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                         ~Francois  Bernier

The Lost Decade of Japan

Posted by VASUDEVA REDDY on Saturday, August 20, 2011 Under: economic articles

LOST DECADE… I heard this term for the first when Raghu Vasu, CEO of trandyne technologies asked us about it. I was the one among the several numb people who didn’t know what it deals with. So I searched for it and gathered some data. The following article is related to the LOST DECADE of JAPAN.

Here we go,

The period from 1990-2000 of Japan economy is considered to be a lost decade. Sometimes the decade of 2000s also referred to be a part of lost decades. To understand why it is called as lost decade, we need to travel back further a decade.


 

After the World War 2, Japan has stringent the tariffs and policies so that the people could save more. By the time it reached 80’s Japan has surplus money with it. As there was more money at the bank, it was easier to people of Japan to get the loan to invest more. As they were producing more the trade surplus was also more for them. Yen has appreciated against dollar. One more issue that caused the sudden appreciation of yen vs dollar was Plaza Accord.  Plaza accord was the agreement between the governments of France, Germany, Japan, US and UK to depreciate the value of dollar against Japanese Yen and Germans Deutsche Mark. This accord had signed by the representatives of those nations in the hotel called Plaza on September 22, 1985. The value of the US dollar has depreciated against Yen by 51% with in two years of time (i.e, from 1985-1987).


 

You may get the doubt why American government went for depreciation of dollar against those particular currencies. The reason is America had suffered a lot due to the inflation and recession which caused stagflation in the decade of 80’s. Imports became cheap for them which caused no demand for local products. To make imports costlier they needed to depreciate their currency. Instead of depreciating their currency they actually went for appreciating the currencies of the nations from which they used to import more (obviously those were Japan and Germany). Moreover with the depreciation, their exports will become cheaper which could reduce their trade deficit. To know more about this one read my previous article US Vs Rest of the World

Coming back to our original point, as money was readily available people borrowed more money and invested in stock markets and real estates and so on. Speculators played a very noticeable role in the crisis. At one particular point of time Nikkei stock index touched ever high value of 38,957 points (still it is the record). Real estate rates went to historical high prices, $93000 per square foot. Tokyo’s residential homes managed to be the most expensive homes in the world. Everything has a breakeven point, it is of no exemption. One very fine day the collapse has started. Tens of trillions of dollars had wiped out with the sharp fall of stock markets and real estates. Nikkei stock market reached its peak levels in December of 1989, and it came down to 15000 levels within 2-3 years of time. Many people couldn’t able to repay their loans, like the things happened in sub-prime crisis, it led to the crisis in banking sector, with many banks bailed out by the government.


 

With the economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and manufacturing firms lost some degree of their technological edge and Japanese products became less competitive overseas. The Japanese Central Bank set interest rates at approximately zero.  This is considered as Japanese asset price bubble.


 

Banks kept injecting their money into the unprofitable companies, which needs constant bailout packages to run their business (also called Zombie companies), to keep them afloat.  However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser's paradise”.  This caused the most of the banks to be bankrupted. Only four national banks left in the japan after that crisis. It became very tough task to get loans for the companies in Japan and also they were in neck depth debts.

This led to the phenomenon known as the "lost decade", when economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life was muted, however. Unemployment ran rather high, but not at crisis levels. This has combined with the traditional Japanese emphasis on frugality and saving to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the miracle.

 

 

In : economic articles 


Tags: japan lost decade america debt asset price bubble crisis 

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