Economic Conditions of Japan

Japan is currently in an economic recession. We can see that the value of the yen is falling; unemployment is rising, and purchasing of durable goods is down. This unhealthy state of economy has progressively become bleaker over the years. Many believe that the start of the slump was due to the economic bubble in the late 1980’s when low rates encouraged an inordinately large amount of investment. When a country has an elevated investment rate, large amounts of capital stock are purchased. This means that an elevated rate of investment must be maintained in order to accommodate for the high levels of depreciation.

In the early 1990’s when investment began to slip asset values imploded. As a result, banks were making bad loans. The Japanese government was not quick to react, and by 1998 many major banks were on the verge of collapse.To try to combat the trend of failing banks, the Bank of Japan Governor, Masaru Hayami, started a “zero interest rate policy” in 1999. This move built confidence in Japanese banks and the Japanese economy.

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However, this positive reform did not last. Banks were not using this recovery policy to write off their bad loans. They also did not get rid of very risky stock market shares.

Hayami became fed up with the actions of the banks and raised interest rates in August of 2000. Then when the stock market began falling, those risky shares that the banks owned caused them to lose even more money. So now the country is a facing a major problem: what to do about the losses experienced the stock market and from default loans. In the worst-case scenario calculated by Merrill Lynch credit analyst Koyo Ozeki, banks would have to write off more than 70 trillion yen in loan losses. In order to do that, banks would have to pull the plug on thousands of deadbeat borrowers.

This would be devastating to the unemployment rate. Japan’s unemployment rate is currently at 4.9%, which is a postwar high for the country. This is due in part to the number of workers losing their jobs.

Another big part of the increase in unemployment is due to the increase in the labor force. Traditionally, Japanese women stay at home to take care of the house in order to give their husbands full opportunity to excel at their jobs. It was a position known as shegyo shufu, which was honored by the government with tax breaks and free pensions. But now that many working men are receiving decreases in pay; they cannot support their families. This forces more women to enter the workforce. If Japanese banks forced firms to payback on their delinquent loans, this would cause the firms to go under, and many more people to be laid off.

Japan would be facing a catastrophe. All of this instability in the economy discourages foreign investment.Foreigners find that investing in Japan is much too risky right now. They also see that there is a very low rate of return on investments there.So Japan will get no help from foreign investors. The one way foreigners might help is to purchase Japanese products. Right now the exchange rate for the yen is very low (about .

008). This means that one U.S. dollar will trade for approximately 120 yen. And with the recent fall in the prices, Japan can expect to experience high volumes of exports. Policy makers are working around the clock to find a solution for the economic problems in Japan.

Japan is looking to Masaru Hayami once again to take some kind of course of action to turn the banks around, and with them, the economy. Bibliography:Works CitedRamaswamy, Ramana; Rendu, Christel; IMF Staff Papers, Vol. 47, No. 2, 2000 International Monetary Fund, pp 259-277Landers, Peter; Dvorak Pherd, The Wall Street Journal, Vol.

CCXXXVII, 2001 Dow Jones & Company, Inc. pp1, 10Ono, Yumiko, The Wall Street Journal, Vol. CCXXXVII, 2001 Dow Jones & Company, pp 1-10Mankiw, Gregory, Macroeconomics, Worth Publishers, pp 90-95