Japan’s financial system was the strongest and largest globally during the beginning of the twenty-one century. The Japanese nation at the time had numerous banks spread throughout the country. Moreover, the nation had nine of the largest banks globally due to their large asset size. The asset sizes of the banks were not comparable to any other banks in the world. Japan also had the biggest securities organizations. It had the four largest security entities globally. The country had some of the greatest casualty and life indemnity organizations.
The financial institutions of the country were profitable, plenty, and had the best credit ratings when compared to other nations of the world. The financial institutions in the country established and vigorously expanded their worldwide businesses. They also had thirty-four percent of the universal credit facilities. No country was close to attaining such figures. However, current Japan portrays an entirely different scenario and picture. The present monetary system of Japan is in total disorder and is very fragile. The system has even gone to an extent of displacement from the top ten best banks throughout the world. The credit ratings in the country have also undergone a decline.
The Japanese nation’s financial system is in a mess and is considered weak. The lending rating continues to decrease resulting in the displacement of the country outside the best financial systems globally. Most of the banks in the country continue to wither as well as some of the four significant securities entities. The existing history of Japan is not only unusual in the era after world wars, but it was unbelievable in the period of the 1990s (Grimes, 2001). It is at that point that it is important to scrutinize the political, social, and economic factors that led to the formation and collapse of the Japanese economic bubble
Impact of Globalization on Japan’s Financial System
The impacts of globalization had a significant effect on the banking mess of Japan. It concerned the fiscal and global transformations concerning the financial position of the nation on a global scale (Sato, 1999). Considering the financial structure of Japan, there were other pertinent factors. Since Japan is an economic powerhouse, its monetary and budgetary policies are prone to external forces especially from the United States of America. It is also prone to forces from the G-7 and the European Union. The country was a leading creditor and its accounts made vast overseas investments. The nation’s financial entities, indemnity firms, and financial systems engaged themselves in portfolio investment as well as foreign lending. The institutions, therefore, were subject to capital market threats.
There were vast amounts of colossal losses as a result of yen appreciation. The existence of a free market economy throughout the world, for example, the Euro gave the yen currency vast creditworthy enterprises. The enterprises had equity options to access loans from banks in Japan as well as inexpensive bonds. The Japanese Ministry of finance did little to halt the offshore fiscal processes. Furthermore, the deregulation process, for example, Big Bang, attracted external investment banks and monetary systems. It also invited foreign indemnity organizations, mutual funds, and property management enterprises.
Japan Macroeconomic Issues
Massive increase of stock market, real estate sector, and the mess of financial institutions in the 1980s were the causes of the economic bubbles in Japan (Noguchi, 1994). All the above factors were due to poor macroeconomic policies. It was a belief based on the after-war experiences and that there would be no reduction of the increasing land prices. The real estate sector was, therefore, seen as perfect security. Financial institutions with sufficient funds ventured into urban land funding as well as investments in the real estate industry. The net result was a high surplus of stocks in the housing sector. The poor and inefficient management of macroeconomic policies led to the economy of Japan performing poorly. The poor economic performance in the 1990s made it difficult to address the concerns of the financial bubble that was ongoing at the time.
The Japanese government committed some errors in policy. The Bank of Japan was compliant with being independent of the finance ministry. It was even after the integration of financial systems. The errors were increasing the gap between the application of fiscal and monetary policies. The level of dedication and timing when the government was working on-demand incentives were also errors. Since the 1980s the Japanese finance ministry was determined to create budget excesses and search for deficit cutback in the budget. Therefore, the duty of compensation macro-policy relied upon the proper utilization of the tools of financial policy.
The great decline in oil prices resulted in the increase of the yen. The economic development, on the other hand, went on an unexpected decline. The supply of money received an increase whereas there was a minimization of interest rates. Despite all that, the finance ministry continued with efforts to minimize budget deficits in the 1970s. The move was, however, fortunate in fastening the rate of economic development. The move was only applied for a short period leading to the financial bubbles of 1990 in the sectors of real estate and stock markets. Finally, the Bank of Japan raised the interest rates in phases, thereby resulting in an economic increase, then decline, and stagnation eventually. It also led to the puncturing of the bubble.
Japan Monetary and Fiscal Policies
Declining to alleviate fiscal and monetary policies in the 1990s was also a factor. The government observed the economic bubble as a cycle related to business. The government also miscalculated the consequences of the decline of assets value and also the impacts of structural and cumulative issues. There was a view that the economic bubble was not permanent hence economic growth plus economic restoration would soon happen at will.
Effortless Monetary Policies
The dependence on effortless monetary policies in the 1990s was also a contributing factor. The huge gap between fiscal and monetary policies raised the interest rates hence fueling demand. The low levels helped financial institutions and borrowers but were unable to delay the resolution of business liquidation and bad loan issues. Moreover, the yen weakened due to the low-interest guidelines. Due to the reasons, savers received dissatisfaction and searched for higher and better returns from assets in foreign countries.
The use of fiscal incentives through a complementary budget in the period of 1990s was responsible for the bubble. Policy incentives are meant to create confidence among clients and businesses. During the period, the tax reduction plan was offered in short-term periods hence creating strange signals. The fiscal incentives reliability was shaken by overstated statements on the exact amount of the incentives. The move is typically fruitless whenever applied. It was until the year 1995 during the supplementary budget that the move of fiscal incentives use was fruitful and efficient. It restored an approximate value of 3.4 percent of the Gross Domestic Product in the following year of 1996.
The Japanese government’s decision to change the policy of maintaining economic recovery to that of managing the reduction of budget deficits was another macroeconomic blander. The concern was a perfect one, but the timing was in no way mature. The policy slip had two issues. It began with the changing of the year 1997 budget to a strict monetary restriction from the relief of the year 1996 budget. The move was achieved by increasing the consumption levy from 3 to 5% hence resulting in the increase in medical fees.
Weak Mechanism to Impose Discipline
The behavior of government, individuals, firms and financial institutions became more aggressive during the period of the economic bubble than during the early days. However, a mechanism to instill discipline in the mentioned people and agents was not working efficiently. The bank system was the one responsible for enforcing discipline among firms. The functioning of the scheme, however, became weak as a result of an increase in funding of the major companies through the capital markets. A system whereby creditors and shareholders are responsible for enforcing discipline could not work appropriately because of issues such as cross-shareholding and lack of proper disclosure (Kunio Okina, 2000).
A new corporate governance system was necessary to financial institutions as a result of the changing environment due to progress in financial deregulation. The government should have created a system for controlling and regulating the risks. The delay by the government to create a supervisory mechanism gave the financial institutions a chance to relax in reviewing their corporate governance. Mechanisms of enforcing discipline on agents and financial institutions are prone to change as the economy undergoes change too. A mechanism that is efficient to a particular period will slowly stop functioning as the financial environment and world change.
Japan’s financial institutions had never experienced bankruptcy since the duration of the wars. The cross-shareholding practice enabled management of firms with an emphasis on long-term stability hence the increasing strength of Japan’s financial institutions and enterprises. Such success resulted in the delaying of the creation of new mechanisms for enforcing discipline.
However, the economy of Japan slowed down instead of improving after 1997. The Gross Domestic Product underwent a 0.7 percent decline leading to a recession. The economy continued to witness errors regarding macroeconomic policies throughout the 1990s period. The finance ministry depended upon overturning the real estate cost reduction. It also put an effort in converting the financial institutions to more active ones to enable the handling of loan issues. The government went on to pursue fiscal deficit minimizing plans that interrupted the restoration of the economy.
The misappropriation of the fiscal performance of Japanese firms was the cause of the current abnormality and struggles of Japanese financial institutions plus markets. The Japanese government realized the essence of complete fiscal reform and started providing necessary public funding in the year 1998. It was at a time when the economic bubble was coming to an end. The Japanese economic bubble is the perfect example of the ever-changing global business environment. A country may be doing well economically, but a slight change in the business climate can change everything. It is, therefore, important to put in place adequate regulatory mechanisms for controlling the financial market to reduce the probabilities of an economic bubble.
Grimes, W. W. (2001). Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000. New York: Cornell University.
Kunio Okina, M. S. (2000). The asset price bubble and monetary policy: Japan's experience in the late 1980s and the lessons. Tokyo: Institute for Monetary and Economic Studies.
Noguchi, Y. (1994). StudiesThe "Bubble" and Economic Policies in the 1980s. Journal of Japanese Studies, 329.
Sato, K. (1999). The Transformation of the Japanese Economy. New York: M. E. Sharpe Inc.
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