Evaluation of Factors behind the Stagnation of Japan’s Economy

At the end of the 1980s, the growth of the Japanese economy was dazzling, and the asset prices sharply increased. Apart from improved economic fundamentals, an inadequate regulatory regime and financial liberalization, together with relaxed monetary policy caused the rise in prices. Financial institutions provided imprudent levels of credit to real estate and equity markets, which fuelled the boom in property prices and caused an increase in speculative money. Japanese authorities became aware of the overheated economy only at the turn of the decade, when the speculative bubble was about to collapse. The tightening of the monetary policy was an overdue step and entailed a dramatic fall of the asset prices. It undermined the profitability of financial institutions, lowered sales and profits of firms, weakened consumer demand and tightened the availability of credit, which caused a protracted economic slowdown in Japan. As a response to economic downturn, the Japanese government has spent trillions of yen to bolster the growth rate, but have failed to revive the economy. Attention has also been focused on solving the problem of non-performing loans at financial institutions and on a comprehensive reform of the economic system. In this paper, we examine the current situation of the Japanese economy. We are seeking answers for that why the economy has not showed any signs of sustained recovery despite the high levels of government spending and interest rates of close to zero percent. Factors behind the pure performance are connected to the pace of reforms, but also to external conditions of the economy. The structural reforms in the economy led by the government are ranging widely from fiscal policies to regulations in the tax system or labour market, but are extremely slow in the light of the fast-changing competition environment caused by globalisation. The level of consumer spending and investment has remained low by historical standards, which causes delay in recovery of the economy. Moreover, depreciation of the US dollar compared to the yen renders the Japanese export, being the main source for growth more difficult. We attempt to outline the outlook for the Japanese economy for the near future. Aging of the society, uncertainty about the social security system, decline in the saving rate, entering in various free trade agreements, complying with the regulations of Kyoto protocol etc. query the bright future of the economy. The Japanese economy must pass through a long and difficult reform period to emerge from the troubles.