BRITISB C0L0NBIA INSTIT0TE 0F TECBN0L0uY

Nacioeconomic Effect of
Bank of }apan's Response
to Ciisis
Foi EC0N , Zuzana Fiomm submitteu by:
Anna Chou ln11 28
Caelen CPagan ln11 28
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1he recenL comblnaLlon caLasLrophe of earLhquake and resulLlng Lsunaml radlaLlon leak
from reacLors and elecLrlcal shorLages ln !apan ls also havlng a dlsasLrous effecL on Lhe
counLry's economy
1he producLlon ablllLy of !apan's manufacLurers has been greaLly affecLed from facLors
such as physlcal damage Lo faclllLles dlsrupLlon due Lo energy shorLages and dlsrupLlons ln Lhe
LransporL of goods from !apanese porLs ln addlLlon Lo affecLlng global supply chalns Lhls means
LhaL !apanese companles wlll noL be able Lo meeL demand and wlll noL recelve as much
economlc lnpuL from exporLlng
1o deal wlLh Lhe economlc slLuaLlon Lhe 8ank of !apan (8C!) ls offerlng 1 Lrllllon yen ($12
bllllon) ln oneyear loans Lo !apanese banks (whlch wlll loan Lo !apanese companles)
1

AddlLlonally Lhe 8C! ls purchaslng more asseLs ln a move Lo lncrease llquldlLy ln Lhe economy
Cash ls needed Lo fund a masslve rebulldlng efforL so companles are selllng asseLs ln order Lo
pay for cosLs such as consLrucLlon cosLs All Lhe purchaslng and Lradlng of ?en causes lLs value
Lo rlse 1here ls a loL of money lnvolved Lhe cosL of Lhe damage ls esLlmaLed Lo be 13 Lrllllon
yen abouL $190 bllllon (uS)"
2

lL lmporLanL Lo noLe Lhan banks ln !apan are much more lmporLanL Lo lndlvldual flrms
Lhan banks ln Lhe WesL As one source sLaLes 8anks are among Lhe blggesL holders of
!apanese sLock !apanese companles have LradlLlonally flnanced Lhemselves Lhrough bank loans
raLher Lhan money from lnvesLors"
3


1
hLLp//wwwbloombergcom/news/20110407/bo[plcksamlcroresponseLomacrochallengeLakenakasayshLml accessed May 32011
2
hLLp//wwwhufflngLonposLcom/2011/03/17/[apanyenLrade_n_837386hLml accessed May 3 2011
3
hLLp//facLsanddeLallscom/[apanphp?lLemld896caLld24subcaLld134 accessed May 32011
Cbvlously lL ls ln Lhe besL lnLeresL of !apanese banks LhaL Lhese flrms survlve and
prosper Loans may provlde some llquldlLy for banks (whlch has never been much of a problem
due Lo large excess reserves)
4
buL dlrecLly loanlng flrms money has a llmlLed effecL Loanlng
money also doesn'L earn Lhe bank much of a proflL wlLh an overnlghL lendlng raLe of 03
percenL or less slnce 1996"
3

ollcles such as quanLlLaLlve easlng whlch Lhe uS lederal 8eserve dld ln Lhe wake of lLs
flnanclal crlsls
6
and whlch Lhe 8ank of !apan dld prevlously ln 2001
7
can sLlmulaLe an economy
1hls works by purchaslng asseLs such as governmenL bonds wlLh newly creaLed currency
8

Powever lL has a llmlLed expanslonary effecL ln LhaL lL can resulL ln a slLuaLlon known as a
llquldlLy Lrap" whlch ls a slLuaLlon ln whlch prevalllng lnLeresL raLes are low and savlngs
raLes are hlgh maklng moneLary pollcy lneffecLlve"
9
1hls ls especlally Lhe case ln !apan where
Lhere ls already a loL of llquldlLy a hlsLorlcally hlgh raLe of savlngs (llkely Lo be more so wlLh Lhe
currenL slLuaLlon)and a low lnLeresL raLe
Loans Lo flrms and quanLlLaLlve easlng wlll help Lo malnLaln llquldlLy buL ulLlmaLely whaL
wlll be needed Lo geL !apan's economy golng agaln (boLh Lhrough consumer spendlng and
exporLlng) wlll be lncreased governmenL expendlLure and/or posslble forelgn lnvesLmenL !apan
used lncreased spendlng on lnfrasLrucLure ln Lhe 1990's Lo sLlmulaLe Lhe economy Whlle !apan
has some of Lhe hlghesL debL of any governmenL ln Lhe world mosL of lL ls domesLlc debL raLher

4
hLLp//facLsanddeLallscom/[apanphp?lLemld896caLld24subcaLld134 accessed May 32011
3
hLLp//wwwbloombergcom/news/20110407/bo[plcksamlcroresponseLomacrochallengeLakenakasayshLml accessed May 32011

6
hLLp//wwwbloombergcom/news/20110407/bo[plcksamlcroresponseLomacrochallengeLakenakasayshLml accessed May 42011
7
p3 hLLp//wwwlmesbo[or[p/engllsh/publlcaLlon/edps/2002/02L03pdf accessed May 4 2011
8
hLLp//wwwbankofenglandcouk/educaLlon/lnflaLlon/qe/vldeohLm accessed May 4 2011
9
hLLp//wwwlnvesLopedlacom/Lerms/l/llquldlLyLrapasp accessed May 4 2011
Lhan debL flnanced by forelgn counLrles
10
8orrowlng from abroad ln order Lo geL !apan's
economy up and runnlng ls sLlll an opLlon Lhough llkely one LhaL ls noL popular ln any case
!apan's debL ls expecLed Lo lncrease Lo 210 of lLs Cu by 2012
11
1he shorL Lerm slump ln
!apan's economy wlll reverse Lhrough lncreased spendlng on reconsLrucLlon efforLs ln Lhe
longer run ln Lhe much longer run Lhough !apan's economy wlll conLlnue Lo face Lhe same
obsLacles lL faced before Lhe crlsls such as overrellance on exporL of goods decreased
compeLlLlve advanLage ln manufacLurlng and an aglng populaLlon wlLh low blrLh raLes and llLLle
lmmlgraLlon resulLlng ln a shrlnklng workforce
12
1here ls also always Lhe posslble of yeL
anoLher naLural dlsasLer LhaL could sLrlke wlLhouL warnlng aL any Llme

10
hLLp//facLsanddeLallscom/[apanphp?lLemld896caLld24subcaLld134 accessed May 4 2011
11
hLLp//llberalsprlnklesblogspoLcom/2011/03/economlclmpacLof[apanearLhquakehLml accessed May 4 2011
12
hLLp//facLsanddeLallscom/[apanphp?lLemld896caLld24subcaLld134 accessed May 4 2011