The nature and causes of the Japanese economic crisis in the 1990s.

Will it move towards an Anglo -

Saxon system?

Japan was claimed to be the Asian miracle since the post war periods due to its vast
capability in recovering from the World War 2 in which saw the whole country fully destroyed despite having
to pay reparations. This was due to Japan’s solid continuity in two of the mainstays of pre-war Japan which
are; the financial system and the finance bureaucracy.1 It has made the world to believe that an Asian nation is
also capable of being rich. However, this “Asian miracle” saw an economic downfall in the 1990s and is in
doubt that it will recover.

The first cause to the Japanese economic crisis was the excess liquidity problem due to high
levels of savings. 1 This problem is also known as the liquidity trap problem. The nation was forced to save
their money at really low returns and the deposits will then be used by the banks to be invested into industries.
These reinvestments will lead to having an increase in the production capacity and thus, increase in labour.
More money will then be deposited back into the banking system. But why do they still save despite having
low interest rates? This is as; they had little choice because the entire financial system was a giant cartel
operated by the authorities as banks did not compete aggressively to lend money to households. 1 Hence, with
the restricted ability to borrow, households need to save in order to purchase goods. Also, there were heavy
controls in the foreign exchange market where currency outflow was impossible. 1 Therefore, the Japanese
workers are prisoners of the financial system. Things became ugly in the second half of the 1970s where the
tremendous liquidity was more than what Japan needed. 1 By 1990, Japan’s excess savings amounted to $345
billion. The excess surplus thus became exported capital and as a result, it increased Japan’s trade surplus 1

These excess savings also fuelled the mad boom economy known as the ‘bubble economy’.
The bubble economy saw asset prices rising to unprecedented levels and when the ‘bubble’ burst, asset prices
fell dramatically and making many companies highly indebted. Also, during the good ‘miracle’ years, big
companies started to raise funds in the stock markets which gave them massive returns. The huge returns were
then redeposited back into the banks giving them problems in search of lenders in the need for credit creation
(as investors no longer lend from banks as they opt to look for funds in the stock market instead) leading to
banking dilemmas

Another consequence of the trade surplus is the, appreciation of the Japanese yen against the
dollar.2 The rise of the value of the Yen made the Japanese exports less in favour as they were relatively
expensive. Therefore, just after the burst of the ‘bubble’, many companies started to move their factories out
of Japan to where input prices were cheaper ie.South East Asia and South Korea. 2 This led to a huge amount
1
Hatcher, P Winter 1998 “Can Japan come back”, The National Interest i54, p32(8)
2
Sayle , M June 1998 , “The social contradictions of Japanese Capitalism”, The Atlantic Monthly, pp. 84-94
3
Porter ,M and Takeuchi, H May 1999 “Fixing what really ails Japan”, Foreign Affairs Vol 78 i3 ,p 66(1)

1
of capital outflow from Japan, increasing trade surplus and, further deteriorates the Yen value. The position of
the Yen was further worsened as; Japan became the world’s top creditor with nearly a trillion dollars of
external holdings and $225 billion of foreign exchange reserves. 2 However, many asked questions of where
did the money go to? It was to the US in which was used to buy Japanese exports and therefore making the
two countries highly dependent on each other. 2 Furthermore, there was also tremendous amounts of loans that
were made to Japan’s Asian neighbours as well. This then saw the Japanese banking system sinking under
bad debts (due to non performing loans), hospitable to criminals and is an informal, non-contributory welfare
scheme for politicians and bureaucrats.2 Also, during the same period, Japan encouraged further savings and
halted imports thus, not helping the Japanese’ balance sheet position.2

Another factor to the Japanese economic crisis was the overregulation by meddlesome
government ministries and also bureaucrats that mismanaged macroeconomic policy by raising taxes, failing
to stimulate internal demand and clinging to export growth for far too long.3 Japan’s problem started off with
the government’s mistrust of competition, which often intervene in the economy in ways that harm the
nation’s productivity and prosperity. 3 Companies also take the wrong approach to competition that ends up
undermining their own profitability. 3 The Japanese government created two types of Japan; one which is
called the efficient Japan with hope to carry the economy while the inefficient Japan would provide stability,
jobs, self-sufficiency and an implicit retirement system of small family businesses. 3 This led to Japan having
no variety in their export industries. Furthermore, Japan’s obligation of good neighbourliness has also led to
anti competition.4

Another problem was its corporate governance. The Japanese banking system often play a
monitoring role in corporate management.5 The banking system concentrated on the industries that were
deemed to be efficient by giving out loans concentrating only within these industries. This works to show that
Japanese banks lack credit analysis.3 The manipulation of the Japanese government was in favour to the
export-led growth policy with government sponsored cooperative research and development (R&D), lax anti-
trust policies, officially sanctioned cartels, subsidized activities, intervention in inefficient industries and
restrictions on trade and foreign investments.

Also, another reason to the Japanese crisis was the rise of the asset prices that further inflated
the companies’ balance sheets that gave sense of prosperity which was actually working on opposite
directions.4 When many companies were highly indebted as asset prices fell dramatically, Japanese banks

2
3

34
Dore, R 1998 “Asian crisis and the future of the Japanese model” Cambridge Journal of Economic, 22, p773-787
5
Ito, T 2001 “Growth Crisis and the future of economic recovery in East Asia” Chapter 2 in Rethinking the East Asian
Miracle by Stiglitz, J and Yusuf ,S
4
4

2
continued giving out loans in the belief that the government will not allow any banks to fail. This old banking
law that Japan had, caused problems to the country as they were hoping that future growth will happen in
which it never did.

With all the reasons to the crisis has now been discussed, should Japan continue its so called
Japanese model or converge towards the Anglo-Saxon model? There are mixed views according to the
readings; some had thought that Japan should not prevail towards the American economic model but some
deemed that Japan should.

There are evidences that proved Japan is moving towards the Anglo-Saxon model. Firstly, the
liberalisation of the foreign exchange controls laws which allow Japanese yen to move overseas through the
so-called Big Bang deregulations.1 With the Big Bang deregulation, the closed club of the Japanese banking
sector will be opened to new players.1 The revision of the regulation will also give the Central Bank of Japan
further independence to run its monetary policy in the best interest of balanced economic growth rather than a
frenetic economic mobilization.1 However, the interest rates in Japan is being controlled by the informal cartel
agreement between banks despite the liberalization.1 Also, the Big Bang plan called for market principles,
transparency, accountability, deregulation and internationalisation.2 Despite the new laws and deregulations,
the Big Bang actually led to a failure in the Japanese economy according to the article written by Sayle in
1998. The economy actually burst its bubble as when part of the reform suggested that the country to stop
lending out to other nations. Therefore, public pressure for a reform is still very slight in Japan and they
themselves are very drift about it and are also unsure in either to have a reform in the social or economic
aspect.2 What Japan should do, is to stabilise its financial system through appropriate reforms as, a stable
financial sector is important in ensuring economic growth.

Despite the failure that Japan faced through the reforms, Japan still does need to open up the
economy a little bit more. Japan should revaluate their policies and controls to gain greater economic strength
in overcoming the 1990s economic crisis and to have a promising future. Therefore, Japan should not fully
liberalise their economy like the Americans do but to adopt bits and pieces of their ways in controlling the
economy. Japan should keep the same model that they previously had and look at ways around it in search of
improvement.3 An example of what Japan should improve is on its anti competition practice and embrace free
trade as this will help to further improve its production levels, companies’ profitability and indirectly its
growth levels but not in the same ‘greedy ways’ that the Anglo-Saxon model possess.4 Japan also needs to
ensure that their banking system is more user-oriented rather than just having high priority to interest of the
banks and other financial institutions. Bank loans should be given based on strict expected profit criteria and

16
Tabb, B March – April 1999 “Japan’s recession : the 800 –pound crisis” Dollar and Sense i222, pp10-14
1
1

3
not based on political cronyism.6 Due to that, Japan needs to overcome its problems in the bureaucracy where
there are high levels of corruption and government interventions. Japan should also relax its restriction on
imports as it will only cripple many of the industries it was designed to protect and dragged down others.

In conclusion, Japan clearly does need some things changed but a move to a fully Anglo-
Saxon model is not required. This is as; the American western ways are different in the cultures and values of
the Asian countries and in this aspect Japan. The ways and thinking of the Japanese government, people and
nation as a whole is different that of the western countries. This is supported in the reading written by Johnson
in 2001, that the US ideologies ignores cultural orientation that makes the purpose of capitalism in many East
Asian countries different from that of serving only the short term interests of shareholders in which is what
happens in the US. Also, what is needed by these East Asian countries according to Johnson is that, there
should be a stop in the US hegemony. As the development of the political system in Japan was what actually
that brought genuine leaders to power and the restoration of industrial policy to its proper place in the society
that pioneered and perfected its use.7

Bibliography

6
7
Johnson , C March 27 2001 “ Japan’s Woes Are Political, and US is not helping” Los Angeles Times

4
 • Dore, R 1998 “Asian crisis and the future of the Japanese model” Cambridge Journal of Economics,
22, p 773-787

• Hatcher, P Winter 1998 “Can Japan come back (emerge from recession)”, The National Interest i54
p32(8)

• Ito, T 2001 “Growth Crisis and the future of economic recovery in East Asia” Chapter 2 in J.E
Stiglitz and Shahid Yusuf “Rethinking the East Asia Miracle”, World Bank and Oxford University
Press ,Washington and New York

• Johnson , C March 27 2001 “ Japan’s Woes Are Political, and US is not helping” Los Angeles
Times

• Porter , M and Takeuchi, H May 1999 “Fixing what really ails Japan”, Foreign Affairs Vol 78 i3
p66(1)

• Sayle , M June 1998 , “The social contradictions of Japanese Capitalism”, The Atlantic Monthly
pp.84-94

• Tabb, B March – April 1999 “Japan’s recession : the 800 –pound crisis” Dollar and Sense i222
pp10-14