Economic Collapse in Japanese Economy in 1990s

Table of Contents

Economic Collapse and Monetary Measures3

Critical Analysis of the roots of Economic Bubble5

Emergence5

Institutional Changes and Political Aspect in 19905

Demand Side Approach6

Supply Side Approach7

Japan's political Economy under Transition (3 Stages)9

The Process of Institutional Transformation10

Phase of Institutional Transformation - Political Reform11

Phase of Institutional Transformation - Economic Structural Reform13

Deregulation15

Theoretical Models15

Keynesian Theory15

Keynesian Theory and Japans' Economy16

Conclusion17

References19

Appendix21

Economic Collapse in Japanese Economy in 1990s

Economic Collapse and Monetary Measures

Japan's economy has gone through good as well as critical phases. The economy was growing rapidly until United States' nuclear attacks on Hiroshima on 6th August 1945 and Nagasaki on 9th August 1945. These nuclear attacks caused Japan's rapidly growing economy to collapse, but the economy recovered much quickly than expected. After surrendering to the United States and its allies in 1945, the economy experienced 'miracle growth' during 1953-1970. The post-war period was much better for the Japanese economy. Huge economic aid and the Korean War produced procurement boom along with conservative monetary and fiscal policy allowed the Japanese economy to grow. The post-war period was much better than the pre-war period. During the 1980s, the Japanese economy showed tremendous growth due to the appreciation in the value of Yen. This appreciation made Japanese exports cheaper for all countries and as a result, Japan earned more, and more through its trade (McCallum, 2001,5-12). During 1985-1987, Yen gained value against the dollar and its economy was booming, even the Nikki stock market exceeded the US stock market in value. In 1994, when dollar was on a post World War II all time low, Japan continued to register growth. Since then the Japanese economy has improved a lot. It has used the skill and talent of its population in the best possible way which has helped it to develop. Major drivers of the Japanese economy are trade, manufacturing sector, automobile and consumer electronics. Japan managed to become one of the most important global sectors in the world as the Tokyo Stock Market became the most prominent stock market in the world.

Until the 1980s, the Japanese economy was regarded as one of the fastest growing economies in the world, but it all ended when the real estate and stock market bubble blew in the 1990s. The stimulus that helped the Japanese economy to revive after the disastrous Nuclear and World War II effects caused the bubble to blow in the 1990s. The Japanese government when confronted with this situation, created an overly tight monetary policy which further damaged the economy. The Bank of Japan increased the interest rates in 1990 and 1991. It started lowering its interest rates since 1992, but the country was nearing deflation thus the real interest rates of the economy were raising. Furthermore, Yen started appreciating due to the increase in real interest rates caused more problems for the economy. The savings in the country fell and a number of people were left unemployed in the country (Noguchi, 2003, 79-105). The deflationary problems in the country started when due to the stock market bubble created in the 1990s, caused the stock prices to move ...