Blowing that “Bubble” Review of Yoshikawa’s Japan’s Lost Decade Essay Example

Blowing that â€Å"Bubble†: Review of Yoshikawa’s Japan’s Lost Decade Essay With his onerous yet insightful analysis, Tokyo University Economics Professor Hiroshi Yoshikawa comprehensively explains in his book Japan’s Lost Decade (2001) how the worlds second largest economy has stagnated in the 1990s and the difficult choices Japan confronted at this crucial moment of transition. After the collapse of the bubble economy of the late 1980s, the 1990’s ushered in with a bleary phenomenon tagged as the Japan’s â€Å"lost decade†. Since this has been one of the most extraordinary economic phenomena, no other country has moved so quickly from the top to the bottom of the worlds economic growth league. What could be the possible causes of the long stagnation of Japan during the 1990s? Since the bubbles burst, economists have focused on the financial problems. A fall in asset prices allegedly had the negative wealth effect on household consumption. Through deterioration of collateral, it also hurt investment of small firms. And banks suffering from bad loans became reluctant to make new loans (kashi-shiburi), and further depressed investment. Three factors have been pointed out to be the main causes of the â€Å"lost decade†, namely, the structural decline in labor input growth (Yoshikawa described the labor market in the â€Å"ice age†), slowdown of the total factor productivity (TFP) growth and the scarcity of demand. We will write a custom essay sample on Blowing that â€Å"Bubble†: Review of Yoshikawa’s Japan’s Lost Decade specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Blowing that â€Å"Bubble†: Review of Yoshikawa’s Japan’s Lost Decade specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Blowing that â€Å"Bubble†: Review of Yoshikawa’s Japan’s Lost Decade specifically for you FOR ONLY $16.38 $13.9/page Hire Writer In addition, the characteristics of the early stages of Japan’s â€Å"bubble economy† saw the rise in land prices, the rates of increases differed greatly depending upon the land use (commercial, residential or industrial) and the location (major population centers such as Tokyo, or elsewhere). In other words, land prices were driven up because of increasingly brisk investment in land by companies, particularly by medium-sized and small non-manufacturing firms, due to rises in expected rates of returns from land in commercial areas in Tokyo, and partly because of erroneous measures implemented by the government, and were not closely related to interest rates. These companies bought up land using funds borrowed from banks, so after the collapse of the bubble economy, their financial state deteriorated drastically and the loans became bad debts. By providing an overview of the Japanese economy, Yoshikawa elaborated the extremely poor performance of corporate investment is the most important factor to explain the long stagnation of the Japanese economy during the 1990’s. Another question that we could draw out in the book is why investment stagnated during that time. The popular answer is a credit crunch caused by bad loans banks hold. There is a good consensus that the effect of credit crunch is much more serious on investment of small firms than that of large firms because large firms have better access to capital markets. On the other hand, much controversy is bared as two groups have differing views on the real causes of the â€Å"lost decade.† A group of scholars attributes the disappointing performance to a lack of effective demand and a liquidity trap caused by deflation, while another group points out that there are several important supply-side factors, which reduced Japan’s economic growth. For example, Japan’s aging population and a gradual reduction in the statutory work-week have contributed to a slowdown in the growth of labor input. Japan also experienced a decline in total factor productivity (TFP), which has important effects on economic growth not only because it reduces output growth by itself but also because it diminishes the rate of return to capital and discourages private investment (Motonishi and Yoshikawa, 1991). Although there are as many different estimates for Japan’s recent TFP growth as there are studies on this issue, most economists seem to agree that Japan’s TFP growth substantially declined in the 1990s. Probably the most popular explanation of Japan’s TFP growth slowdown is the â€Å"zombie† hypothesis. This states that in order to conceal their bad loans, Japanese banks have been keeping alive money-losing large borrowers by â€Å"evergreening† loans and discounting lending rates, although the chance that these borrowers will recover is slim (Caballero, Hoshi and Kashyap 2004). Because of the existence of zombie firms, the entry and growth of more productive firms are impeded and TFP growth slows down in industries infested by zombies (Ahearne and Shinada 2004). Japanese banks’ bad loans are concentrated in non-manufacturing sectors, such as real estate, construction, commerce, and services, since a major cause of the bad loans is the burst of the land price bubble in the early 1990s. The effects of the real factor on investment are much more significant than those of the financial factor. In particular, a fall of investment during 1992 to 1994 was basically caused by worsening real profitability; during the same period, financial factor was supportive. However, beginning 1997 amid recession, the credit crunch finally occurred. Based on Yoshikawa’s investment equations, the estimates of the effects of the credit crunch on investment as a whole. If the circumstances in Japan’s â€Å"lost decade† are viewed from the aspect of the macroeconomics, the parties selling land to companies at inflated prices during the bubble economy were households. Therefore, households realized huge capital gains by selling land to companies at high prices. A more detailed investigation into the capital gains made by households revealed that during the bubble economy a very limited number of households with high income realized huge capital gains, while most households saw little rise in their assets. The enormous gains realized by very few households were deposited and did not lead to effective demand. Overall, Yoshikawa showed in his book on how Japans financial bureaucrats blindly ignored the obvious collapse of the bubble for well over a year, simply because they had already decided to pursue fiscal austerity. Yoshikawa used a strict facts-based approach to convincingly demonstrate that the stagnation of the Japanese economy is due to an exceptionally long-term shortage of aggregate demand. This makes his book an indicator of the lessons learned during the time of Japan’s lost decade as their mistakes should be taken into perspective. As Japanese firms strive to sustain their competitive advantage in their superior ability, the lost decade must just be a thing of the past.