Self-Trapped Japanese Economy - Lecture at Salento University, Italy

       The Self-Trapped Japanese Economy

– An Overview

Toshiaki Hirai (Sophia University, Tokyo)

1.  Introduction

Up until 1990 Japan as the most successful nation was struck with awe and consternation. While throughout the 1980s the US, the UK and European countries suffered from stagflation, Japan maintained high economic performances. Thus much attention was paid to the clue to the success of the Japanese economy, and the “Industrial Policy” by the MITI and the “Japanese Way of Doing Business” were lionized like hot cakes.

In the late 80s there emerged great cracks in the Socialist Bloc which played a　part of the Cold War System. In Eastern Europe the civil movement became more and more active, having Poland at the top, which would escape from the yoke of the Soviet Union and try to introduce some capitalistic system. The Soviet Union, leaving no power to oppress the movement, finally fell down in 1991.

Since then twenty years has passed, and we are here in 2011. During this period the world experienced great transformation and turbulence. The US attained some economic growth due to the IT revolution and the financial globalization, while the UK due to the financial globalization. More than that, what was unexpected and surprising was miraculous economic growth of China, India and Brazil, which came to have some influences on the world economy.

It was Japan which was left out in the cold. Japan tumbled by its own and remained stagnant - the so-called “Lost Decade” (or the “Lost Two Decades”).

It became an everyday affair to speak of Japan as the country which can still find no way out of the stagnation, or as the one of which one should learn something from the lesson. It was an emblematic event that Obama stated at the Presidential Inaugural Speech two years ago that he would implement any resolute policy for the recovery of the US economy from the crisis, referring to the Lost Decade.

The present paper will see the actuality of the Lost Decade by examining the path along which the Japanese economy proceeded over the three decades.

2.  The Misstep from the Supreme Reign

2.1 The Plaza Accord (1985)

In the 1970s the world economy has seen the collapse of the Breton Woods System and the flexible exchange rate system as a new currency system.

After yen was fixed at 1 dollar = 308 yen at the Smithsonian Agreement (December 1971), Japan came to adopt a flexible exchange rate system in February 1973. Immediately after that, yen appreciated to 1 dollar = 260 yen, but it remained stable at around 300 yen thereafter. Then a rapid appreciation of yen  occurred since October 1977, arriving at 175 yen in October 1979.

Beside the change in the monetary system, the world economy saw the US-Japan trade conflict.

The Japanese firms, producing high-quality goods due to highly developed technology, rapidly expanded the sales abroad and came to dominate the world market. In consequence the balance of trade of Japan continued to have a surplus, and there arose trade conflicts with the US. As huge exports to the US forced the American firms to go bankrupt, the US came to criticize Japan from a point of view of unfair trade. This US-Japan trade conflict was to continue over the long period, starting with synthetic fiber, followed by steel products, colored TV, and cars. Japan usually responded to the US by means of self-imposed restraint. According as the surplus in the balance of trade, however, rapidly increased from 1983 on, the US’s complaint became stronger and stronger.

At that time the US economy suffered from stagflation. Volcker, who became chairperson for the Fed in August 1979, implemented tight monetary policy (“New Adjustment Finance Method”), causing the FF rate to rise to 20 % (“Volcker Shock”). In consequence, albeit the price level attained rapid stability, the unemployment rate rose further, reaching 11 %. Due to the high rate of interest, huge amount of dollars poured into the US, which caused large appreciation of dollar (from 200 yen in October 1981 to 275 yen in October 1983). Then the exchange rate remained at around 250 yen, which meant some depreciation of yen, resulting in a rapid increase in the surplus of the balance of trade. The balance of trade in relation to the US also recorded the huge surplus, which heightened the trade conflict.

It was the “Plaza Accord” (September 1985) which was concluded with the strong initiative of the US Administration under these situations. This was a pact among the G5 for cooperatively intervening in the foreign exchange market. Its kernel was to appreciate yen (depreciate dollar) through selling dollar and buying yen.

 In consequence, the exchange rate rose from 1 dollar=255 yen in October 1987 to 150 yen in October 1987. Thereafter yen went on appreciating until it reached 125 yen in October 1988. Then it continued to depreciate for a while, and again appreciated until it reached 79 yen in April 1995 (see Chart 1).

  In spite of this appreciation, a large surplus in the balance of trade of Japan continued throughout the 90s.

            　

         

　　　　　(note) black curve= Yen/Dollar, blue curve=Yen/Euro

          (source) Based on a chart from the BOJ data.

2.2 The Bubble Period

Speaking of recent bubble economy we can mention real estate bubbles of the US, Ireland and Spain in the early 2000s. In advance of them we can mention the real estate bubble in Japan. It continued from December 1986 to February 1991, and its collapse continued from the spring of 1991 to that of 1993.

                    

2.2.1. The Upward Phase (December 1986 - February 1991)

The Conquest of Worries over the Depression Induced by the Yen Appreciation – As Japan’s economic growth has been led by exports, there spread worries that the steep yen appreciation due to the Plaza Accord might cause serious depression if the government does nothing. The surplus, in fact, in the balance of trade from 1987 to 1990 continued to decrease.

  Then the Nakasone Cabinet implemented fiscal and monetary policies aiming at stimulating domestic demand. For fiscal policy it put forward “Emergency Economic Measures” (May 1987) and for monetary policy it lowered the discount rate to 2.5 % (February 1987 - May 1989). In consequence, public investment as well as private investment tremendously increased. Besides them, the nation-wide project of developing the resort area was worked out as a means of stimulating domestic demand (“The Resort Act” [1987]).

  The Japanese exporting firms adopted two methods for tackling the yen appreciation. One was to reduce production cost through a rise in labor productivity. The use of robots in production process was an emblem of this method, which amazed the world.

  Another method was to transfer production base abroad for cheaper labor cost. This was extensively carried out to such a degree that it might induce de-industrialization. The ratio of production abroad to total production in the manufacturing sector, in fact, showed a rapid rise from 3.0 % in 1985 to 6.4 % in 1990 (the main location was the South Eastern Asia¹).

  And yet the balance of trade of Japan was in large surplus, albeit it continuously decreased until 1991. Japan did not see the worriso

me depression, but maintained the boom thanks to the fiscal and monetary policies.

                 

                 (note) black curve=exports, pink curve=imports,

                       bar graph = exports – imports

               (source) Based on a chart from the Ministry of Treasury data

The Abode of Demons : The Change in the Financial Structure – There proceeded the state of affairs, under these situations, which was to lead to big policy failures – a shift from indirect finance to direct finance (or self finance) in the Japanese financial structure. As a result of steep increase in exports, there emerged many firms which came to possess huge amount of money (the phrase, “Toyota Bank” was an emblem), and felt less necessity of depending on the banking institution for procurement of capital.

  On top of that, the stock market came to gain popularity, so there emerged the situation in which firms could easily procure capital through it. The stock price continued to go up, with the Nikkei Average Stock Price from 1,300 yen in 1986 to 38,900 yen in 1989 (see Chart 3). Around that time there emerged a social atmosphere in which more and more housewives became keen in investing their money into equities and other financial assets (the so-called “Zai-Tech Boom”).

(Chart 3)　The Process of the Nikkei Stock Average

   

(source) The Nikkei

                              

 These states of affairs were serious to the banks. So far the Japanese economy continued to attain a high economic rate of growth, and firms were eager to get a vast amount of capital. Under the circumstances in which the stock market was underdeveloped², firms had no means of procuring capital other than borrowing it from banks. The people deposited a large proportion of their increased incomes at banks (or the post-offices), and yet this was not sufficient to meet the demand by firms. As the loan rate, moreover, was fixed above the deposit rate, banks were able to finance capital safely by means of rationing.

Then, due to a large shift to the direct finance and self-finance this traditional method came to be out of order. In addition to this, due to the huge surplus in the balance of trade the foreign exchange reserves rose abruptly (Table 1), which made money supply rapidly flowing into the banks. Thus the banks, different from hitherto, were forced to develop new customers.

(Table 1)　Japan’s Foreign Exchange Reserves (in one million dollars)

1985　　26,510　　

1986　　42,239　　

1987　　81,479　　

1988　　97,662　　

1989　　84,895　　

1990　　77,053　　

                         　　1991    68,980  

1992　　68,685

1993　　95,589

1994　 122,845

1995　 182,820

1996　 217,867

                          (source)  BOJ Data

Thus the banks came to expand their business, including mortgage loans, stock loans, and free loans (usable for any purpose). Individuals and firms, who were able to get loans, purchased immobile properties, stocks and other financial assets.

According as the property price and the stock price start to go up rapidly, more and more people were eager to get loans, believing that the prices will instantaneously rise. When the prices actually go up within a short period, the demand for loans will further increase, which, in turn, cause the property price and the stock price to rise further. 

Gradually the persons who make transaction for the sake of pure speculation, dreaming of get-rich-quick, come to occupy a large weight in the markets. In consequence, the land value within the Yamanote Line became reportedly equal to the land value of the entire America. The objects of the speculatively borrowed money were not confined to properties and stocks, but went to membership cards of golf, great pictures, and even foreign fancy cars. And the prices of these items, in fact, continued to go up rapidly.

These speculative activities seriously affected the manufacturing industry. There emerged many manufacturing firms which came to be devoted to speculation to such a degree that they almost forgot their primary business. There were firms which even prided larger profit in the “Zai-Tech” than that in the primary business.

  The speculative activities extended beyond the domestic to the world market. Speculative investment in properties, stocks, and other financial assets, pictures³ increased at an accelerated pace. The purchase of the Rockefeller Center by the Mitsubishi Jisho Company in 1989 was an emblematic dealing.

2.2.2. The Burst (February 1991- March 1993)

According as the price of immobile property went up, the unlawful activity in connection with it (that is, “Jiage”) became a big social problem. On the top of it,  the unlawful loan by financial institutions (e.g., the counterfeiting of the deposit account by bankers) came to the surface. Then there arose harsh criticism by the mass media and the public of property speculation and the loan stance of the banks.

In response to it, the Treasury embarked on “the Regulation of the Total Sum concerning the Property Loan” (March 1990). It was an administrative directive aiming at restraining the rate of growth of the property loan below that of the total loan. This became a direct trigger for the burst of the bubble.

  It was rather the stock market which was initially affected. The Nikkei Average Stock Price, which was record-high at 38,000 yen in December 1989, plunged into 15,000 yen in 1992. Then the price of property, which saw only decrease in the rate of increase even in 1991, sharply dropped. Many firms and individuals, who developed speculative activities, were suddenly refused to get loans by banks. They were forced to rush to sell their properties and equities, which caused further decline in the price of the stock and the properties. The burst of the bubble was there.   

This, in turn, worsened the balance sheets of the banks and security companies which made a loan to these firms and individuals. It turned out to be difficult to retrieve loaned money, for more and more firms and individuals were pushed into default, and the value of the collateral possessed by the financial institutions plunged. In a word, the loaned money turned into the bad debts.

The banks, which initially held an optimistic view that the property value as well as the stock price will soon rise, tried to prevent the bad assets from coming to the surface. Under the system of acquisition cost basis accounting, they were able to do so unless the bad assets are disposed of. However, this behavior was soon to be denounced by the mass media as the so-called “bad asset concealment”.   

3. Recovery, Stagnation, and Recovery        

When the bubble economy turned into the depression, what kind of economic measures would the government implement? The phrase, “the Lost Decade” is quite often used as featuring the Japanese economy in this period. However, it is not true to say that all were doomed to failure from the start, for there was a period in which policy effect was evidently recognizable. It is premature to call it, in a lump, “the Lost Decade”. Let us see the period in order.  

3.1. Economic Stimulus Measures and Economic Recovery (1993- 1996)

While the property value and the stock price were abruptly deteriorating, the government implemented the following economic stimulus measures which had fiscal policy for increasing effective demand as top priority.

 (1) “The Overall Economic Measures” (August 1992. 10.7 trillion yen) by the Miyazawa Cabinet (November 1991 – August 1993).

(2) “On the Promotion of the Overall Economic Measures” (April 1993. 13.2 trillion yen) by the Miyazawa Cabinet.

(3) “Emergent Economic Measures” (September 1993. 6 trillion yen) by the Hosokawa Cabinet (August 1993 – April 1994).

(4) “The Overall Economic Measures” (February 1994. 15.25 trillion yen) by the Hosokawa Cabinet.

(5) “Economic Measures” (September 1995. 14.22 trillion yen) by the Murayama Cabinet (June 1994 – August 1995) together with a lowering of the official discount rate to 0.5 %.

Thanks to these measures, personal consumption and capital investment increased. The Japanese economy was able to accomplish an economic rate of growth at 3.1 % in 1995 (as compared with the last year), and 4.7% in 1996, and fear over the bad debt decreased. The effect of fiscal policy was recognizable around this period.

3.2. Fiscal Structural Reform and the Financial Crisis (1996-1998)

Seeing the economically favorable situation, the Hashimoto Cabinet (January 1996 - July 1998) set its primary policy objective on the fiscal structural reform. The cabinet raised the consumption tax by 2%, the abolition of special tax break (2 trillion yen), an increase in the burden on the public through medical system reform (2 trillion yen), expecting to increase the tax revenue by the total sum of 9 trillion yen.

  Contrary to the expectation, however, the economy which showed an upward trend, was to plunge again due to this policy. In 1997 the stock price sharply dropped and the bad debt problem came to the surface. At the G10 summit in July 1998, moreover, it was decided to require an international bank to maintain 8 % plus as the capital-to-asset ratio (the BIS regulation). The banks concerned widely carried out credit crunch and credit withdrawal.

Thus the Japanese economy again deteriorated, and, additionally, took on a  financial crisis (the following bankruptcies occurred in succession: the Hokkaido Takushoku Bank and the Yamaichi Security Company [November 1997]; the Long-Term Credit Bank of Japan [October 1998]; the Nippon Credit Bank [December 1998]⁴. The asset prices rapidly went down, and the number of bankrupt firms and individuals rapidly increased, which, in turn, worsened the balance sheet of the financial institutions⁵. The value of the bad debts possessed by the banks, which was worth 40 trillion yen in August 1995, jumped to 79 trillion yen in December 1997.

The Hashimoto Cabinet, which faced a serious depression, suspended the fiscal structural reform and implemented the “Overall Economic Measures” (16.7 trillion yen) in April 1998. However, the effect was not favorable. This should not be attributable to the fiscal policy, but rather to the fiscal structural reform, which is, in nature, a deflation policy. The rate of economic growth in 1997 was 0.2 %, and -0.6 % in 1998.

The megabanks, which suffered from a continuous decline in the asset prices, finally asked the government for public funding. In consequence, the following bailout was carried out: (i) (February 1998) 18 trillion yen for the 21 large banks including the Long-Term Credit Bank of Japan and the Nippon Credit Bank; (ii) (March 1999) 7.5 trillion yen for the 15 large banks⁶. The mass media and the public opinion denounced it as a continuation of the so-called “Convoy System”.

Through the 90s, after all, 18.6 trillion yen for the bankrupt financial institutions, 9.6 trillion yen for buying up the assets from the financial institutions, 12.3 trillion yen for capital infusion into the almost bankrupt financial institutions were spent⁷.

The Line of Financial Liberalization - The collapse of the financial system in the latter half of the 90s gave the government a big inducement to leave the traditional “Convoy System”⁸, and to promote the financial liberalization (the “Japan-Version of the Big Bang”. This was carried out mainly by the Hashimoto Cabinet.

The plan was composed of two pillars. One pillar was the liberalization of securities, finance, and insurance.

  In November 1996 the Hashimoto Cabinet put forward an idea for the financial system reform, advocating “the three principles” (Freedom, Fairness and Globalization). The idea was realized as the “Financial System Reform Act” (June 1998), which advocated: (i) deregulation of brokerage commissions; (ii) promotion of new entry into the banking sector, the security sector, and the insurance sector; (iii) shakedown of the investment trust; (iv) complete lifting of the ban of the OTC derivatives; (iv) abolition of the obligation of concentrating  the exchange business; (v) enhancement of disclosure; (vi) upgrading of the rule of transaction.

  This movement was closely tied to the financial liberalization carried out in the US, where the Glass-Steagall Act (1933) was mutilated and eventually taken over by the Gramm-Leach-Briley Act (1999). The US strongly urged Japan to adopt the same approach.

  Another pillar was the reorganization of the bureaucratic machine. In June 1998 the Hashimoto Cabinet separated the Bureau of Check and Oversight from  the Treasury according to the“policy of separating fiscal matter from monetary matter”, and set up the “Financial Supervisory Agency”. In July 2000, moreover, the Mori Cabinet founded the“Financial Services Agency”, integrating the Financial Supervisory Agency with the Financial Planning Bureau of the Treasury. It is important to know that this reorganization brought about the weakening of the Treasury which had so far flaunted absolute powers.

3.3. Economic Measures and the Economic Recovery (1998 –2000)　

The Obuchi Cabinet (1998–2000) which was established in July 1998 when the Japanese economy spiraled downward and the financial system was in crisis, advocated the recovery of the economy as the top priority: (i) for fiscal policy, the “Emergent Economic Measures” (November 1998. 23.9 trillion yen) and the “Economic Renovation Measures” (November 1999); (ii) for monetary policy, the zero interest rate policy (February 1999). Thanks to these policies the Japanese economy clearly showed some recovery (November 2000).

  Then the Bank of Japan lifted the zero interest rate policy (August 2000) although the Obuchi Cabinet opposed it. At that point the so-called “Dot Com Bubble” busted in the US, and the Japanese economy again showed a decline due to the decline in exports. The Bank of Japan again implemented the zero interest  rate policy (together with the Quantitative Easing policy. March 2001. This was maintained up until July 2006).

As compared with fiscal policy, however, to what degree monetary policy worked for alleviating the economy is doubtful (see Table 3).

 

　　　（Table 3）Monetary Base and Money Supply（%. Compared with the Average Balance of the Previous Year）

	Monetary Base	Money Supply
97	8.2	3.5
98	7.4	3.7
99	9.8	3.2
00	3.8	2.2
01	14.7	3.1
02	21.8	3.2

                        (source) BOJ Data                 

According to this table, monetary base (the account current balance of the banks on the BOJ) showed a big increase in 2001 and 2002, while the rate of increase in money supply (the deposit balance of individuals and firms on the banks) was incredibly low. At that time the credit crunch was in vogue and the financial institutions were not willing to make a loan to the real economy. Rather they usually purchased the national debt with money obtainable.

　　

3.4．The Structural Reform and the “Izanami” Boom

It is the Structural Reform and the “Izanami Boom” (February 2002–October 2007) which featured the Koizumi Cabinet era.

  The Structural Reform was a succession of the Hashimoto Cabinet as well as an explicit approval of the “Market Fundamentalism” (or the Washington Consensus). The Koizumu Cabinet, which advocated small government and the balanced budget, persistently adopted a deflationary policy.

The zero interest rate policy by the BOJ attracted the US investors who borrowed yen and exchanged it into dollar, which was carried over to the US and used for consumption and investment (the “Yen Carry Trade”), which further boosted the US economy which had shown an upward trend. The Yen Carry Trade brought about an depreciation in Yen, which induced a rapid increase in exports, due to which the Japanese economy was able to get on a modestly upward curve.

This situation continued from February 2002 to October 2007. Due to the long boom it was dubbed the “Izanami Boom”, contrasting it with the “Izanagi Boom” (November 1965 – July 1970). However, this boom’s beneficiaries were confined to the exporting firms and the financial institutions. At the same time restructuring   proceeded in the whole industry; the employment of labor was greatly shifted to temporary employment; the level of income remained stagnant; and the income disparity has been widened. Thus the general public did not know as much about  the actuality and the benefit of the boom. And the economic growth in this period was, in fact, very modest. No wonder it is also dubbed “Kagerou (or Air Turbulence) Boom”.

3.4.1. The Structural Reform

The Koizumi Cabinet took a critical stance of the counter-cyclical measures and put its main concern on the structural reform, for which the Cabinet put forward the following: (i) the privatization of the Postal Services, which was the only and main point of dispute in the general election in September 2005; (ii) the privatization of the Highway Public Corporation; (iii) the Structural Special Zone; (iii) the Divine Trinity Reform; (iv) the reorganization of the bureaucratic machine.

  It is doubtful, however, to what degree these reforms (some of which were not carried out) effectively contributed to revitalizing the Japanese economy. Many reforms were watered down and privatization was no more than nominal change. Albeit the bureaucratic machine was vertiginously changed, the restructuring of public officials was not touched at all. Although the Koizumi Cabinet emphasized   the private economy (the market economy) and the reduction of the activities by the state, the administrative reform reduced to be all bark and no bite.

  The structural reform by Mr. Koizumi was carried out with the support of the general public. Although he was a maverick, he had an ability to resort to populism, which was very unique in the Japanese political scene. When the mass media did not show interest to a reform, it came to an end without any substantial change as a result of power struggles behind the scene. Then another plan for structural reform was put forward to attract the general public.

3.4.2. The “Izanami Boom” (February 2002 – October 2007)　

Cavalcade of Deflatinary Policy － To repeat, the Koizumi Cabinet took a critical stance of the counter-cyclical measures. It implemented, in fact, a series of deflationary policy as follows: (i) a rise in the consumption tax rate; (ii) the abolition of income tax credit; (iii) an increase in health insurance premium; (iv) a hike of the age at which pension is eligible.

 The grounds for them are based on a microscopic idea of normalization (or equilibrium) of each account: (i) In order to solve a budget deficit, a rise in the consumption tax rate, and the abolition of income tax credit was advocated; (ii) In order to deal with the medical insurance fund deficit, an increase in health insurance premium was advocated; (iii) In order to work out the national pension fund deficit, a hike of the age at which pension is eligible was advocated.

Among them the medical insurance and the national pension problems are closely related to the aging problem with which Japan is faced, so this is a serious problem to deal with by all means. But they were implemented at bad timing. In the situation in which the economic conditions were not improved to the general public, these measures, in fact, made them feel uneasy toward the future, which led to fall in consumption (rise in the propensity to save).

 What was really problematic was the stance of the budget deficit which the Koizumi Cabinet took. A rise in the consumption tax rate, the abolition of income  tax credit and a reduction of budget expenditure put heavy deflationary pressure on the Japanese economy⁹.

　

The Izanami Boom － What has been said above, however, does not describe

the Japanese economy sufficiently in the Koizumi Cabinet period, for the boom

dubbed the Izanami continued.

The Izanami Boom was brought about mainly as a side effect of the zero interest rate policy implemented in March 2001 (which was maintained until July 2006), for it induced the Yen Carry Trade on a huge scale. The US economy was   beginning to recover itself, mainly, in the housing market, from the 9.11 shock. It was American investors who paid attention to yen with zero interest rate. Borrowing yen and exchanging it into dollar in Japan, they used them for buying  properties and financial assets.

The Yen Carry Trade induced a depreciation in yen, so the Japanese exporting firms were able to make huge profits. The contribution ratio of the exports to the economic growth in this period, in fact, reached almost 60 %. Due to increased exports, capital investment rapidly increased as well.

And yet, the annual rate of economic growth in terms of GDP was relatively low (2%). This was greatly affected by stagnation in consumption which was due to a deterioration of the labor conditions (among them, a large shift from normal employment to temporary employment and little or no increase in wages) and the widening of income disparity. The general public chose a life style to save (not to consume). The sales of the retail trade including the department houses, and the supermarkets, continued to decline over a long period.

The Izanami Boom was largely dependent on the exports, and lacked in domestic effective demand. Although the exporting firms and the financial institutions made huge profits, there spread a sort of social uneasiness, again, due to the restructuring, the predominance of temporary employment¹⁰, little or no rise in wages. To the eyes of the general public who could not get beneficence the Izanami Boom was Kagerou (Air Turbulence) Boom.

3.5. After the Lehman Shock

The Lehman Shock, which took place in September 2008, caused the collapse of not only the US economy but also the rest of the world economy. Far from Japan being an exception, it got a serious damage.

  Japan, as already noted, experienced the financial system crisis in the latter half of the 90s. During the Izanami Boom, however, the bad debt problem was finally able to be worked out, and the financial institutions made unprecedented huge profits. Different from the US and European financial institutions, the Japanese financial institutes was not involved with the financial bubble in connection with the securitized papers, for they were preoccupied with the bad debt problem.

The root cause of the deterioration of the Japanese economy was due to a sharp drop in exports which was caused by the crisis of the US real economy. Almost all the exporting firms (including the car industry and the electronic industry) racked up huge loss, followed by massive restructuring and stoppage of investment. Consumption, which had remained stagnant over a long period, showed further decline. Thus the Japanese economy was abruptly spiraled downward. The stock price sharply dropped as well. Then there occurred a speculative buying of yen. As the Japanese government did not intervene in the foreign exchange market, yen reached the highest level (76 yen) in March 2011.

Facing these critical conditions, however, the Japanese government is too much worried about the huge budget deficit to implement counter-cyclical economic measures. Far from it, bashing of“public investment”is in an abnormal situation. The featured policy of the Democratic Party was composed of Child Benefit, Agricultural Individual Income Compensation, and Free Tuition for Senior High School, all of which have nothing to do with counter-cyclical measures. The government did not intervene in the foreign exchange market, fearing international reaction. The only measure which was implemented as counter-cyclical measures was the zero interest rate policy by the BOJ (October 2010. This was the third time) and the Quantity Easing policy. Even if money flows, however, to the financial institutions through the QE (by buying the national debt), the purpose cannot work well, because of the credit crunch and the credit withdrawal by the financial institutions on the one hand, and the feeble credit demand by the firms on the other.

During this period consumption has remained stagnant. Due to a rapid increase in unemployment the general public is uneasy about living and try to restrain   consumption and save money, so there occurs the saving paradox. In the case of firms, they are endeavoring to move their factories abroad because of the yen appreciation, so there is occurring de-industrialization. Thus investment remains low as well. Taking the stagnation in exports into account, all in all, the aggregate effective demand is very low. The Japanese economy, in which the deflationary situation persisted, encountered March 11, 2011, finding no definitive solution for tackling the depression.

4．      Looking Back the Two Decades

4.1. Japan on the International Scene

Throughout the 80s the US economy suffered from serious stagflation. It was Japan and the West Germany that economically led the world, and Japan incessantly had trade conflicts with the US. Albeit militarily and politically weak, Japan was outstanding in creating the highest quality manufactured goods through the endeavor of the firms (such as the QC activities, and innovative technology). Economically speaking, Japan was top-drawer without doubt.

  With abundant money supply at its zenith, however, the Japanese economy ran in the bubble, and there occurred a high rise in the property price, the sock price and other asset price. And because of the failure in tackling the bubble, the Japan economy was to experience the Lost Decade. Then, helped by the Yen Carry Trade, it was able to maintain the “Izanami (or Kagerou) Boom”. Being afflicted by the Lehman Shock, however, it again plunged into the bottomless depression. Now harsh instability are imposed both on the firms which had high reputation for the “Japanese-style Management”, and on the laborers and salaried men who were regarded as the “corporate warriors” with awe.

   The US in the 80s saw liberalization (above all, financial liberalization) proceed on a large scale. In this process the Shadow Banking System (SBS) was enlarged, and the US came to financially lead the world. This, together with the innovative IT industry, made the US economy go up in the 90s. The people enjoyed consumption while the firms regained self-confidence.

  An excessive financial liberalization, however, was to force the US economy, which laughed at Japan’s Lost Decade, walk on, ironically, the same but the more serious path, influencing the world economy.

  In 1991 the Soviet Union collapsed, and there emerged a political situation in which the US showed, in military terms as well, an overwhelming presence in the world. This, however, did not last long. The US was to be deeply involved in  endless wars under the name of Terrorism.

  In the same period, there developed the phenomenon which was to transform  the economy and politics of the world. China, Brazil and India, which had been in the state of underdevelopment over a long period, continued to attain surprisingly   high economic growth. China, among others, continued to grow at, on average,       8 % plus over the three decades, as a result of which it became No.2 in terms of GDP, and No.1 in terms of the foreign currency reserves (2 trillion dollars).

 Thus the economic and political structure of the world dramatically changed to such a degree nobody was not able to foresee twenty years ago. As compared with the two decades ago, the presence of the Japanese economy in the world economy is manifestly in decline. While the Japanese economy was continuously stagnant, the US and the UK led the world in the financial area, and the BRICS and the Southeastern Asian countries heightened their position in the area of the real economy.

 Twenty years ago it was said that Tokyo was soon to become the world financial center together with New York and London. Now there remains no shadow to show it. The Japanese manufacturing industry, which was proud of its overwhelming productive efficiency through introduction of robots twenty years ago, lags behind the US industry in the IT area. It is, moreover, followed up by Korean and Chinese firms, and is put in a harsh condition. On top of it, while Korea and China built up the strong backup system by government, the Japanese firms evidently lack in it.

The deterioration of the Japanese political system in recent years, and the weak position in the world politics are outstanding. We can say, ironically enough, that there is no country such as Japan which observe the Principle of Laissez-Faire. While the US, the UK, China and Russia move based on its “national interest”, only Japan seems to leave everything to the market fundamentalism. The restructuring of the Japanese political system is indispensable to the resurgence of the position of Japan in the world economy.

4.2. The Main Cause of the Lost Decade

There is an argument that the root cause for the Lost Decade should be ascribed to the line of cooperation with the US, starting with the Plaza Accord. The real responsibility, however, should be sought in the failure of the government of adjusting policies to the changed conditions.

  The appreciation of yen rapidly ran its course according to the Plaza Accord. Soon there spread worries over the coming of depression. Then the government implemented easy money policy (the low interest rate policy) and fiscal policy which includes public investment. Thanks to these measures, the Japanese economy, far from falling into depression, was able to maintain an upward trend.  So far, so good.

 During the same period there proceeded a great shift from indirect to direct finance (and self-finance) in the financial structure. Due to maladjustment to this change, the Japanese economy gradually dashed to the bubble phase. Above all, without implementing tight monetary policy the government allowed the bubble to run its course.

  Then, a series of drastic tight money policy such as “the Regulation of the Total Sum concerning the Property Loan” was implemented in order to prevent this process. But because the government allowed the deflationary process to proceed so long that the economy plunged into depression beyond the halt of the bubble. The government should have lifted this tight money policy earlier. Thus a series of asset deflation, starting with a sharp decline in the price of property and the price of stock, followed suit. Then the Japanese economy saw the collapse of the financial system. It seems to have been, as it were, self-trapped by the inappropriate timing of economic policy.

  These policy failures have been further worsened bye the Structural Reformers’ inconsistent policy. They stand on, in nature, the basic idea that the economy should be left to the workings of the market as much as possible, and should be made efficient through de-regulation. So far, so good. However, because they lost sight of macroeconomic policy, rational economic policy was nowhere¹¹. The refusal of fiscal policy (abnormal reaction to public investment), and the implementation of the de facto deflationary policy in the deflationary phase are emblematic examples.

4.3. Chaos and Lost Confidence

Turning our eyes to the domestic side, the Japanese as a whole seem to fall into lost confidence from the state of impatience.

In the 90s Japan saw political whirlwind. In addition to that, in recent years government changed like an eye of a cat. The Democratic Party, which organized the cabinet in October 2009, did not implement any policy measures to tackle the economic crisis which attacked Japan immediately after the Lehman Shock. The featured measures advocated by the Party are Child Benefit, Agricultural Individual Income Compensation, and Free Tuition for Senior High School, all of which are not aimed at tackling the economic crisis. The government has no definite policy vision of how to manage the economy, consequently leaving to the working of the market economy. Fiscal policy is regarded as a sort of taboo, while monetary policy (zero rate of interest) has no effect on the recovery of the stagnant economy. The government seldom intervenes in the foreign exchange market, allowing yen (to dollar) to appreciate abruptly. In these respects the Japanese government is in sharp contrast with foreign governments (such as China, the US, Russia, and the EU) which deliberately defended their national interests.

Consequently, even in the theater of international economy the presence of Japan dwindled. The State of the Union Address by President Obama this February was an emblematic event, in which he very often referred to Korea and China without mentioning Japan. In the sphere of foreign policy, the presence of Japan was meaningless. In the redeployment problem of the US military base in Okinawa, and the conflict of the Senkaku Islands, the government voluntarily abandoned responsibility, almost losing the raison d’etre.

The firms – the driving forces of the Japanese economy - need to survive on their own in the world market, given the incompetence of the government.  Japanese firms continue to be exposed to severe competition from Korean and Chinese firms. Given the persistent shrinkage of the domestic market, they are forced to operate global strategy desperately. What is worrisome is, as a consequence of many firms in the industries shifting their factories overseas, an  acceleration of the de-industrialization.

The Japanese people seem to lose self-confidence. As they suffered from restructuring and a rapid increase of temporary employment during the long depression, their mind is, psychologically and economically, set in unstable   conditions. Thus even if the income of interest from savings is almost nil, they get   accustomed to abstain from consumption for the future.

Mirroring this social atmosphere, the young tend to be introversive. They like to make vigorless way of life, avoiding competition and not showing interest abroad. And yet the world as of today is not in such a situation as this introversive attitude is allowed for. Even the Japanese firms which are trying to make a survival through the global operations will not able to trust the future to them.

Thus the Japanese economy is in the state of self-trap, finding no exit.

                   

5. Conclusion – New Social Philosophy Required

  The Japanese economy is a market economy, and yet the private economy (the market economy) at present lacks in the ability of recovering itself on its own. Even if there are innovative entrepreneurs, the present financial institutions lack in the ability and the will of providing them with required capital. In Japan, different from the US, venture capital market is not successfully created.

Direct finance is, moreover, completely cut off because of the stagnant stock market. The key to boost the market economy should be put on the government which could implement clever and bold policy. After the private economy was allowed to bubble, we saw it remain stagnant. Then the government fell into the negligence of macroeconomic measures¹¹. This should not be repeated.

“The power of the private sector, the self-adjusting mechanism of the market, the economic behavior based on self-responsibility” etc. --- These mottos seem to lose color in the present Japanese economy. Entrepreneurs are not necessarily beings to which we can completely trust the future of the Japanese economy. What they are doing at present is the behavior of reducing cost through the restructuring. Although firms might, by means of this, improve the financial conditions to some degree, mass unemployment is emerging in return. It has become the common practice that firms would reduce bonus, and lower wages, which would further put the deflationary pressure on the economy.

  We should suggest that both the efficiency by means of the market and the safety by the government should be required for the smooth working of the market economy. It is important for the economic agents to feel some degree of stability. It is an obligation of the government to work out the institutional framework, for only within the stable framework can the people make competition with self-confidence. Contrastingly the society, in which the people entertain some degree of uneasiness, seeing no future prospect, and drop out as a result of competition, is not a good society. “Self-Responsibility” has no meaning unless some degree of stability and safety should be guaranteed. Jungle of business competition in the sense of Hobbes should be avoided.

1) This was a key factor for the Southeastern Asia’s dramatic economic development thereafter.

　2) It should be noted that this was not the case in the prewar period.

  3) A successful bidding by a Japanese in auctions such as Sotheby’s became the notable quote.

   4) Ironically, it was in November when the “Fiscal Structural Reform Act” was enacted.

5) The Housing Loan Companies (“Jusen”) Problem became a hot issue in relation to the property. They were subsidiaries for making loans to the property set up by the financial institutions. Even when “the Regulation of the Total Sum concerning the Property Loan” was implemented, money flew, through a loophole, into the Jusen from the financial institutions managed by the Agricultural Cooperation. The Jusen continued to make a loan for the property. However, this came to further worsen the balance sheets of these financial institutions under the overall asset deflation.

6) The road to the public funding for banks was paved by the “Early Promotion of the Financial Function Act” (October 1998).

  7) It is a historical irony that a similar thing were to be carried out on a larger scale throughout the world after the Lehman Shock.

8) Another factor is a pressure from the US.

9) The Structural Reformers has an allergic antagonism of fiscal policy, so  they are unaware of such perception (the knowledge that it might put deflationary pressure on the economy.

10) The phrase, “Working Poor”, was coined.

11) This is a responsibility of macroeconomics as well.

　

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