Japan -Post Miracle Years
Japan’s miracle growth occurred following the devastation of World War II. From 1954 to 1971 Japan saw a compound annual growth rate of 10.1% in GDP. This rapid growth ended in 1971, but continued to produce benefits for the next 20 years as evidenced by an average annual growth rate of 4.4% from 1971 to 1991. In this 20 year period the growth rate only fell below 3% four times due to economic shocks including the ending of Bretton Woods, oil embargoes, and a period of high yen or “Endaka.” During these shocks, Japan proved its ability to make economic reforms in order to stay competitive and raise the growth above 3% quickly.
The 1970’s oil shocks hurt ...view middle of the document...
5% which caused investment to grow from 27% of GDP in 1986 to 32% of GDP in 1991. Japan’s trade surplus again began to increase and interest rates were kept low. This led to tremendous investment by the Japanese in the stock market, real estate, and foreign debt/equity.
The Bubble Economy and its Consequences
Positive growth and low interest rates led to the formation of an economic bubble between 1986 and 1990. Coupled with a high level of confidence in the economy and huge trade surpluses, aggressive speculation led the Nikkei stock market average to rise from 11,000 to 39,000 points and land prices in Tokyo and Osaka to more than triple. Banks began issuing risky loans to businesses and individuals that depended on increasing economic growth and high asset prices.
This bubble burst as a result of reforms made in 1989 to reduce the risk of inflation. At that time, Japan increased interest rates to cool off their economy, but as rates continued to increase in 1990 and 1991 to 6%, Japan fell into a recession. Economic growth fell to 1% in 1991, recovered slightly to 3% in 1996, before falling into another recession in 1998. Land prices decreased 85%, the stock market plummeted below 9,000 and the economy grew only 0.8% through 2004.
This collapse had many consequences. First, after the bubble burst many banks found themselves with nonperforming loans (NPLs). They lent to businesses that used high priced assets as collateral. When the asset prices declined, the borrowers could no longer pay their loans. As a result, by 1993 loan-loss charges had increased to more than 1 trillion dollars. The government spent approximately ¥30 trillion to support the troubled banks. Using this aid, the banks reduced lending and began to merge in order to clean up their balance sheets.
The slow growth as a result of the bubble burst also affected domestic firms who were financed mainly by debt. In 2001, the number of monthly corporate bankruptcies reached 2,500. Many businesses had to make great restructuring efforts to remain solvent. Large businesses that offered lifetime employment faced greater difficulties reducing their headcount. Japanese employees placed a tremendous amount of importance on job security. They preferred a secure low paying job with a prestigious firm rather than a less secure job with a small foreign start-up. Eventually these large firms were able to achieve their goals by promoting early retirement.
Another result of the bubble burst was changes to equity ownership in keiritsu groups. Because banks cross-owned company stock, this increased their exposure to market fluctuations. Regulations to decrease this level to less than 100% of banks’ tier-one capital helped to reduce this exposure in the future.
Fiscal and Monetary Policy
The Japanese government implemented numerous fiscal policies to try to stimulate economic growth. Between 1992 and 2000 the Diet approved 10 stimulus packages cutting taxes cumulatively by...