Japan: beyond the bubble

Date: June 5, 2006 Pham Thi Thuy Ha

Fruits of the Miracle:

Although Japan was affected by the ending of the Breton Woods system of fixed exchange rates and the first oil shock, the 2nd the oil shock helped depreciate Yen so Japan gained export competitiveness at the end of 1980s. Due to the rise of U.S real interest rate in 1981, Yen was weakened again and Japan enjoyed export competitiveness and much cheaper imported materials to boost economic growth. However, under a threat of inflation and pressure of estate speculation, the Bank of Japan had to raise interest rate and cool off the economy in 1989. After a series of attempts to balance budget, the government implemented fiscal stimulus in 1992. As a result, deficit spending rose quickly but the economic growth was still stagnated. Then, the government lowered interest rate to 0.5% by 1995 and the Bank of Japan introduced a zero-interest rate policy in 1999 in order to have enough cash to raise price and reduce price deflation. The bank increased interest rate in august 2000 but implemented again this policy in 2001 to deal with deflation problem. However, the bank will gradually increase interest rate to turn monetary policy to normal.

Institutional Concerns:

The ministry of Finance (MOF) managed government fiscal policy and influenced over monetary and securities policy and therefore the Bank of Japan has not acted independently in monetary policy making. In the labor market, job security and seniority system were changed in the late 1990s due to recession. Labor costs were increasing. The bankruptcy of some companies forced employees to find alternative solutions. In the financial market, banks changed from book-value systems to marked-to-market accounting systems to increase their transparency. The government also changed its long-term policy not to allow banks fail to allow banks collapse in 1997. Still, individuals had limited opportunities in the capital markets and were limited in reporting foreign exchange transactions so their personal savings were held in personal saving accounts with very flat interest rates. As a result, unlike American firms, Japanese firms have had limited capital equity. Keiretsu, business groups, has been a dominant business practice in Japan. Keiretsu has 3 types: horizontal keiretsu, vertical keiretsu and satellite groups centered on banks for funds. Cross-holding of share is still common practice and thus, firms were not really under the pressure from shareholders. Japan also faced social issues such as aging problem, medical care, pensions, role of women, standard of living and education.

The Hashimoto Era and Structural Reform:

Hashimoto introduced a grand plan to restructure administration, education, the financial system, fiscal policy and social security among which the financial market reform was the most important reform. According to the plan, the administrative reform is to re-organize the governing structure to be more efficient and more responsive to the needs of the people by strengthening the power of the primer minister and cabinet, reducing number of ministries and limiting numbers of bureaucrats. The economic reform encompassed removal of restrictions on large-scale retailers, telephone deregulation, series of deregulations in 5 main areas: logistics, energy, petroleum and gas, telecommunications and trade/commerce. The educational reform was to reorganize educational system, cultivate a rich humanity, elicit prompt responses to changing social needs and increase schools’ cooperation with students’ families and communities. The financial restructure aimed at the financial market reform and disposal of the massive bad debts by lifting the ban on derivative and amending the Anti-Monopoly Law. The fiscal reform included five major principles: 1) reduce budget deficit; 2) devote to fiscal reform; 3) implement year-to-year reductions in general expenditures; 4) reduce all current long-term spending programs; 5) maintain the national burden below 50%. The social security reform received 5 different proposals and a pension reform bill was completed in 2000. This massive reform resulted in less power of MOF and the primer minister was granted the rights to submits policy proposals to the cabinet.

Structural Reform under Koizumi:

In early May 2001, Koizumi proposed structural reforms. The new reform agenda was: 1) force banks to write off all nonperforming loans in 2 or 3 years; 2) privatize the postal saving system; 3) a cap of government borrowing of $245 billion to halt Japan’ $5.6 trillion debts; 4) Reduce deficits by cutting government spending; 5) a government-subsidized unemployment plan to grant jobless benefits so that firms can lay off worker easily.

Lessons drawn from the case:

The government should change timely the policy in response to the changes of domestic and international macroeconomic conditions. In my country, a massive reform was done in late 1980s and 1990s in accordance with the change of the government’s policy from a close to an open economy after the collapse of the former Soviet Union. So far this reform has boosted economic growth at high rates and maintained political stability. The government continues reforms in all areas such as deregulation, legislation, education, health care, pensions, social security… and promotes privatization.