Japan Economic and Financial Policy Part I

The nineties represent a transition period for the Japan The processes of internationalization of production and the globalization of financial markets have called into question the constitutive elements of the Japanese development model, opening a phase marked by a sharp slowdown in economic growth and the emergence of the structural weakness of the financial system.

The peculiarity of the Japanese development model arises from a combination of institutional factors, rules of behavior, state intervention and direction policies that have given the economy of Japan a high dynamism and a notable capacity to absorb economic shocks. From a production point of view, the business system has gradually polarized into a dual structure consisting, on the one hand, of the fabric of small and medium-sized enterprises, operating mainly on a highly regulated and protected internal market and, on the other, of large industrial groups, oriented on foreign markets and organized in the form of conglomerates (Keiretsu) which bring together, through complex shareholdings, commercial companies, manufacturing companies, insurance companies and banks. In the Japanese system, the financing of production is subject to the administrative guidance of the Ministry of International Trade and Industry and the Ministry of Finance which authorize the granting of credit by banks in order to favor the development of those industries considered strategic. The financial system, despite some partial liberalization attempts initiated in the 1980s, has maintained a high level of regulation which has allowed the authorities to use securities and currency transactions to control the yen in order to increase the competitiveness of exports.

According to HARVARDSHOES.COM, the characteristics of fragility and inefficiency of the Japanese banking system emerged on the occasion of the strong monetary expansion promoted by the Bank of Japan in the second half of the 1980s. The growth of the money supply, which gave rise to a rapid development of trading in financial securities and real estate activities, soon turned into a veritable speculative bubble, characterized by the soaring prices of shares, land and real estate, by a corresponding expansion of bank loans, granted against guarantee of the securities themselves and by the further increase in value of the latter through a spiral of increasing intensity. By the end of 1989, the volume of speculative activity had allowed the Tōkyō (Kabutocho) to surpass Wall Street in terms of capitalization.

When the Bank of Japan initiated a monetary tightening to cool speculation in 1990 – 91, stock and housing prices plummeted, leaving the portfolios of banks and insurance companies most exposed in lending a mass. huge amount of bad loans and mortgages no longer covered by mortgages. Since 1992, the Japanese economy has entered a phase of stagnation, characterized by income growth close to zero, from a sharp slowdown in domestic consumption, from the vertical fall of the stock market indices and from a severe crisis in the banking system. The government intervened by financing substantial spending programs that included incentives and aid to businesses and the construction of public works. Despite the large budgetary resources allocated, these measures have proved ineffective due to the high propensity to save of the population, which has kept internal consumption growth low, and the excess production capacity that has hindered private investment decisions..

Government spending plans, on the other hand, have had a negative effect on the public budget, which since 1993 has recorded continuous negative balances. In terms of external accounts, the current account, favored by the stagnation of domestic demand, in 1994 reached a record value of 130 billions of dollars, causing an appreciation of the yen against the dollar which had significant repercussions on the domestic level. In fact, the overvaluation of the currency, pushing wages to levels incompatible with the maintenance of the profitability conditions of companies (especially those operating on the domestic market), has reduced the space for economic recovery.

Furthermore, the appreciation of the yen has accelerated the transfer abroad by large companies of plants and production plants (hollowing out) to those areas, such as China and the countries of Southeast Asia, which are characterized by their importance of outlet markets (these countries absorb a total of over 40 % of exports of Japan) and for the enormous availability of cheap labor. The transfer of production capacity abroad has had significant consequences on the industrial organization, since in addition to creating for the first time problems of deindustrialisation and the growth of unemployment (which has exceeded the 3 % rate since 1994, a value still low in relation to the other industrialized economies but increasing compared to the 1980s), has loosened the ties that bind producers to national suppliers in the Keiretsu, cracking one of the mechanisms that have guaranteed high flexibility to the Japanese economy. The current surplus of Japan, also decreasing after 1994, has been affected by industrial relocation, as a growing share of production transferred abroad has begun to move along commercial circuits that no longer necessarily pass through the motherland. It should also be added that the internationalization of the industrial system is still a limited phenomenon, having affected, up to 1995, about 9 % of Japan’s production capacity, against 28 % in the United States and 25 % in Germany.

Japan Economic and Financial Policy 1