The fundamental reason for the prolonged Japanese great recession
There are many contributing factors to the cause of the prolonged Japanese recession. These are the labour input, government expenditure, capital investment and productivity change. An analysis was carried out measuring the changes in the mentioned factors against the changes in GPB over the period of 1985 to 1990s. The analysis showed all the four factors contributed to the depression but at different levels. The government expenditure on the economy during this time actually stimulated the economy rather than depressed it. During this time the government tried several spending projects in a bid to revive the economy. In the years 1992 to 2000 the government spent over 100 million Yen in 10 spending projects. The government reduced income tax to encourage spending. They also borrowed heavily from international financial institutions in order to spend in the economy.
The second factor was efficiency. This measures the productivity of changes in output. As per the analysis though there was a decline in the productivity, its depressive effect was not very strong in the late 1980’s and early 1990’s. This shows it was not a major contributor to this great depression. The third factor is investment. This was also not a major cause of the depression though it contributed to it. When an analysis is done of the country’s stock market it shows a major withdrawal of investment from the business community. Investors lost confidence. This caused the stock market index, Nikkei to fall by more than 50% in the 1990s. (Powell, 2002). The major contributing factor to changes in GBP, and a major cause of the depression was the changes in labor input. The contractionary monetary policies increased the price of real wages. This caused inefficient input (Keiichero, 2005)
Lack of Demand for Labour and Goods and Services
In the late 1990s, there was a decrease in the prices of land and shares. This limited the amount of collateral a person could have in order to secure sources of finance. This contributed further to the depressive labour input. Low collateral leads to lower consumption. In Japan loans taken against real estate are a major source of finance. However decreases in land prices made the labour input decrease even further. The people in Japan have now lost hope and many are pessimistic. This has caused people to save so much and consume so little. Companies have excessive debts. They are more interested in paying off their debts than investing in the economy. The low interest cuts by the government do not motivate them at all in investing. There is therefore low demand. The money the government has in high supply does not help either. This situation has increased unemployment in the country. The people are now facing low salaries and those ones that have jobs are losing them or getting salary cuts. With the low salary and high savings consumption goes even lower. All these factors are working together to affect the economy adversely (Koshiba, 2001).
Monetary policies of the BOJ (Bank of Japan) that should be implemented in Japan
The bank of Japan needs to put in place certain monetary policies. The bank of Japan should have a set time frame or target time on dealing with deflation. The bank should work towards boosting the domestic asset prices. The regulatory structure for various institutions should be strengthened. Corporate governance principles should be adhered to. The government needs to increase the flexibility of labour and revitalise the real estate market. This will increase employment and investment raising productivity.
Japanese future options to sustain its long-run-economic growth.
For Japan to sustain growth the following policies need to be adopted. There needs to be reforms in the financial sector. The financial markets need to be liberalized. There should be financial restructuring of Banks. The supervisory body of Banks should also be efficient in order to perform their roles well. Banks play an important role in any economy. The insurance markets like the banking markets should also be liberalised. The disclosure requirement level of financial matters in companies should be enhanced. Shareholder rights need to also be enhanced. They need to know more about the company affairs so as to make wiser and informative capital investment decisions .Venture capital companies should be started to invest in new companies in order to generating more employment. Formation of companies with subsidiaries and associates should also not be restricted. There should also be enhanced competition in domestic markets. The retail, telecommunications, transport and retail markets are just a few of the industry sectors that need deregulation.
The country should also move towards globalisation and trade liberalisation to increase competition. Monopolies and oligopolies should be reduced in order to remove their high product prices. Bureaucracy should be done away with. The ministry of finance has a lot of power that is destructive. The department should be split into several agencies. Regionally, there should be decentralisation in order to reduce power (Penouilh, 2010) The Japanese economy with the right monetary and fiscal policies have a very great future. The country needs to liberalise the markets and let them operate like in a capitalist country where forces of demand and supply determine the prices of goods and services with minimal government interference.
Keiichiro, K (2005). What were the causes of Japanese’s “Lost Decade?” Research Industry of Economy, Trade and Industry. Retrieved from http://www.rieti.go.jp/en/columns/a01_0177.html
Penouilh, G, (2010). The Japanese Economy: The Bubble Economy and the aftermath. Retrieved from http://html.rincondelvago.com/japanese-economy.html
Powell, B, (2002). Explaining Japanese Recession. Ludwig Von Mises Institute. Retrieved from .http://mises.org/daily/1099
Yuichi K, et al. (2001). Macroeconomic analysis of the monetary policies in Japan. Tokyo: Bantam Books