1. JAPAN - A Critical Analysis

2. Economic bubble:-bubble Economy is an economy in which trade takes place in large volumes with a discrepancy between the price and the intrinsic value of the product. The intrinsic value reflects the fair value, which takes into account the hypothetical calculation of the risks and future returns. The prices in economic bubble waver easily and cannot be calculated only in terms of demand and supply. The economic bubble is normally followed by a period of deterioration of prices. This crashing phenomenon is known as bubble burst or crash. The boom and the bust period in bubble economy are considered to be a positive feedback mechanism. LOST DECADE JAPAN 11/28/2009 2 Total Slides = 41

3. Bubble economy can lead to disastrous consequence as it occurred in the 1930s in the form of Great Depression and during the 1990s in Japan. The condition misallocates resources. The period of crash following this condition adds to the devastation. It is seen that this economic condition has far fetched effects. The Japanese asset price bubble was an economic bubble in Japan from 1986 to 1990, in which real estate and stock prices greatly inflated.The bubble's collapse lasted for more than a decade with stock prices bottoming in 2003, until hitting an even lower low amidst the current global crisis in 2008. The Lost Decade is the time after the Japanese asset price bubble's which occurred gradually rather than catastrophically. It consists of the years 1990 to 2000 11/28/2009 3 Total Slides = 41

4. THE LOST DECADE ( 1990-2000 ) 1980s, it ranked as the world's second largest economic power after the United States. Stock exchange also recorded its peak of almost 40,000 yen at the end of 1989. Bubble ended in 1991, and Japan experienced lost decade Japan’s economic growth plunged from an average 5.1% in the 1970s to 4.1% over the 1980s to less than 1 % in the lost decade Average CPI over Lost Decade -0.4% (i.e. deflation) Unemployment has risen to over 5% 11/28/2009 4 Total Slides = 41

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6. The period from 1990 to 2000 has often been called "Japan's Lost Decade." It's now just a year away from becoming two lost decades. And except for one brief point in 2003, The Japanese stock market is lower than it has been at any time in the last 25 years dating all the way back to 1983.In 1990 the Nikkei peaked at 38,900. It is sitting at 8,438 as I type. After 19 years of ups and downs including one big rally of 140%, the Nikkei is down a whopping 78%! In a 10 year period (1990-2000) Japan has gone from owning over 40% of world market capitalisation to just 10% 11/28/2009 6 Total Slides = 41

7. Gross Domestic Product (GDP), is the market value of all the final goods and services produced within in a country in a given time period. A final good or service is an item that is bought by its final user during a specified time period.The economy of Japan is the second largest in the world,afterthe United States at around $5 trillion USD in terms of nominal GDPFor three decades, Japan's overall real economic growth had been high: a 10% average in the 1960s, a 5% average in the 1970s and a 4% average in the 1980s.Sliding stock and real estate prices marked the end of the "Japanese asset price bubble" of the late 1980s, and ushered in a decade of stagnant economic growth. GDP Evaluation 11/28/2009 7 Total Slides = 41

8. Prices in Japan are exhibiting mild deflation, less than 1% Japan’s economy is actually on the verge of the “deflation spiral”, which has not happened in the world since the World War II. Real GDP in Japan grew at an average of roughly 1.5% yearly between 1991-1999, compared to growth in the 1980s of about 4% per year. Growth in Japan throughout the 1990s was slower than growth in other major industrial nations In 2008, due to the global financial crisis, the economy of Japan was strongly hit and shrank 0.7% and is expected to shrink some 5% in 2009. As per recent Goldman Sachs estimates, Japan's real GDP is expected to fall as much as 5.8% in 2009, after already falling 0.7% in 2008. 11/28/2009 8 Total Slides = 41 Evaluation

9. Japan’s GDP Growth 11/28/2009 9 Total Slides = 41

10. Reasons These problems may have been exacerbated by domestic policies intended to wring speculative excesses from the stock and real estate markets. Japan has inadequate natural resources to support its growing economy and large population. No Exports, and High Imports Improper Spending would suggest that the Japan’s economy lack of effective aggregated demand. 11/28/2009 10 Total Slides = 41

11. Options Available Japan's government inched toward agreeing new stimulus measures that could be worth $30 billion on Monday as economic growth is likely to slow next year due to sluggish personal spending and rising inventories "The stimulus would come from what they've cut elsewhere, so the effect on the economy could be close to neutral,“ To stimulate the consumption To implement the structural reform and deregulation Increase of the liquidity 11/28/2009 11 Total Slides = 41

12. Secrets behind an Economic Miracle

13. Key Messages Japan achieved a miraculous economic . Japanese economic develop . The secrets behind the miracle lie in very effective economic and trade policies . 11/28/2009 13 Total Slides = 41

14. Destruction by the World War II The production index of Japan at the end of the war was only one-fifth , and international trade was almost nil. Most major cities, e.g., Tokyo, Osaka, Hiroshima, etc., was almost destroyed by the bombing of the American forces. People suffers from shortage in every essential goods, such as food and energy. The situation facing Japan then was probably worse than many developing countries today. However, the Japanese economy quickly took off, and in 1968, Japanese GDP was the third-largest in the world 11/28/2009 14 Total Slides = 41

15. Figure 1: Real GDP of Japan 600 500 400 300 trillion yen (1990 price) 200 100 0 1980 1988 1990 1992 1994 1930 1935 1950 1952 1954 1956 1958 1970 1972 1974 1976 1978 1982 1984 1986 1940 1944 1946 1948 1960 1962 1964 1966 1968 1996 1998 2000 2002 year 11/28/2009 15 Total Slides = 41

16. The Priority Production System (PPS) The PPS tried to start reconstruction process by concentrating available resources on two critical industries, coal and steel. The recovery plan was called ‘inclined production system. Almost entire production of coal was put in steel production, and almost entire production of steel was put in coal production. 11/28/2009 16 Total Slides = 41

17. Inflation Inflation means a persistent rise in the price levels of commodities and services, leading to a fall in the currency’s purchasing power. Central bankers believe that mild inflation, in the 1 to 2 per cent range, is the most benign for a country’s economy. 11/28/2009 17 Total Slides = 41

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19. Unexpected effects of price Deflation Debt repayment becomes more difficult, firms default on loans. Money demand increases Consumption falls in anticipation During recession, price deflation make things worse by further reducing aggregate demand 11/28/2009 19 Total Slides = 41

20. FISCAL POLICY JAPAN

21. Problems Dramatic Fluctuations in Stock and foreign exchange markets. Corporate financial positions worsening. Economic developments, exports, production and corporate profits have substantially decreased. Corporate bankruptcies have been increasing the employment situation has been rapidly worsening and real wages decreasing. 11/28/2009 21 Total Slides = 41 Japan Economy in DANGER

22. Futuristic Risks Global financial crisis will worsen. May lead to further slowdown in overseas economies. Large fluctuations in stock and foreign exchange markets EXPECTED. Growth of both domestic and external demand may become stagnant. Economic downturn may be prolonged & more severe. 11/28/2009 22 Total Slides = 41 Something Needs To Be Done…

23. Challenges in Formulating Policy Decreasing population. Declining birthrate. Aging population ahead of other countries. 11/28/2009 23 Total Slides = 41

24. Fiscal Condition Improvement in Fiscal Situation 11/28/2009 Total Slides = 41 24

25. Fiscal Condition Followed by Improvement in GDP by result of a decline in tax revenues. 11/28/2009 Total Slides = 41 25 Deficit + Government Dept may

26. Implementing economic measures in the near term. Promoting fiscal consolidation in the medium term Pursuing economic growth through reforms in the medium- to long-term. Solution: 3 stage Policies 11/28/2009 Total Slides = 41 26

27. Implementing Economic Measures-Near Term Measures: Tax Deduction. Fixed-sum stipend to each person temporarily. Special Care in: Employment. Cash-flow of companies. 11/28/2009 Total Slides = 41 27 1 ECONOMIC RECOVERY

29. Establish sustainable social security system.

30. By:

31. Mid-level burden-sharing2 Restore Fiscal consolidation

33. Increasing employment.

34. Developing new industries and technologies.3 ECONOMIC GROWTH

35. Monetary Policy Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money (ii) availability of money (iii) cost of money or rate of interest in order to attain a set of objectives oriented towards thegrowth and stability of the economy. 11/28/2009 30 Total Slides = 41

36. MONETARY POLICY FOR THE YEAR 2005 IN THE MONTH OF JANUARY WHEN THE MEETING TOOK PLACE MEMBERS SAID THAT BANK MIGHT FACE GREAT DIFFICULTY IN SUPPLYING THE AMOUNT OF FUNDS INTENDED TO THE MARKET THE JAPAN ECONOMY WAS ALREADY IN RISE, SO ANY AGGRESSIVE MONETARY POLICY SHOULD BE CLOSELY MONITORED 11/28/2009 31 Total Slides = 41

37. CONTINUED IT WAS APPROPRIATE TO MAINTAIN THE CURRENT FRAMEWORK OF THE QUANTATIVE EASING POLICY IN ACCORDANCE WITH CENTRAL BANK. 11/28/2009 32 Total Slides = 41

38. Monetary Policy of Japan in January 2006 BOJ lowered the target range for the outstanding balance of current accounts at the Bank mainly for the following two reasons Financial institutions demand for cash required for funds management was on a declining trend. the Bank should encourage formation of interest rates based on the market mechanism as much as possible to ensure smooth termination of the quantitative easing policy in the future. 11/28/2009 33 Total Slides = 41

39. Monetary Policy of Japan in June 2006 BOJ noticed that developments in the money market had been generally stable in the process of reducing the outstanding balance of current accounts at the Bank and it had been reduced without difficulty. 2. As a result of the reduction of the balance, the proper functioning of the call market had been steadily restored. 11/28/2009 34 Total Slides = 41

40. Bank of Japan overnight rate 11/28/2009 35 Total Slides = 41

41. Monetary policy for 2008 Slower output growth, increased uncertainty about the economic outlook and continued deflation, the Bank of Japan has appropriately kept its short-term policy interest rate unchanged at ½ per cent since February 2008. Under the new monetary policy framework introduced in 2006, the central bank sets the policy interest rate to achieve a path of sustainable growth under price stability. As part of the framework, the Bank of Japan’s Policy Board announced that 0 to 2% is its understanding of price stability in the medium to long term, the first time that it has specified an inflation range. In addition, the central bank examines risk factors that may significantly impact economic activity and prices in the longer term. 11/28/2009 36 Total Slides = 41

42. Interest rate developments in Japan the Bank would aim to maintain the extremely accommodative financial environment and also provide steady support for Japan's economy to return to a sustainable growth path with price stability 11/28/2009 37 Total Slides = 41

43. Monetary policy for 2009 The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent. Exports have been decreasing substantially reflecting a slowdown in overseas economies, and domestic demand has become weaker against the background of declining corporate profits and the worsening employment and income situation in the household sector. With regard to risk factors, much depends on global financial conditions as well as developments in overseas economies, and attention will need to be paid to the downside risks posed to economic activity. 11/28/2009 38 Total Slides = 41

44. Turning to prices, there is a possibility that the inflation rate will decline further if downside risks to economic activity materialize or commodity prices fall. In this case, the risk of a decline in medium- to long-term inflation expectations of firms and households warrants attention. Since last fall, the Bank, in addition to reductions in the policy interest rates, has been conducting various measures to support Japan's economy from the financial side 11/28/2009 39 Total Slides = 41

45. The Bank will continue to carefully assess the future outlook for economic activity and prices, closely considering the likelihood of its projections as well as risk factors, and to exert its utmost efforts as a central bank to facilitate the return of Japan's economy to a sustainable growth path with price stability. 11/28/2009 40 Total Slides = 41

46. Thank You