May 24, 2017 0604 GMT
By Sadrodin Moosavi
Collapse of the bubble (1990’s)
With the collapse of the asset bubble, the economy stagnated. It was dubbed ‘the greatest slump since the war’.
Bad debts (Bad loans)
The mismanagement of some firms was linked to the increase in the amount of bad debts that banks carried. In order to avoid systemic risk (a financial collapse), public funds were pumped into the banks.
In this Heisei recession, the ‘deflation spiral’ became a chronic problem. There was a vicious cycle whereby a fall in prices of goods led to the fall in firms’ profits which in turn led to the fall in wages/employment that led to the fall in demand which led to the fall in prices that led to the fall in profits.
Heisei is the current era in Japan. The Heisei era started on January 8, 1989, the day after the death of Emperor Hirohito. His son, Emperor Akihito, acceded to the throne. In accordance with Japanese customs, Hirohito was posthumously renamed ‘Emperor Shōwa’ on January 31, 1989.
Until this point, the Japanese economy, or the global economy in general, had been formulating strategies to deal with the problem of inflation.
‘Deflation’ was a problem with which governments had little experience, so it was more difficult to fight against. Although the government wanted to implement an expansionary fiscal policy, the government issued bonds were already 130 percent above GDP, so there was a limit to the effectiveness of this policy.
For this reason, interest rates were lowered to almost zero (virtually unprecedented in history), in order to boost the money supply. The government/Bank of Japan’s sluggishness in responding to the crisis meant that Japan struggled to get out of recession in the 1990’s.
1) Loosening of regulation (1980’s)/‘Structural Reform’
From the 1980’s, business regulation was gradually relaxed. ‘Structural Reform’ became the keyword of the time.
Professor Watanabe said this loosening of regulation, characterized by privatization, led to the development of new industries and markets. In particular, less regulation influenced fields such as finance, insurance, social security (care)/medical services and labor.
2) Lower tax on R&D investment
The government placed heavy emphasis on TFP (technological innovation). In order to encourage TFP, policies favorable to R&D investment were enacted, she said. As a result, these policies mainly were in favor of large corporations and became an important factor in the later economic recovery.
Regarding the current condition of Japanese economy, Professor Watanabe said, up until the present, Japan has been struggling, with some trial-and-error, to restructure its economy. Japan can no longer rely on factors that produced growth in the past (such as capital or labor). Since technological innovation is the most important factor in Japanese economic growth today, structural reforms can be said to be vital.
However, the process that will bring about reform carries the risk of causing societal problems, i.e. the creation of a society of haves and have-nots. For example, business conditions at many small and medium enterprises have worsened compared to the large corporations, she said.
Moreover, the professor concluded, the loosening of regulations has led to the development of a new class of ‘temporary workers’ and ‘irregular employment’. If past policies are taken up to reform the economy without pondering on the current requirements, particularly without focusing on technological innovation, then we will face problem in many areas such as low wages, little job security, and rising unemployment including even university graduates.
Iran Daily is grateful to the Embassy of Japan in Tehran, Kyoto University and Kyodo News for their help in this series.