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“Growth Miracle” was the term associated with the remarkable growth of the Japanese economy in the early 60s. Japan’s economic and social institutions were considered models to be emulated by other industrial economies which tried to keep up technology and competitively. However, after 30 years of significant growth, the economy suddenly imploded causing a rapid and dramatic drop in commodities and assets price. Since 1991, Japan has experienced almost the complete breakdown of the banking system, rising unemployment rate, deflation, political and social instability and stagnation. The “Great Recession” lasted for almost two decades when the Bank of Japan policy was to keep as low as possible interest rates and provide additional monetary stimulus to the system.
The duration of the Great Recession can be comparable with the 29’ depression for the persistence of banking problems and financial distress and a constant deflation combined with zero rates. Furthermore, the “traditional” Japanese financial system contributed to weakening the financial stability. The main banks kept on lending to unprofitable affiliated companies rather than supporting healthier businesses.The ‘Keiretsu System’ approach demonstrated to be fairly good in the aftermath of WWII but proved to be particularly problematic with economic downturns and deflation. According to the IMF, in 2010 Japan walked out the recession after more than a decade of expansionary monetary policy and zero rates. The rebound of Japanese economy proves that a combination of constant supply of liquidity to the financial system accompanied by structural reforms and low rates can prop up a troubled economy with the high level of public debt.
Japan’s Economic Recovery
In the aftermath of the 2008 global crisis, Japan’s economy rebounded strongly as a result of rising external demand and large-scale fiscal stimulus. Despite the Yen appreciation, Japan’s exports grew remarkably driven by a sharp increase in trades with China, which had increased from 12% to 21% between the 2000 and 2007, rose further to 25% in 2009. The rise in export triggered a positive spiral of rising profits, business confidence, business investments, employment, wages and consumption. To boost a still fragile economy, Bank of Japan introduced large-scale of fiscal stimulus including large purchasing of medium-long term government bonds, corporate bonds and commercial papers, short term credit loans to the banking system and an accommodation monetary policy of virtually zero interest rates. Additionally, the government promoted a fiscal policy in support of the labor market expanding employment subsidies, increasing public job creation programmes and extending subsidies for purchases of energy-efficient vehicles and home appliances. The Great East Japan Earthquake in March 2011 caused thousands of victims and economic damages which deteriorated the short-term Japanese economic outlook. However, despite the damages of buildings, public utilities, capital stocks and disruption of supply chains estimated as 4% of GDP, the economy rebounded strongly as a result of the massive investments piled up for the reconstruction.
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