Story of Japans Crash (Banking/Internal Crisis)

Story of Japan is a Tragedy and Omen

Tragedy- No public policy to turn the situation around and get the
country back in track
Omen- story provided a reason to why it could happen to other
countries, even the United States
Japan as Number One:
Fast growth, low unemployment, and high profits.
From 1953-1973, Japan experienced high growth years -through becoming
the worlds largest exporter of steel and automobiles, and increasing the
standards of living
Economist say that they have good fundamentals high percentage of
basic education and a high savings rate leading to more investment in
the economy
Economic philosophy- government guidance
MITI and Ministry of Finance Economic style- growing Infant industries- no worrying about shortterm profitability, and secured protection from foreign competition
Downfall- weakens of the system? Reliance on the relationship between
government and business, the extension of easy credit by government and
business
Bubble, Toil and Trouble
1990s Market Capitalization of Japan grew
Land became more valuable and expensive
No economic data to justify the dramatic increase and overvaluation of the
prices of stocks, and land.
Japans bubble and other countries around the world had a common feature:
they were financed by bank loans Moral hazard- one person makes the decision, and someone bears the
cost; thus the borrowed bank money from banks created huge
incentives for borrowers and high risk from banks.
Deregulation- Restraints such as restricting what banks could do with
depositors money to prevent excessive risk taking, and limited the amount
of competition among banks to promote stability
1980s restraints broke down- more freedom and competition
Global epidemic of moral hazards
Thus leading to a bubble economy growing to grotesque proportions
Bank of Japan knew and in the 1990s began raising interest rates to air out
some of the pressures of the bubble
Stock prices began a steep decline and 60 percent below their peak
End of the bubble economic economy brought no economic health but a
deepening situation

Stealthy Depression
Economic decline
No real GDP growth
A growth recession- economy cant grow fast enough to keep up with the
economy expanding capacity
o Leading to a growth depression experiencing a decade long growth
depression
Japans Trap
Japans policy maker in particular its central bank werent able to get the
economy moving again
Interest rates of Japan at 0 percent, but no injection of money to fuel the
economy- not willing to spend enough to use the economys capacity even at
zero interest rates
Liquidity trap
o Private demand is so weak that even at zero short-term interest rates,
spending falls far short of what would be needed for full employment.
o Injection of cash into the private banking system fails to decrease
interest rates, and makes monetary policy ineffective.
Japans RecoveryExports- United states ran huge deficits imported manufacture good
Americas import boom, recovering Japanese economy
However, the escape is provisional because Japans interest rates at 0.5 percent and
could cut very little in the face of a recession
NO accountability and transparency within the banking/financial center caused by
deregulation,

Asias Trap (Exchange rate/External crisis)

The Boom
o Early 1990s, Growth came from the dramatic increase in savings,
leading to more investment
o Fall of Communism made investment safer for the Western investors
and other international countries to invest in emerging markets
o IMF and World Bank financed investment to the tune of 42 billions,
increase private capital to these emerging markets.
Huge capital inflow to businesses

 Vulnerability of Asian Economics

o Foreign Exchange Market governed by law of supply and demand:
therefore increasing the demand for an item, will cause the price to
normally rise (so stocks, and land prices dramatically rise from
growing demand)
o Thailands Central Bank was committed to maintain a stable rate of
exchange between baht, and the U.S dollar.
o To fuel the economic boom, massive expansion of credits, fueled new
investments and by 1996 Southeast Asia economic was starting to
show a resemblance of Japans bubble economy
The Meltdown
o In 1997, the devaluation of Thailands currency triggered a financial
avalanche, which affected much of Asia. It was intended to make Thai
industry cost-competitive compared to other markets.
o The Baht went into free fall, as people begin pulling away their money,
thinking that the Baht would continue to fall. Panic ensued, causing
declining confidence in the markets, and financial deterioration.
Cycle of Financial Crisis
o Loss of Confidence leads to a plunging currency, rising interest rates,
and a slumping economy, thus causing financial problems for
companies, banks, and households.
Why Asia?
o Exchange rates between Asian countries and the dollar. Because Asian
currencies were pegged to the dollar, exports look more expensive
contributing to an export slowdown
o Crony Capitalism- Success of business depended on close
relationships between business people and government officials.
Policy
Keynesian compact- The idea that the citizens will tolerate the insecurity of
capitalism if the government will respond to recessions by lowering taxes,
increase government spending, and expanding money supply, lowering
interest rates.
In Japan, the Keynesian approach to fighting the recession was
compromised by crony capitalism between government officials and
business people.
In East Asia, the IMF advised countries not to use Keynesian policies,
but rather encourage restrict spending and balance the government
budget, which kept interest high to attract investors.