East Asian Financial Crisis

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Throughout 1970s and 1980s, Japan was considered to be a good example of the most vibrant and emerging economy in the world. In fact, the rate at which the economy of Japan was growing was quite alarming. Analysts argued that the nation was headed towards being the world’s largest economy.

Many scholars used Japanese economic growth as a case study to determine how emergent economies were headed towards replacing the western nations to global capitalisms (Metzler 657). However, within years, the situation in Japan took a completely new direction. Towards the end of 1980s, the Japanese economy experienced its first crisis.

The economic development in Japan, which was looked at as a good example of effective approach to economic and social development in 1970s and 1980s, abruptly started to face problems that affected the country for more than 20 years. First, the real estate bubble declined, followed by the banking sector.

Throughout 1990s, the country faced a prolonged economic recession triggered by a bubble burst in real estate and equity markets as well as an ensuring crisis in the banking system. To make matters worse, the East Asian economic crisis of 1997-2000 deepened the economy of a number of countries in the region, further affecting the situation in Japan.

It has been argued that if one needs to understand the inherent flaws and problems affecting the approach to economic and social development taken by nations in the East Asian region, it is important to consider the example of Japan and its long-standing economic crisis and the East Asian financial recession.

Analysts have argued that the inherent problem with the approach in the region, especially in Japan, was primarily due to much involvement of the government in guiding the free economy.

The long-term result of this, witnessed in Japan, is a saturation of the regional and global export market, distortion of market forces, excessive investment, excessive debt taking by companies and saturation of the regional and global export markets. In addition, policization and crony capitalism affect the decision making process.

In addition, it has been argued that the situation in Japan was made worse by the approach taken by East Asian nations, including authoritarianism and environmental degradation. In fact, Japan is yet to recover from the crisis- 20 years since it experienced the first effect of a bursting bubble.

Arguably, the economic crisis in Japan and the East Asian region should provide enough proof that newly developing nations should be warned away from taking the same approach, lest they face the same problems faced by Japan and other nations in the region.

First, emerging and newly developing economics should take note of the situation in Japan prior to and during the economic crisis. In fiscal policy, the Japanese example shows a failed stimulus package initiative in addition to the less effective as a rationale for marking these packages.

It is worth noting that the fiscal stimulus, taken as an approach to economic development in Japan, had the desired economic effect in a country where the industrial development was the main force behind economic growth. However, this approach only worked as a substitute to the lending by banks and consumer spending, both of which were under depression.

Noteworthy, the Bank of Japan focused on “zero-rating” of interest as a monetary policy to aid development. It was argued that this was an attempt to “push a string” into the nation’s economic and social development. In the initial stages, the approach demonstrated its ability to strengthen the balance sheets of the Japanese banks.

The purpose was to aid the lending to recover as well as to aid the role of the deposit insurance corporation of Japan in helping to get rid of the toxicity of bank assets. Arguably, this approach could be an important initiative by the emerging and newly developing economies in the modern world, especially as they seek to steer economic growth through stimulus programs.

However, this approach made some deadly errors that would affect Japan in the coming decades. For instance, it encouraged the creation of “Zombie corporations”. These corporations were bankrupt, but the government loaning approach and other financial support kept them alive, despite having collapsed financially.

This means that the government had to spend much of its resources in keeping these corporations alive at the expense of taxpayers and other socioeconomic projects. The rationale behind the creation of “Zombie” corporations was to ensure that the problems of nationalization and subsequent privatization of banks were dealt with and the problem of deflation was solved (Metzler 659).

The fact that Japanese government financed its fiscal stimuli through providing new debts is the major problem. This caused the government debt to increase by more than 167% of the GDP (Wade 32).

Clearly, these problems provide an indication that the stimulus program taken by Japan as an approach to stimulate growth is a failure. To the emerging and newly developing economies that seek to sustain economic growth through economic stimulus programs and government financing of corporate, the case of Japan should actually act as a warning (Metzler 657).

In the traditional setting, economic analysts have always perceived the causes of the Great Depression and the East Asian crisis in macroeconomic terms. The focus has especially been on the monetary as well as fiscal policies taken by Japan and other nations prior to, during and after the crisis.

By applying a balance sheet approach to the situation in Japan, the scholars have argued that the same problems that affected America and Europe during the recent depression are relatively applicable in determining the problems the Japanese economy is facing.

Therefore, it has been argued that the fiscal crisis in the Japanese economy generates massive losses in the national wealth. This wealth is specifically in terms of financial assets. According to Wade (4), it has an impact on the corporate and the households in a country because they tend to lay emphasis on efforts aimed at repairing their balance sheets.

On the other hand, households attempt to increase their savings rather than consumption. This is primarily because both firms and households do not seek to add more debt until they balance their debts and liabilities with lower asset levels. According to Wade (42), once the zero interest rate has been reached, it becomes possible to stabilize the balance sheet for corporations and households.

Since balance sheet crisis are long and recoveries eventually follow them after becoming feeble, it is clear that the situation in Japan did not take place because of the economic approach taken by the government. It was a result of a wide range of issues in both households and firms.

This suggests that the argument that newly emerging and developing economies should be wary of taking the same steps undertaken by Japan as well as other nations in the East Asian region holds true. Otherwise, they face the same economic crisis these nations have faced over the last two decades.

On the other hand, this argument could be supported by an analysis of the origin and trend of Japanese economic crisis in the late 1980s. It is worth to mention that the crisis in Japan was first seen in two critical areas, they are the stock market and the real estate sectors. In case of Japan, the authorities erroneously flooded the market through liquidity.

This was actually an attempt to encourage businesses to cope with the rising value of the national currency against the international currencies. This created a number of business opportunities, which in turn encouraged businesses to invest in new capital in an attempt to increase their competitiveness on the international front.

However, it is clear that the authorities did not consider the impact of this approach on the stock market, real estate and foreign investments. In fact, investors failed to consider the risks involved. Owing to their quest to invest in a vibrant economy, investors made a mistake by investing in the Japanese market after failing to predict its future (Wade 27).

I disagree

Despite the existence of evidence showing that that the crunch of the Japanese economy was fuelled by an excessive focus on reducing lending rates, focus on real estate and behavior of rogue banks, this does not mean that focus on reduced rates of lending is the overall cause of the problem. Arguably, developing nations should not consider the situation of Japan as a warning as they attain growth.

First, it is correct to argue that the principal cause of the problems facing the Japanese economy prior to and during the recession may have been the authoritarianism democracy that Japan assumed after the Second World War. Theoretically and practically, authoritarian democracy allows for a centralized concentration of power.

In the case of Japan, devolution of power was generally lacking, while a small group of leaders, especially the parliament and the executive, assumed political and economic powers. With this kind of economic system allowed the government to collaborate with commercial banks that were now running rogue.

For instance, the excessive funding of commercial banks by the government can be attributed to the authoritarian system that gave the government the absolute powers over the control of the national finances. Consequently, there were few institutions to control the government as well as the financial institutions.

The banks’ ability to concentrate on real estate was actually a product of this system, which eventually led to the credit crunch. Japanese banks focused more on lending in real estate, which was arguably insecure way of investing.

The bubble burst, leading to the long period of economic crisis in a country that was first thought to be the next world economic powerhouse. With this argument, it is clear that the problem the Japanese economy is facing was inherent to the economic approach taken by the government.

Secondly, the approach to solving the crisis was actually faulty, especially as far as the initiatives taken by both the government and the international monetary fund are concerned. For example, the Bank of Japan took too long to respond to the situation, especially by failing to control the rogue behavior of commercial banks that were heavily investing in real estates.

Moreover, the Bank of Japan was involved in bailing out a number of banks that were on the process of collapsing due to their rogue behavior. For instance, the bailout of Nippon Credit Bank and the Long Term Credit Bank of Japan received massive criticism from commercial experts, the media and the public in general.

Rather than investing in controlling the behaviors of banks, the Bank of Japan was involved in clearing their debts by bailing them, which implies that they were encouraged to continue with their rogue behaviors. From this perspective, it is clear that the problems facing Japanese financial sector at the time could be controlled, but the IMF and the Bank of Japan failed to act accordingly.

According to macroeconomic analysts, this argument could be rendered ineffective in determining the causes of economic growth, and may actually not provide a warning to the emergent and newly developing economies in the modern world.

For instance, scholars argue that the situation in Japan should not be attributed to the economic approach the government took in the 1970s and 1980s as argued by some. In fact, it is evident that the problem in Japan was a result of a number of inherent issues rather than the stimulus programs the government initiated.

It should not, therefore, act as a warning to the emergent nations (Metzler 660). For instance, scholars argue that the economy in Japan was suffering from a recession in balance sheet.

Thirdly, it is clear that manufacturing industry, in which the Japanese economy heavily relied, had been booming since 1970s. In fact, the overreliance on this sector proved risky when the banks started feeling the impact of the crisis.

Most industries were actually affected, making the crisis yield a similar effect on the entire economy. Developing economies do not have to operate under the Japanese model, especially because most of them do not rely on steel as the principal raw material.

It is also worth noting that capitalism was an important factor that influenced the credit crunch, but developing economies may not necessarily be affected as they are cautious when dealing with capitalism.

Works Cited

Wade, Robert. “The Asian debt-and-development crisis of 1997-?: Causes and Consequences.” World Development, 2.3 (1998): 23-46. Print.

Metzler, Mark. “Japan: Toward a Financial History of Japan’s Long Stagnation, 1990–2003.” The Journal of Asian Studies, 67.2 (2008): 653–674. Print

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East Asian Financial Crisis

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