Japanese Economy

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Japanese Economy

The Japanese economy is the second largest in the world, behind only the American economy. As such, its decade long downward slide has many lessons the American economy can learn from. The difference between the economies is one of degree, not type. Our own economy has been faltering of late, bringing fear of recession. The Japanese have been on that road for over ten years, and of late have been making aggressive moves towards a restructuring. This paper will look at the types of reforms planned in the Japanese economy, and more importantly if these reforms will be enough to pull a modern economy from the doldrums.

The current state of the Japanese economy has much to do with a failure to adjust. In post-WWII Japan the country's economy experienced a "bubble economy". This era of high growth is very similar to that which the American economy experienced after WWII. A booming population and a new focus on industry were mostly responsible for the unprecedented growth in both countries. In the mid-1980's, Japan's central bank reduced prime interest rates in response to what was then considered a moderate slowing. This lowering wasn't enough to give the economy a chance at sustained growth, as it wasn't combined with robust reform. Japanese banks took advantage of the low rates, and began taking on massive debt. The slowdown never truly stopped, though there were quarters of greater growth. Though the economy grew by one percent on average, the combination of out of control debt and little population growth led the economy down a path of ever slowing growth. Today this debt, coupled with distrust of banks by depositors, has held back even the most well though out and well intentioned reform. Simply put, no restructuring can lead to real gains if the banks continue to fall behind on debt payments.

In April, the normally optimistic Central Bank of Japan issued a report downgrading its forecast for the Japanese economy, the third straight month it has done so. This was also the first report since September 1995 that the admitted that the economy is in a state of deflation. Deflation is the lowering of prices, and leads to lower corporate profits across the board. Deflation has a crippling effect on an economy, and demands an immediate and strong response. The report attributed this most recent downturn to lower industria...

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...k governor, Masaru Hayami, said growth has come to a standstill because of slowing exports.

Worried about the stagnant economy, the Bank of Japan moved to push interest rates to zero last month. It decided to keep such monetary policy unchanged at a meeting Friday.

Exports have long been the driving force behind Japan's economic growth. But the cooling U.S. economy has dampened demand for Japanese exports.

Japan unveiled an emergency package earlier this month that set a two-year deadline for major banks to dispose of their riskiest bad loans estimated at $104 billion.

The non-performing loans -- a leftover from the collapse of Japan's easy-lending conditions of the late 1980s and early 1990s -- have crippled the nation's economy.

The April report pointed to five key areas of the economy that remain troubled -- industrial output, corporate profitability, business sentiment, employment and housing construction.

Late last year, Japan set a target of 1.7 percent growth for fiscal 2001 through the end of next March. But some economists believe the forecast is too optimistic. For the fiscal year ended last month, the government has set a target of 1.2 percent growth.

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