The Japanese Economy

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Once a symbol of enormous economic growth, Japan has plunged into a deep recession with the burst of its bubble economy beginning in the early 1990's. This is, without a doubt, the worst economic crisis facing this country since the end of World War II. One wonders if Japan can see its way through the storm and overcome these latest doldrums.

In the 1980's, real estate prices soared to super inflated levels, and investors sank their money into the booming stock market. There seemed to be no end in sight for the land of the rising sun. Everything was rising, and the government, financial institutions, and individuals paid little heed to the warning signs of an imminent crash. Then, the bubble burst, and land and stock prices plunged.

The results of the crash? Many companies have faltered due to poor sales and bad debt, and have closed their doors. The domino effect on many financial institutions is that they must bear an enormous number of unrecoverable loads, which have resulted when companies, depending on profits from land investments to repay loans, have found themselves insolvent. Furthermore, many individual depositors, fearing a collapse of more banks and securities companies, have withdrawn their money in droves.

Attempts by the government to revitalize the sluggish and contracting economy have proven fruitless. Pump-priming measures including tax cuts and public works spending have done little to put the economy on tract again. What's more, the government's decision to increase the consumption tax from 3 to 5 percent in 1997 has had a devastating impact on consumer spending. As for the business sector, companies have tried various measures to streamline management, but other ill effects of such policies, including rising unemployment among older workers, have surfaced and have dealt a huge blow to the recovery process.

Japan's faltering economy has had an impact on other Asian countries, and some fear that the whole region will be drawn into depression. What will stem the tide of further economic collapse? For one, Japan must stabilize its financial system and take immediate and effective measures to deal with nonperforming loans. Revealing the severity of the problem to the public and foreign governments is an essential first step. A more vital solution might be to institute a permanent tax cut to stimulate consumer spending and confidence in the government's handling of the situation. Ultimately, this will encourage domestic demand for goods and services and will be the driving force behind much of the recovery. That's the bottom line. Of course, many more factors including deregulation will play a vital role in expediting economic stabilization and growth.

Whatever the case, action must be carried out swiftly and decisively. A passive and reticent approach to reform and change is what has hampered any improvement so far. Other nations have encouraged Japan to step up the pace of implementing change, but Japan must make the first step . . . or else we might be witnessing the setting of this great rising sun.



Randall Davis. All rights reserved.
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