Japan Economic and Financial Policy Part II

In September 1995, in the wake of a protracted economic stagnation, the Bank of Japan increased the money supply, bringing the official discount rate at 05 %, one of the lowest levels not seen since the war. Monetary expansion has widened the differential of Japanese interest rates compared to the US ones, opening a phase of descent of the yen that from the exchange rate of 80 – 85 yen per dollar at the end of 1995 has led to an exchange rate of 120 – 125 yen per dollar in the last quarter of 1997. The devaluation of the yen gave a new impetus to exports and pushed GDP growth in 1996 to a rate of 5.1 %, the highest in the most industrialized countries. The economic recovery, however, proved to be transitory. At the beginning of 1997 the new government of R. Hashimoto, in an attempt to slow down the rapid rise of the public deficit, launched a package of public finance measures which, due to its highly restrictive nature, slowed down the fragile economic recovery.

According to HEALTH-BEAUTY-GUIDES.COM, the austere fiscal maneuver, which included an increase in VAT from 3 to 5 % and the abolition of part of the existing tax cuts, eased the tenuous effects of the expansionary fiscal policies on internal growth, harnessing the economy in a vicious circle. The worsening of economic expectations, in fact, depressed the weak stock market, accelerating the fall in securities on the stock exchange which had continued almost continuously since 1994. The decrease in securities has aggravated the capital situation of banks (holders of about 42 % of securities traded on the stock exchange) and credit rationing increased. All this translated into a slowdown in consumption and production, in the further reduction of share prices and bank assets and in the consequent restriction of the supply of credit along a downward spiral. The situation worsened between October and November 1997, when, partly as a result of the financial and foreign exchange crisis that occurred in some South Asian countries (Indonesia, Philippines, Thailand, South Korea), the stock market of Tōkyō lost almost 10 % of its value in a few days, halving its capitalization compared to December 1987, and shrinking in size to about a third of the Wall Street Stock Exchange.

The new economic slowdown (grown of ‘ 14 % in 1997, according to the OECD) has shown that the G has been trapped in a deflationary grip that traditional expansionary economic policy have not been able to loosen. Monetary policy, in fact, has failed to stimulate the growth of private investment, both because the low level of domestic consumption did not justify it, and because small and medium-sized enterprises have not been able to obtain credit from a system blocked in its activity of bad loan brokerage which, according to official estimates, exceeded $ 600 billion in 1997. Fiscal policy and public works spending programs have instead encountered a serious limit to their expansion in the continuing rise of the budget deficit and the stock of public debt. The latter, in particular, approached the 100 mark in 1997 % of GDP. The only factor of income growth remained the development of exports, the possibility of expansion of which, however, diminished. Indeed, the financial crisis in Southeast Asian countries has not only reduced outlets in the most important market area for Japanese exports, but has also exacerbated the conditions of competition as a result of the devaluations that have occurred there. area. For these reasons, the Japanese authorities have tried to encourage the depreciation of the yen by insisting on conducting a strongly expansionary monetary policy. However, this has aggravated the tensions with the European Union and especially with the United States, whose trade deficit with respect to Japan has shown a remarkable growth between 1997 and 1998.

In order to tackle the growing imbalances, the government has promoted a program of deregulation of the financial system, completely liberalizing currency controls and capital movements in April 1998, and approving, in the same period, a law that guarantees greater autonomy to the Bank. central.

The objective of the program, which foresees by 2002 the elimination of the barriers between banks and the stock exchange, and the liberalization of brokerage commissions, is to stimulate the restructuring, diversification and reorganization processes of Japanese financial and banking institutions by opening up to foreign competition. In this perspective, for the first time in fifty years, the government has decided to allow the bankruptcy of particularly compromised financial institutions, such as the Yamaichi (fourth financial company of Japan) and the Hokkaido Takushoku bank. However, the confidence placed in market forces has not prevented the Japanese government from continuing to support the banking system with the granting of subordinated loans, the purchase of preferred shares and other measures at the expense of the public budget.

In March 1998, the difficulties inherent in the growth of domestic demand and new threats of recession prompted the government to adopt a set of measures to support the economy of such size (16 trillion yen) as to be the largest intervention of public finance never achieved since the postwar period. However, the economic situation remained critical throughout 1998. The GDP declined by almost 3 % and the unemployment rate has exceeded 4 %, a historic high last two decades.

Japan Economic and Financial Policy 2