Approximately three decades ago, Japan had one of the strongest and most successful economies in the world. At the beginning of the 1990s the country, however, began enduring a long and grueling economic recession which resulted in dawdling development. Between 1990 and 2012, Japan was on record as the country with the slowest growth rate among the developed nations (Harada, 2012). The great recession lasted for up to 25 years and during the same period, the Gross Domestic Product for the country experienced a sharp decline. It has, therefore, become imperative for other nations to study the economic downturn of Japan in order to prevent such an event from occurring. There has been speculation that the problems experienced were as a result of a temporary downturn, however, it is apparent that these challenges emerged from structural glitches as will be demonstrated.
Causes and Consequences of the Recession
Current statistics indicate that the average life expectancy of Japan stands at 85.52 years (Guesmi & Kablan, 2015). This is based on information obtained from the World Health Organization. In this case, there is no doubt that the country bears the largest number of aged individuals compared to other nations across the globe. Besides, it is also apparent that the average life expectancy has been increasing steadily over the year due to improved quality of life for the residents. The women, however, live for a longer duration compared to their male counterparts and their average expectancy is 86.8 years leading them to be ranked ahead of other females in the world (Guesmi & Kablan, 2015). Part of the reason why people in Japan are able to live for a long duration is based on factors such as genetics and their lifestyles. Also, the individuals have good dietary consumption which helps to keep people healthy. Concurrently the People`s Republic of China is expected to attain a larger population of aged individuals compared to Japan as a result of the "one child" policy it initiated (Harada, 2012).
While the above is viewed to be a great achievement, it ended up being one of the sources of the countries long list of growing economic problems. Despite being the leading nation in terms of life expectancy, it appears that most individuals in the country retire at 60 years of age (Harada, 2012). This has the effect of reducing the working population a fact that is likely to result in dreadful consequences. The scenario is such that the number of individuals who are above the above-mentioned age is generally increasing while the young population of individuals decreases. In addition to this, the wage system of Japan does not favor the elderly individuals. It is a mechanism which works on basis of people`s seniority. This implies that there are a lot of people who have reached retirement age but are still eager and willing to continue working. Due to the systems in place, nevertheless, they have no option but to retire early despite their unwillingness to do so. With a decrease in the working population, it is unlikely that the production function will not be affected (Harada, 2012). As can be observed in Japan`s case, the effects were very significant to an extent of affecting the entire economy.
Further problems emerge when such individuals retire. The government is forced to spend a lot of money in terms of social welfare in order to assist the aged individuals. Before 2012, the social welfare costs were very high and currently, the government allocates a significant portion of its budget to cater for such costs. A great majority of senior citizens were forced to pay for medical expenses using their own income since they have no income to sustain them. This situation has greatly affected people from destitute backgrounds. The fiscal year 2018 results show that Japan will spend up to YEN121.3 trillion while catering for the social welfare of its nationals (Harada, 2012). It is anticipated that by 2040 the amount allocated for social welfare projects by the government might escalate to YEN190 trillion which would be 1.5 times greater than it is at the moment (Harada, 2012). The Japanese government has dedicated a third of its entire budget to cater for the social needs of the aged individuals. This amount had been increasing consistently over since the 90s causing a strain on the country`s budget. It is estimated that 65 percent of individuals in the nation have attained working age (Kusukawa, 1994). As a result of the mandatory retirement age, it is expected that the number could decrease by almost 50 percent, leaving a large void that requires to be filled (Harada, 2012). Most importantly, a reform of the policy pertaining to aged citizens would lead to desirable effects in the long run.
Poor banking behavior
In the course of the 1980`s a majority of the banks in Japan relied on collateral when offering loans to individuals. Most individuals put up their lands as a source of security for the banks and they were able to obtain the finances they needed. Ten years later, the prices of land decreased substantially and it emerged that the banks had made a poor decision. The consequences for their actions were detrimental. Around the same time, the default rate for most of the banks stood at 12 percent (Kusukawa, 1994). This meant that they would not be in a position to recover any unpaid monies to the tune that they had funded their clients in case they defaulted to pay the loans. When this dreadful event occurred, it became almost impossible for the banks to advance and attain their goals. This had an undesirable effect on the economy. The banks were forced to increase their lending rates as they varied their interest rates on savings accounts hence leading to a lot of economic pressure. Performing and non-performing loans also resulted in large shortfalls a situation that took impacted negatively on the banking sector.
In addition to the aforementioned precept, the Basel Capital Requirements further added to the banks` woes. The law required that all the banks hold on to 8% of capital (Kusukawa, 994). This was an obligation that had to be fulfilled irrespective of the situation that would occur in the economy. On the same note, such capital was used by the banks to write off the large bulk of bad debts they had encountered. Because of this, most of the banks chose to reduce the number of loans that they were offering individuals by setting stringent requirements that were expected to be met by the qualifiers. The reason why this was done was in a bid to ensure that the minimum percentage of capital required was met to avoid being at loggerheads with the governing authorities (Harada, 2012). Subsequently, when funding ceased, the number of small market enterprises and other businesses being formulated declined substantially leading to economic inefficiency. For a majority of large firms, they had no problem in accessing loans from banks. The development was, however, not effective enough to prevent the impending crisis.
While the above situation was occurring, the banks did not make any effort in reducing the rates of interest. The high rates, therefore, led the market to plummet, and the economic strife ended up being experienced, with pressure mounting on the relevant authorities. Besides, the Nationals were also anxious that the economic failure would lead to greater problems (Harada, 2012). At that time, the banks did not have a contingency plan, and hence whatever occurred could not have been avoided. Also, there was delayed innovation and the development of technology was disrupted. In some cases, advancements are viewed as aiding guides that lead to the progression of the economy. Also, most of the skilled businessmen who were seeking to startup new establishments could not do so effectively because of the prevailing conditions (Harada, 2012). They were, hence, not able to contribute to the overall establishment of the economy. It is, therefore, apparent that whenever such encroachments are interrupted the economy ends up suffering, in the same way, it that it occurred in Japan.
Inefficiency of the fiscal policy
The fiscal policy is mainly a way that the government seeks to influence how the economy is likely to develop. This can be attained by adoption of certain mechanisms such as the changes in taxation and expenditure of public funds. For instance, if the government chooses to reduce the amount of tax. It is highly likely that individuals will be in a position of having more income at their disposal and hence there will be greater spending. This would have a negative or positive effect on the economy. The banking crisis and the decreased efficacy of the fiscal policy translate to some of the major reasons why Japan experienced an economic crisis. Before 1990, it occurred that the economy of Japan was in jeopardy and due to this, Miyazawa the then Japanese Prime Minister effected the fiscal policy (Harada, 2012). According to this leader, he had high anticipation that the public sector would be in a position to instigate the development of the economy. Increased, public investment, nonetheless, made it impossible for the economy to flourish since many of the developments pertaining to roads and other structures had already been completed and hence investment in infrastructure could not flourish.
Resources were also not equally distributed and because of that, public sector investment became very challenging. It also emerged that the greatest portion investments in the public sector were centered on the rural areas compared to urban regions. It is impossible that this would have a significant impact since, in a majority of cases, the influence is greater when such resources are concentrated in the urban areas. Besides, investment in the agricultural sector were not as effective as those that were made in the industrial segment (Hausman & Wieland, 2014). The multiplier for public investment also reduced from 2.5 to 1. In a majority of cases, the figure is expected to be greater than 1 which indicates that the country is experiencing significant development (Hausman & Wieland, 2014). The misallocation of public investment in the current scenario, however, greatly contributed to a decline in the multiplier factor. As result, there was a budget deficit which added to the problems that the country`s economy was facing. A decline in the multiplier will also not assist in leading to a significant advancement in terms of investment.
Large amounts of fiscal stimulus were experienced in Japan before the introduction of Abenomics. Consequently, the government increased its expenditure and as a result, there was stagnation in the growth of the economy and also to a large extent an economic depression was inevitable. In addition, the public debt in Japan had been rising steadily over the years. It became difficult for the nation to repay the obligation since future payments continue to attract higher rates of interest required to be paid (Hausman & Wieland, 2014). This made it difficult for the nation to fulfill its debt commitments appropriately and as a result, the economy ended up being affected as well. The decrease or increase in the tax rates during the entire duration also had no significant impact in making the economy better. This was because the situation had worsened due to the overwhelming sums of money that had accumulated over time. A more distressing fact was that the money that was borrowed was not spent in prudent investments in which case it never made a substantial impact on the Japanese economy.
Transmission from central to local government
According to studies conducted previously in relation to the issue of decentralization, it has often been argued that workers from the local government are capable of handling matters better...
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