Japan

After the financial crisis in 2008 many countries throughout the world have engaged in stimulus spending in order to prop up sagging demand and reinvigorate many of the world’s largest economies including, of course, the United States. Therefore I think it will be prudent to examine other countries that have utilized stimulus spending in the past and see how the measures have affected their economy and whether they were an appropriate tool in bringing an economy back to vitality. Japan in the 1990’s is an interesting case because it provides us with a financial situation not very different from what many countries face today. Japan can also give us keen insight on the effects government stimulus, regulation, and access to easy money have on an economy and whether these are effective measures to combat a recession.

After World War 2 ended Japan was brought back onto the world stage with the help of the United States. With special trade privileges and access to American technology and consumer markets Japan was able to claw its way towards being the world’s second largest economy. Japans economy was controlled by the central government, large parts of the banking and corporate sectors were controlled by relatively few powerful families or organizations called keiretsu. The Ministry of Finance used tax revenues and access to the large savings of many Japanese as a direct outlet to fund industrialization and infrastructure projects. Also the closely intertwined banking and corporate sectors enabled access to virtually unlimited sources of credit. The economy was assumed to continue growing as housing and stock prices skyrocketed, this had the effect of fueling the economic fire as a viscous cycle of investment and inflating asset prices continued. What is interesting is that this economic collapse occurred under a very centrally controlled system, even with the power to lend and spend consolidated in the hands of a few, low interest rates and access to easy sources of credit led to a collapse in the Japanese economy. Japan’s problem was not a lack of regulation or oversight, as the government was intricately connected with industry, access to easy credit and the proliferation of rampant speculation fed the economic bubble in Japan much as it did in the United States during the 2000’s. We see the use of these same methods throughout the world today as countries attempt to solve a problem by continuing with the very policies that caused the problem in the first place.

After the bubble popped in 1990 real estate and stock prices began to collapse. Deflation began to take hold as credit dried up and the Japanese began to spend less. This deflation is seemed by many to be a horrible economic phenomenon that occurs when an economy enters a recession and resources are not being utilized to their fullest. To many economists deflation is to be avoided at all costs. What many, including the Japanese, do not understand is that deflation is a necessary part of the economic cycle that occurs after an economy that has been spending and speculating too much and must come to terms with its loose monetary policy and large number of malinvestments. In effect the economy is trying to right itself; consumers are saving more so that eventually their savings can be loaned out again into projects that are hopefully more efficient and useful. This period is necessary and is a result of market forces trying to balance out the distortions caused by loose money. The Japanese and apparently the United States did not and do not understand this concept as both economies sought to re-inflate their economies by keeping access to credit artificially easy. This of course causes bad and inefficient investments to be made all over again as consumer savings now and in the future are squandered on centrally directed projects. For Japan this has meant over a decade of stagnation as the economy keeps on falling back into recession after repeated attempts at stimulation, for the United States whose debt dwarfs that of Japan the consequences could be dire.