Comparing the 2008 Us Crisis with the Japan’s “Lost Decade”
Both the Japan’s lost decade and the 2008 United States and the world financial crisis were caused by excess savings and inflation of huge asset bubbles. By 1980s many Japanese resorted to a lot of savings on their income as they expected to retire. This translated negatively on the economy as it lowered the Gross Domestic Product and weakened local demand of commodities. Furthermore, much savings simply meant that the Japanese citizen had foregone consumption. However, this problem was disguised in the Japanese poor finance policy as well as financial technology. Inflation therefore arose from poor regulation of the flow of money especially in the corporate investment. Indeed, the inadequate demand was the main reason behind the Japanese lost decade.
Between 2007 and 2009, a similar case as the Japanese rocked United Sates and the entire world. Many economic analysts had predicted that investors would eventually lose faith in the United States economy and abjure their investment. This came to pass when during this period the United States exported more than it imported. This situation called for a more dangerous resolution of trade imbalances between imports and exports. The trouble manifested itself when United States and many other parts of the world including Europe went for heavy debts. This is very similar to what Japan went through in the 1990s. In response to this, market securities devalued leading to immense asset sales that dragged about $15 trillion from the public hands. To make the matters worse, this huge sum of money was directed into saving accounts since people feared the future economic uncertainties. This move seriously lowered the United States Gross Domestic Product. This is an effect that had to be felt for several years.
Kim Clark poses that why do people think that the United States recession is different from that of Japan. The United States is going through debt crisis and stalled economy. According to his analysis, whenever the government stimulates the economy it nourishes and any time the government takes a lower profile, the economy worsens. In this regard, many people believe that the Japanese government step to spend hugely on public projects brought no big change to its economy. But his further analysis shows that the Japan’s financial crisis was worse than people perceived. The Japan’s commercial real estate prices went down by 87 per cent. But in the end, this gesture brought more light to the Japanese economy.
Reinhart and Rogoff in their close examination of the historical qualitative and quantitative indicators of financial crisis confirm that the United States 2008 financial crisis never took a different path. They cite that the sub-prime mortgage financial crisis was not anything new to the post second world war economy of the major industrial nations. They go further to spot out that for countries going through huge capital inflows, the run-up in equity and housing are inevitable. In fact these have been the key and the leading indicators of most of the previous financial crisis. In other words, the 2008 United States financial crisis is a true reflection of the inverted v-shaped of the real economic growth that preceded this crisis. (Reinhart and Rogoff, 2008, p.2)
For a healthy global economy, the world exports of capital must be proportional to its global imports of capital. This is becoming practically possible as Japanese surplus is dropping steadily from its 2007’s 4.8 per cent. This notion is further reiterated by the economic status of china and Germany. China’s exports dropped by 26% as Germany’s and other commercial powers together with rising economies whose success is dependent on these major countries is expected to follow suit.
The Japanese attempts to recover from her financial crisis are also very similar to that of the United States and the rest of the globe. The first approach adopted by the Japanese government was to swing its budget from a surplus one to a deficit budget. In this way, it quickly created a new domestic demand to counter the decrease in consumption and investment as well as strong growth in net exports caused by foreign rebellion. The Japanese government also revived its commercial banks and central bank which consequently eliminate the short-term lending rates. However, these move simply stabilized the financial systems. This country’s national debts increased to fill the gap in demand which in turn led to annual economic growth of one percent.
This governmental initiative was not enough to get Japan’s economy to its feet. External contributions from countries like china, United States and the East Asian region by buying Japanese most exports. Within several years of economic struggle, the Japan’s Gross Domestic Product rose by about one third. Ironically, this was no acknowledged by the Japanese leaders including the Prime Minister Junichiro Koizumi. But this was later proved when the United States economy collapsed in 2008. This led to the reduction of the US consumption that eventually impacted negatively on the Japanese exports.
Similarly, the United States and the global economic recovery from the crisis followed the same path as the Japanese. Since the financial crisis faced by the world is the same as what the United States of America went through, Katz uses Washington’s policies to study the world financial crisis. However, Katz observes that the United States policies were more thorough than what took place in Tokyo Japan. He goes ahead to reiterate that the United States may recover much faster than Japan but only if it considers the following aspects. First, the United States must believe that the current crisis it is facing is not as grave as that of Japan. However, this may not be the case as its banking industry has faced many challenges over the lending rates and debts.
Many economic analysts had predicted that investors would eventually lose faith in the United States economy and abjure their investment. This came to pass when during this period the United States exported more than it imported. This situation called for a more dangerous resolution of trade imbalances between imports and exports. The trouble manifested itself when United States and many other parts of the world including Europe went for heavy debts. This is very similar to what Japan went through in the 1990s. In response to this, market securities devalued leading to immense asset sales that dragged about $15 trillion from the public hands.
Many economic analysts had predicted that investors would soon lose confidence in the US economy. This happened and when they drastically reduced their investment into US economy. It brought an economic setback in the US during that period. The US exported more than their import, causing an imbalance of trade. Many European countries, including United State sought for a solution to this crisis. They were struggling with heavy debts. This same problem hit Japan in 1990s. To solve this problem, Japan resorted to market security devaluation. This caused the public about $15 trillion. With these measures, Japan was able to stabilize her economy although her debt rose between 1989 and 2002. Japan started steady recovery in 2002. They capitalized on domestic reforms. The United States, China and East Asia started buying more export from Japan. This improved their foreign earning thus stabilizing the economy. Japan’s export produced about a third of the country’s GDP. However thie economic stability depended on the United States. When the United States’ consumption of Japan’s export reduced, Japan’s economy almost collapsed, poising for a 5-6% contraction in GDP, the worst ever recorded in Japan since 1945.
There are various differences between the US and Japan’s crisis. First, there applied different response of policies. The US used a shorter period to reduce the higher interest rate as opposed to Japan that almost a decade the reduce their interest rate. Also, Japan took eight years to recapitalize the banks with the use of public funds. On the other hand, Washington did so in less than a year. Moreover, Japan used government funds to aid banks in lending the public while the US banks were writing off public debts. The Japan’s government has taken long time to implement her fiscal measures while the US has applied the fiscal measures and Obama’s government proposes a long term program.
In conclusion, the Japan’s ten years of financial crisis look a very similar path as the 2008 global crisis that rocked major countries including United States and Europe. The perspectives of the financial crisis in both Japan and US took similar dimension even during the recovery process. Both United States and Japan’s lost decade financial crisis were consequences of loose monetary policies that propelled quick unsustainable accumulation of property asset bubbles. The two crises paralyzed their country’s economy alike. However, it is worth noting that the extent and level of complexity between the Japan’s lost decade and that of the United States slightly differed. Also, Japan has struggled to trace back a better economy back, although it longer time as compared to the US.
Carmen M. Reinhart and Kenneth S. Rogoff. (2008). Is The 2007 U.S. Sub-Prime Financial
Crisis so Different? An International Historial comparision. National Bureau of Economics .
Clark, K. (2012, January 4). Are we the next Japan? CNN Money .
Derek Scissors and Kumi Yokoe. (2012). Japan's National Budget: Time to Give Up on
Keynesianism. Washington DC: Asian Studies Center.
Kashyap, A. K. (2012). Sorting Japan's Financial Crisis. National Bureua of Economic Research .
Madsen Robert and Richard Katz. (2011, March 22). Comparing crises: is the current economic
collapse like Japan's in the 1990s? Retrieved April 18, 2013, fromhttp://find.galegroup.com.ezproxy.emich.edu/gtx/infomark.do?&contentSet=IAC-
Takeo Hoshi and Anil K Kashyap. (2004). Japan’s Financial Crisis and Economic Stagnation.