POLI 342 Lecture Notes - Lecture 10: Keiretsu
Japan: Economic crisis, political outcome, and policy responses
Class discussion:
How do you explain economic recession in Japan since 1990?
• Appreciation of the yen relative to the dollar
o Caused Japanese exports to be more expensive and not perform well
• As the crisis took place, the bureaucrats could not come up with a solution. This worsened the
faith of the people in the government
• Close ties between businesses in Japan. The focus on forming close ties rather than improving
productivity prevented the firms from being competitive in the international market
• The private banks have control over themselves (vs. in SK where the government owns the banks).
• The government continues to subsidize the agriculture market. This is because the LDP
government requires the support of the farmers in order to stay in power
Evidence of the recession: the lost decades
• Massive stock and land price collapse
• 1991-1999: Annual GDP growth rate around 1%
o Very low relative to economic miracle
o Called the lost decade
o Gained attention from the West
• Decrease in manufacturing and productivity
• Increase in unemployment rate
Explaining the recession
1. Initial policy change
• Appreciation of yen
• Deregulation of financial/banking sector vs. open rice market
o Due to domestic politics and need for farmer's support
• Over confidence in economy
o Banks have more freedom
• Race-to-bottom competition among banks
o Competition based on low interest rates
o Banks accumulate debt
• Commercial real-estate bubble
o Rise in debt
2. Demographic and accumulative change: aging population and government debt
• Aging population
o Aging population means that there is a declining workforce
o Increasing government spending on pensions
o Reduces savings which limits government's ability to borrow
• This is because older citizens spend more money
o The smaller workforce less likely to be able to payoff the growing government debt
3. External crisis:
• 1997 (South east Asian region)
o Japan was negatively impacted by lower exports in the South east Asian region
• 2008 (global financial crisis)
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