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A 2 Pages Term Paper on Japanese Economy

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Japan is the world’s second largest economy after the United States whose gross domestic product (GDP) was $4.35 trillion, compared to $9.15 trillion for the United States in early

nineties. Japan’s per capita GDP rose from 21 percent of the U.S. level in 1955 to 56 percent in 1970. By 1992 per capita GDP had reached $19,920, 86 percent of the U.S. level. Despite the overall strength of the Japanese economy, in the late 1990s Japan was mired in its longest recession. GDP, which had grown slowly in the early 1990s, fell 0.4 percent in 1997 and another 2.8 percent in 1998 and is still having the effect of falling down.  (Japan.com)

Why Japanese Economy Is Stuck

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Because of continuing Government influence over private business decisions also continued in an indirect manner. In the high-growth era, the government guided the economy through clear laws and powers, such as the open import restrictions of the Ministry of International Trade and Industry (MITI) or the official list of favored industries for bank loans of the Ministry of Finance (MOF). In recent decades, ministries have tended to use informal “administrative guidance” (gyosei shido) instead. This guidance takes the form of suggestions or directives that do not have the force of law. Businesses generally comply voluntarily with administrative guidance; if they do not, ministries may punish them indirectly by enforcing unrelated regulations. MITI used administrative guidance to encourage Japanese auto manufacturers to cooperate with voluntary export restrictions requested by the United States. The effectiveness of administrative guidance decreased widely from industry to industry. In general, its power has diminished over time.

The structural flaws in Japan’s economy came to a head in the late 1980s, first generating a five-year period of financial euphoria known as the bubble, and then bringing on a collapse. After the value of the yen rose sharply in last two decades, Japanese exports fell and economic growth slowed. The fundamental structural reforms to avoid long-term stagnation were to be adopted. Instead, the Bank of Japan (BOJ) cut interest rates to stimulate investment and growth. This raised the price of stocks and real estate, which began to escalate in a self-feeding spiral. By 1989 the average stock was valued at 100 times the annual corporate earnings, an overvaluation of 400 to 500 percent. Rising stock and real estate prices stimulated an investment boom that led to rapid economic growth.

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Presuming that Japan was just suffering from a normal recession, the government responded with standard recipes to stimulate the economy. The BOJ once again lowered interest rates, and the MOF increased government spending. The economy appeared to respond, with growth rebounding significantly in 1995 and 1996. Anxious to balance Japan’s budget and calculating that it was safe to ease stimulus measures, the MOF reduced government spending in 1996 and raised Japan’s consumption tax (a tax added to the price of goods and services) in 1997. A few months later, the value of several Southeast Asian currencies fell sharply, triggering a regional economic crisis and jeopardizing Japanese trade and investments in the region. (Center on Japanese Economy)

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Can The Economy Be Revived 

The government reversed itself again and created three large spending packages. It also addressed the banking problem with a series of bills that authorized the nationalization of failed banks and the sale of bad assets, and provided funds to protect depositors and inject government funds into the banks. The government hoped to spark recovery by 1999, but Japan’s economy remained stagnant till early 2002. Government ownership of business enterprises is very low in Japan. The government has steadily sold off the few big enterprises that it did own, such as Nippon Telephone and Telegraph (NTT) and Japan National Railway (JNR). It still owns the major television network, Nippon Hoso Kyokai (NHK).

In addition, through extensive formal regulations as well as administrative guidance, government ministries influence private business activities. Japanese policymakers have begun calling for deregulation of sectors including telecommunications and transportation, and the Japanese government launched a series of moves to deregulate banks. Known as the Big Bang, the banking reforms were to be completed by the year 2001 and are still under consideration.

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1. http://www.japan-guide.com/e/e644.html
   Information Pages, Economy
2. www.gsb.columbia.edu/japan/publicatin.htm 
   Center on Japanese economy and Business



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