Keynesian Case Study

Background

Japan is the third largest economy in the world by nominal GDP and it used to be second. Japan was in a very rough state after World War II, but was able to become an economic power house once adopt western government and economic idea during the time. Keynesian was very popular during the time. Using government spending multiplayer and boost the economy was used throughout the world. However the Keynesian model have its limit as Keynes once said “in the long run we are all dead”. Than the “Lost Decade” happened after the speculative asset price bubble busted due to sharp rise in bank rate by Bank of Japan, which was used to try to counter speculation and inflation. The stock market crashed and firms failed, lots of firm where on life support by the government and not really making

Banks had a lot of bad debts resulted from firms not be able to repay debt and was also only operational by the support of government. Business could not get loans because they were full of debt and banks did not want to get out loan in fear of bad debt. Expert thinks that the Japanese economy did not start to recover until the government stop keeping alive dead firms and banks. Since they are not making real profit and only eating up government revenue. People begin to cut down on their spending because they expected to earn less in the future. They would by gold or USD because they do not trust the banks will collapse and result in loss of money. As spending started to decrease so does the CPI ultimately results in deflation. Firms would stop borrowing because loan would be paid back with money that is worth more than it is now. And even if firms wanted to borrow, there are limited funds in the bank because people save their wealth in other ways. Unemployment raises and wage drops as companies struggles to make a profit due to