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TABLE OF CONTENTS
Page 1: Introduction
Page 2: The second oil crisis in 1979 and the secretary technique
Page 6: The trade war between Japan and America
Page 8: The bubble burst in the late 1980s and its consequences
Page 11: The inflation expectations trap in 2000s and global finance crisis
Page 12: The Abenomics and the population decline
Page 14: The first time of reaching inflation target since 1980 and the
conclusion

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Nguyen Tran My Anh declare that I am the sole author of this assignment

and the work is a result of my own investigations, except where otherwise

stated. All references have been duly cited.

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INTRODUCTION
Japan is in the other polar for the rest of the world, which is the country face
with not inflation but deflation. This unique situation can be explained by
using some macroeconomic model, following by some advices depend on
those analysis. First of all, the essay will discuss about how the external
factors and Japan’s policy itself make the miracle development country
become stagnate and impasse. From the history of mistakes and failures in
awareness and reconstruction, the conclusion will open some prospects
and solution in the future for the economy of the land of the rising sun.

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According to the graph below, Japan’s energy depended so much on the

importation of oil from the Middle Ages. In the 1980s, the percentage of oil
imports to Japan from the Middle East hovered around 65% to 71% (Japan
Still Reliant on Middle Eastern Oil, 2020). That was the reason why, during
the oil crisis triggered by the Iranian Revolution and the conflict between
Iran and Iraq, Japan was hit so hard that it had to change some monetary
policy to ease the effects of this shock on its market (Oil crisis of the 1970s,
Energy Education ). 

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The first policy from the government was restraining inflation by slowly
increasing interest rates from 4.25% on April 17, 1979, to 5.25% on July 24,
1979, and 6.25% in November 2, 1979, which raised the cost of borrowing
money to satisfy people’s demand and made them spend less on goods
and services, especially for oil production ( Oshima, K., Suzuki, A., &
Matsuno, T., 1982) (N. Gregory Mankiw).

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Besides, Japan also reduced its budget deficit with the help of a power
source promotion tax and a tax on the use of imported crude and fuel oil.
The data below shows that in 1979, the consumption tax revenue increased
by 5%, and the total tax revenue was nearly 55 trillion yen. Japan took
advantage of those taxes to provide safety for emergency use and support
the domestic coal industry, nuclear power plants, and alternative resource
promotion (The Political History of Japan’s Consumption Tax, 2019).

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But the story did not end there. In the mid-1950s, when observing the
official discount rate worked ineffectively, the Bank of Japan devised a
method of creating credit in strategic industrial sectors called Window
Guidance and realized it was perfect to deal with the period of tightening
monetary conditions (Suzuki Yoshio, 1981). The Bank of Japan guided the
largest banks in Japan to manipulate the allocation of funds and create
credit the automobile industry and the shipbuilding industry (Suzuki Yoshio,
1981). This technique seemed to be so successful that it made the
financing activity thrive since the early 1980s.

To conclude, the oil crisis signaled the commencement of monetary easing

and prepared the foundation for the largest bubble period. As expected, the
effectiveness of window guidance was undermined in the late 1980s by
several factors, such as financial liberalization and deregulation, the
reliance on securities businesses, the exclusion of overseas loans, and
inflexible lending shares (Tomoyuki Fukumoto, Masato Higashi, Yasunari
Inamura, and Takeshi Kimura, 2010).

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One of the factors that brought Japan closer to the bubble time was the war
trade with the US. In the 1970s, semiconductors reorganized the Japanese
computer industry with the help of a $300 million investment from the
government in six major computer companies. And in 1982, Japan
surpassed the US to become the leader of memory (Hideki Uno, 2022).
Andrew Pollack, 1982). Besides the success of Japan, which worried the
US's position in the market, the conflict actually escalated when the US
accused Japan of selling Soviet-era equipment that made its submarine
quieter and more dangerous for the US Navy (Wikipedia contributors,
2023). Simultaneously, Japanese people were furious because some
Americans demolished their Toshiba cars for revenge (Wikipedia
contributors, 2023). Nevertheless, according to Chalmers Johnson, America
needs to adapt its own industry policy to keep up with Japan. In 1985,
politicians in Europe, the United States, and Japan concurred  that global
commerce was unbalanced and that the dollar was overvalued in relation to
the British pound, French franc, and most crucially, the Japanese yen. As a
consequence of these agreements, the Bank of Japan committed to selling
a large portion of its dollar reserves, leading the yen to rise while the dollar
fell.

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The purpose of the US was quite clear. The yen's appreciation provided an
opportunity to improve US exportation and pursue trade surpluses since it
could sell goods and services to other countries at a cheaper price
compared to that of Japan. In accordance with the foreign exchange rate
data above, since 1985, the USD to Japanese yen has decreased
significantly, from more than 250 in January, 1985, to 150 in July, 1986, and
has hovered around 100 to 150 in the next 5 years (Dollar Yen Exchange
Rate (USD JPY) - Historical Chart ). Although the Plaza accord failed to
reduce the US-Japan trade deficit, it still caused changes in Japanese
monetary policy (Joe Weisenthal, 2010). Because of the strong yen,
Japan's exports became more troublesome, and they had to lower interest
rates to meet domestic demand, which was believed to take longer than
necessary, resulting in the bubble economy (Joe Weisenthal, 2010).

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As it was mentioned, the interest rate was kept too low for a long time,
which led to property and stock prices expanding and creating a
bubble( Karube Kensube, May 30, 2022). The bubble period in the 1980s in
Japan shocked the world due to its unprecedentedly gigantic scale (Mariko
Fujii, Masahiro Kawa, 2010). The line chart below outlines Japanese asset
prices and nominal GDP from the 1980s to 2003. Since the 1980s, the
Nikkei 225 Index,the top and most-respected gauge of Japanese stocks,
has risen dramatically, peaking at nearly 1700 in 1989, more than 40%
higher compared to the S&P 500 Tracking in the US (Lance Roberts, 2021).

Furthermore, according to a survey of housing bubbles in the 1980s, both

the Japan's six largest cities index and the American 10 city index rose
from about 62% in the 1986 to 275% and nearly 200% respectively in the
1990 ( Doctor Housing Bubble, 2012).Furthermore, according to a survey of
housing bubbles in the 1980s, both Japan's six largest cities index and the
American 10 city index rose from about 62% in 1986 to 275% and nearly
200% respectively in the 1990s. (Doctor Housing Bubble, 2012 )

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Those two huge gaps between Japan and the US created one of the most
sarcastic sayings in the world: the Kyoto Imperial Palace is worth more than
all of California's real estate combined (Wikipedia contributors, 2023). With
the yen's appreciation, Japanese investors flocked to the world, rushing to
buy the Rockefeller Center and Columbia Film Studios ( Times, N.Y., 1989).
As a result, the bubble burst and turned Japan from a miracle economy into
one of stagnation and deflation. Observing the two charts above again,
since the 1990s, all the housing and stock prices have fallen deeply, leaving
people with a massive mortgage and a devalued house, which makes it
difficult for them to repay their debts. This caused them to tighten spending,
which led to an income spiral downward and more deflation. The Bank of
Japan knew that it had to act forcefully to break the deflationary spiral, as it
cut interest rates dramatically, from 5% in 1991 to less than 1% in 1995,
and went down further in the next few years to ease the debt pressure, but
it didn’t handle the problem.

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The Bank of Japan confronted the fact that they could no longer give further
loans, and thus it needed to take rapid action to re-capitalize the banks so
they could start lending again, but the public backlash against them
because they were out of money made future rescues infeasible.
Subsequently, the banking crisis of 1997 happened (Akio Fuji, 2017). Since
Japan’s foreign exchange reserve was the highest compared to that of
Asian countries, the situation was more miserable (TJ Pemper, 2007).
Because the Bank of Japan could not lower interest rates any more, they
directed banks to let in as many clients as possible to prevent a panic and
run on all banks. Fortunately, the debt deflation halted, and the Japanese
banking system was eventually salvaged by bank bailouts and letting their
left-over debts appear on the government balance sheet, which could be
filled with taxpayer money.

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Nevertheless, Japanese people stuck to the trap of inflation expectation in

that they preferred saving rather than spending and thought that money
would be worth more in the future if interest rates kept dropping. So the
government started the quantitative easing method with the hope that they
would hit the inflation target, which they did not due to a weak banking
system (Pelin and Berkmen, 2012). The graph below shows that CABs
increased gradually from 5 trillion in 1998 to a peak of 36 trillion in 2004
during the quantitative easing period before declining at the end of the QE
in 2006 (IMF, 2011).

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But, unexpectedly, the global financial crisis struck Japan hard in the 2000s.
Japan was strongly dependent on exports, notably automotive exports, and
when demand in Europe and the United States fell, both industries suffered
greatly, particularly in 2009. (Zoia S. Podoba, Victor A. Gorshkov, and
Anastasiya A. Ozerova, 2021). This was also a setback for the Bank of
Japan, which was still attempting to raise inflation expectations.

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Another factor that has prevented Japan from achieving inflation is the
population drop caused by Abenomics. While Abenomics aggressively
pursued quantitative easing, Japan had the highest public debt of any
industrialized nation in December 2022, estimated to be 1.29 quadrillion
yen, or 263% of GDP, with the Bank of Japan owning 43.3% of this debt
(Wikipedia contributors, 2022).

Nonetheless, other policies, such as corporate tax cuts, assisted the

administration in dealing with this (Iori Kawate, Jun Yamazaki, 2017). In
truth, inflation has been greater since Shinzo Abe took power than in prior
decades, but it will not reach the 2% target until April 2022. (Japan: inflation
rate 2027, 2022). Monetary policy is unsuccessful at healing an economy,
yet reducing interest rates to boost productive development is difficult since
corporations would exploit the chance to finance bigger dividend payments
to affluent investors with cheap loans.

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Finally, the reason for the deflation in Japan was the aging population. It
was estimated that the Japanese population will dip below 50 million by
2100, and the number of working-age people is expected to decline further
to around half of the total population by 2065 (Japan: Demographic Shift
Opens Door to Reforms, 2022).

With fewer people working means lower wage income and reduced product
demand, and as greater technology is being utilized to replace the
employees who are presently enjoying their pensions, the deflation has
proven tough to remove.

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The repercussions of two decades of deflation in Japan are evident.

Average yearly salaries have climbed a meager 3% over the last 30 years,
compared to a 47% gain in the US (William Sposato, 2022). Prices have
followed a similar pattern, with cost reducing, the lowering of tariffs, and
increasing import substitution helping to drive costs down (William Sposato,
2022).  To break out of this, the central bank has flooded the markets with
cash, an unprecedented initiative that has made it the buyer of practically all
new government debt( William Sposato, 2022).  This raises two huge
difficulties. Firstly, the Japanese government is the most indebted nation in
the world, with a total debt equivalent to about 190% of its yearly economic
production (William Sposato, 2022).   Secondly, the BOJ's aim was to
create a demand-driven cycle in which better-paid employees go out and
spend more, driving up demand and leading to new investment and then
higher wages, thus the energy bill pushed by the war is the unanticipated
plan (William Sposato, 2022). 

Recently, Haruhiko Kuroda pledged to remove deflationary pressure,

although it is very hard in reality (William Sposato, 2022).   Owing in part to
the dismal situation in Ukraine, electricity and cooking oil prices are
considerably higher. (Stephen Stapczynski, Soko Oda, 2022) The line
graph below displays the electricity bills in the Kanto area. For example, in
2022, the average electricity bill for a model family is around 7,500 yen, up
nearly 20% compared to the previous year and predicted to climb much more
(Stephen Stapczynski and Soko Oda, 2022).

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As a result, Japan has already reached its inflation target for the first time
since the 2000s, at about 2.1% in April, 2022. The inflation rate in 2023
seems to be quite good for the economy (Trading Economics, 2023).

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The Bank of Japan is planning for economic development by using

economic, fiscal, and monetary policies as well as preserving financial
stability and supporting capitalism. They are reducing gender inequality,
encouraging green and digital investment, reforming budget expenditure
ceilings, intervening at the FXI to maintain the yen's movement at a rate
that is more in line with fundamentals and healthy markets, accelerating
start-ups, and transitioning to a low-carbon economy (Brian Walker, 2023).

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