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It is now more than a decade that Japan, the world's second largest economy, is deprived of economic sunshine. All endeavors to restore the brightness of the pre-1990s have ended in utter disappointment.
Japan, once well-known as the largest creditor country has entangled herself in a severe whirlpool, from which escape seems to be a far cry. All economic, financial and social reforms have proved ineffective to revive the sagging economy. Ever since the collapse of the asset price bubble in 1992, the economy went out of steam and started sinking. Though initially it seemed to be a standard downturn, the problem amplified over time and every macroeconomic policy trying to revive the economy turned out to be an utter failure.
The frenetic growth of the economy of the 1980s fueled an explosion in share prices, and property prices shot up at a jet speed. The burst of the bubble meant bad loans mounting in the financial system of the country, due to lack of proper supervision. Low demand, deflation, bankruptcies and bad debt burdens in the banking sector are some of the problems Japan now faces. Its deflationary spiral appears to be intensifying. Retail sales have fallen for a record fifth consecutive year, consumer confidence is at a record low and the trade surplus is at its lowest level in 18 years. The biggest threat comes from a deflationary spiral that is pulling prices and incomes ever downwards. It is also increasing debt burden and giving consumers little incentive to spend as prices continue to fall. The Government expects the economy to shrink by one percent in the year ending March 31, 2002 and to post zero growth in the following year.
Within a couple of years of the collapse of the asset price bubble, the economy swung from being a rich country with a huge surplus to a recession-ridden giant with a huge deficit. Interest rates have been pushed almost to zero without having an effect on investment. The Bank of Japan kept pumping liquidity into the financial system, but could hardly anticipate that the economy was caught in a liquidity trap. Lowering the interest rates did not have any impact on recovery. Confidence of both the sectorshousehold and businesshas been so low that viable businesses became reluctant to borrow money any longer. Adding fuel to fire, the population has also been aging markedly, thereby reducing the propensity to save and adding up to unemployment problem.
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