumption and reduce unemployment (see figure 4). Although by 1995 interest rates were cut almost to zero the economy was still not picking up, Japan had fallen into the “liquidity trap”.

Figure 4: Japan Unemployment 1988-2005

Although unemployment was controlled through the generation of government sponsored programs, they did not generate an important multiplier effect. Yet despite large and repeated fiscal stimulus packages, the cost effectiveness of these packages is questionable. Yamano and Ohkawara (2000) find that public investment has not been allocated in accordance with marginal productivity and that public capital investment has been used as a policy tool for adjusting income inequality. Public investment has been focused on social infrastructure such as rural roads and agriculture, which have lower marginal productivity compared to larger urban-based projects . This added to the cultural tendency of Japanese to save, Japan has an estimated Public Investment Multiplier of 0.14 , ended up making these stimulus plans not very effective, resulting in stagnant growth and deflationary pressures.

Figure 5: Japan Net Debt

At the same time all these package stimulus generated a deficit of 4.3% of GDP by 1996 , which started to worry Japan’s Ministry of Finance, who was concerned about the long term budget position. This was caused as Japan has a working age population that is aging steadily and the number of retirees rapidly grows, and since retired citizens are a heavy fiscal burden on modern governments, standard fiscal principles said that Japan should be building a trust fund to meet the future bills, not running ever-growing deficits .

So in 1997, Japan increases taxes to reduce the bidget deficit and the economy plunged into recession again (see Figure 6).

Figure 6: Japan Real GDP

It is important to mention that through this “lost decade”, Japan never went into a catastrophic economic decline, it actually only went through 2 years in which real GDP actually fell (1998 and 1999), but year after year, growth fell short, this is evident looking at Figure 6 focusing on the slope of the GDP between 1988 and 1991 and then the change in the slope for the next 15 years. Economists call this a “growth recession”, and happens when an economy grows but it’s growth isn’t fast enough to keep up with the economy’s expanding capacity, so more and more machines and workers stand idle. Normally these growth recessions are short. Japan however experienced a decade long growth recession, which left it so far below where it should have been that verged on a new phenomenon: a “growth depression”

The next idea was to fix the banks, which were in a weak position because of the bad loans they had issued before 1990 and the long stagnation that turned even more loans bad, so the Japanese Government put together a $500 billion rescue plan.

At the same time, Japan needed some inflation, which causes the real value of money to melt away over time. Inflation would force people to get their money out of savings as they will star loosing value if kept at the bank.

Japan was finally able to get out of the recession mainly because of the recovery of the rest of the world. This recovery pushed their exports strong, mainly to the US and China, generating an increase in demand for Japanese goods, increasing GDP and reducing unemployment.

Similarities with 2008 Crisis

The 2008 US recession and

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