Economic Conditions of Japan

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Economic Conditions of Japan Japan is currently in an economic recession. We can see that the value of the yen is falling; unemployment is rising, and purchasing of durable goods is down. This unhealthy state of economy has progressively become bleaker over the years. Many believe that the start of the slump was due to the economic bubble in the late 1980’s when low rates encouraged an inordinately large amount of investment. When a country has an elevated investment rate, large amounts of capital stock are purchased. This means that an elevated rate of investment must be maintained in order to accommodate for the high levels of depreciation. In the early 1990’s when investment began to slip asset values imploded. As a result, banks were making bad loans. The Japanese government was not quick to react, and by 1998 many major banks were on the verge of collapse. To try to combat the trend of failing banks, the Bank of Japan Governor, Masaru Hayami, started a “zero interest rate policy” in 1999. This move built confidence in Japanese banks and the Japanese economy. However, this positive reform did not last. Banks were not using this recovery policy to write off their bad loans. They also did not get rid of very risky stock market shares. Hayami became fed up with the actions of the banks and raised interest rates in August of 2000. Then when the stock market began falling, those risky shares that the banks owned caused them to lose even more money. So now the country is a facing a major problem: what to do about the losses experienced the stock market and from default loans. In the worst-case scenario calculated by Merrill Lynch credit analyst Koyo Ozeki, banks would have to write off more than 70 trillion yen in loan losses. In order to do that, banks would have to pull the plug on thousands of deadbeat borrowers. This would be devastating to the unemployment rate. Japan’s unemployment rate is currently at 4.9%, which is a postwar high for the country. This is due in part to the number of workers losing their jobs. Another big part of the increase in unemployment is due to the increase in the labor force.

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