Friday, 27 March 2009 07:00

More than 15 years have passed since the “Bubble Economy” of Japan has burst. Today, the Japanese economy continues to suffer from the adverse effects of government policies implemented in hopes of buoying the quickly sinking Japanese economy of the ‘90s. The topic of Japan’s economic policies has resurfaced with significant relevance as today in the United States current economic corrective actions are being taken in light of the world-wide economic downturn, causing many to question if we are retracing the ill-advised path which Japan has followed. By analyzing the precipitating factors which lead to Japan’s economic downturn and the corrective governmental economic policies implemented, a conclusion can be reached about the effectiveness of such policies.

Precipitating Factors Leading To Decline

In the years following the end of WWII between 1946 and 1960, the Japanese economy experienced a shift from operating with a large trade deficit, to a focused government policy encouraging “export promotion”. The awareness that a reduction of the trade deficit by increasing exports was needed to pay for the growing amount of imports coming into the country during a period of rebuilding following WWII. The result in Japan was government justification for “export promotion programs and import restrictions” which included stringent tariffs and policies encouraging personal income savings (Trade 1). Two paths were followed for export promotion including the development of technologically advanced industries which could produce substitutes for imported goods and initiating government incentives for industries aimed at increasing exports which came in the form of tax relief and funding. Within 5-10 years, trade deficits in Japan were eliminated causing an end of government assistance and in some cases a reversal of export promotion philosophies in some industries spurred by the overwhelming success and growth of the Japanese economy.

Throughout the ‘80s, Japan experienced an economic boom which spurred greedy business practices. “With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies” (Japanese 1). With credit easily flowing, investment in domestic industry became readily available and lead to a stark rise in the strength of the financial sector. In December of 1989, the Nikkei stock index hit its all-time-high of 38,957.44 (compared to a 26-year low of 6,994 recorded in October of 2008), and the real estate market in Japan boomed with prime downtown Tokyo properties bringing in more than one million US Dollars per square meter of property. “From 1987 to 1990, private consumption increased an average of 5.6 percent per year while at the same time gross fixed capital formation increased by 10.63 percent per year” (Powell 6). With money so freely flowing, investments turned to a speculative nature which was marked by banks granting “increasingly risky loans”, and as late as 1997, “banks were still making loans that had a low probability of being paid” (Japanese 1).

Increasing investments overseas began drawing large amounts of money away from reinvestment in domestic industry causing a loss of Japan’s technological and industrial advantage, leading to a sudden economic downturn. “As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral” (Japan 2). Coupled with a drastic reduction in consumer spending, numerous banks and businesses found themselves holding assets in cross-shareholdings with allied companies. Banks began finding themselves the bearer of bad debts and found limited funds to invest in domestic industrial expansion. Due to inflated real estate prices creating an impenetrable barrier to entry and expansion, industrial development overseas began to occur resulting in a loss of jobs causing the unemployment rate in Japan which had never risen above 2.8% since 1980, to more than double within a few years to 4.7% in the late ‘90s. “Real GDP during the ‘90s stagnated, rising only from 428, 826 billion yen in 1990 to 469, 480 billion yen by the end of 2000” with growth being negative since 1998 (Powell 1). And, as with the nature of a deflationary spiral, as unemployment rose, spending decreased causing prices to drop which in turn lead industrial production to begin to cease spurring mortgage defaults. Tens of trillions of dollars were suddenly lost with the simultaneous collapse of the Japanese stock market and real estate market.

Japanese Government Economic Policies

Japan’s solution to remedy its sinking economy called for the government to adopt a Keynesian approach causing increasing government involvement and “active fiscal policies” including increased government spending in hopes of raising aggregate demand. Immediately, the government dropped interest rates to nearly zero and began to “subsidize failing banks and businesses, creating many so-called “zombie businesses” (Japan 2). During the years between 1992 and 1995, Japan attempted 10 different fiscal stimulus spending programs that totaled more than 100 trillion yen and cut income taxes to amount for a loss of more than 2 trillion yen.

Japan began to “focus inward” in an attempt to rally hope in the market by increasing jobs through government spending, causing a major government spending effort on infrastructure. In 1999 Japan announced a plan to create 700,000 jobs through infrastructure spending focused on the building of bridges, roads, airports, train systems, and improved construction practices to prevent earthquakes. These efforts produced little fruit in terms of economic production or job growth and further reduced Japan’s edge as a technological industrial giant as it moved into becoming “The Construction State”.

Unfortunately, the result of Japan’s Keynesian approach has thus resulted in stifled growth by preventing a natural self-correction from the market that was obstructed with unnatural policies and regulations that unhealthy artificial adjustments in the market.

The Result of Japan’s Keynesian Approach To Market Correction

Through all of its efforts, Japan’s financial stimulus spending has produced no positive results, but rather has caused “public debt to exceed 100 percent of GDP” (Powell 2). The result of government spending focused on infrastructure has lead the Japanese Government to “suck in the country’s wealth and consume it inefficiently” which many have compared to the cold-war Soviet Union. Rather than sparking job growth as intended, Japan now has unemployment that tops 5%.

One very fascinating transformation of the banking system that has evolved in Japan is the fact that with Government regulation of bank lending, while banks operating with government funding are enabled to lend, they are not aiding in economic recovery. The reason is that “funds are not being allocated according to market-based consumer preferences, but to the most politically connected businessmen”; this phenomena is of potential concern to Americans as the United States government has taken majority control of two major banking institutions in Citigroup and Bank of America. (Powell 3).

In conclusion, a result of all of its efforts, Japan’s government interventions which have included financial stimulus packages, tax cuts, government spending, bank nationalization, industrial funding and interest rate cuts – all created with the intentions of serving as artificial corrections to maintain the existing structure of production, have failed to do so. The result that is still evident today is a Japanese economy that fails to prosper, the detrimental result of a combination of all government interventions and efforts have prevented the necessary market processes to occur. Bringing to light the almost identical path that is being followed in the United States in terms of economic policy and Keynesian government intervention, we are all left to ask the question why? Time will tell if the United States elimination of toxic assets from banks and restored confidence in the consumers will allow for an economic turn around, or if we are headed the way of the Kimono.


“Japanese Asset Price Bubble” Wikipedia: The Free Encyclopedia. 7 March 2009. 24 March 2009 .


Powell, Benjamin. “Explaining Japan’s Recession”. Ludwig von Mises Institute. 19 November 2002. Mises Daily. 24 March 2009 .


“Trade Policy of Japan” Wikipedia: The Free Encyclopedia. 4 February 2009. 24 March 2009 .


“What Caused Japan’s Recession” BBC News: World Edition – Business. 14 August 2002.
24 March 2009 .

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3.23 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."