Why did the Japanese economy falter?
Does the Asian Financial Crisis mean an end to the Asian Miracle?
The fall of the Japanese economy in the early 1990s provoked a fierce criticism of the East Asian economy. The praise turned into a criticism: Lack of transparency, and institutional defects were only a few examples of structural problems of the East Asian economy. It was reinforced with the Asian Financial Crisis in the late 1990s.
1. What caused the fall of the Japanese economy?
1) Systemic Problem of the Japanese Financial System:
The most standard theory pins down on bubble of the real estate market, and over-extended credit to this area, and subsequent burst of the bubbles, which has resulted into a mounting bad loans in the financial system.
For instance, a papper by A. Posen, http://www.iie.com/publications/pb/pb01-4.htm
2) Wrong and Ineffective Government Policy
Some argue that the Japanese government adopted wrong monetary policies.
A. Posen, “It takes more than bubbles to become Japan,” http://www.iie.com/publications/wp/2003/03-9.pdf
Some argue that the Japanese economy is stuck in a classic example of the Keynesian concept of ‘Liquidity Trap’.
2) Lack of Technical Innovation
Adam Posen, “Unchanging Innovation and Changing Economic Performances in Japan, “ For the paper, just click http://www.iie.com/publications/wp/2001/01-5.pdf
3) Human Factors, or Changes in Cultural Value
Relaxation of the Post WWII high spirits
2. Are these arguments convincing?
Not really.
Some of the so-called problems used to be hailed as ‘effective institutions’.
The so-called problems existed even before the Crisis, particularly during the rapid
growth period.
The western scholars use the concept of sustainable economic growth, and say that the sustainable economic growth requires institutions or infra-structure. They imply that the East Asian institutions might have been good for the quick start of economic growth, but eventually turn out to be inadequate for a long-term growth.
Many Asian countries have tried to implement institutional reforms suggested by the western scholars: efforts to enhance transparency, communication (publicly open policy), reduction of information asymmetry, corporate governance, etc.
However, were the institutions really as bad as were described in the post-Crisis materials? Was Amakudari a source of excessive intimacy between the government and the corporate sector, so that it hindered the economic efficiency? We have different views.
In addition, there is no evidence that the western concept of transparency is taking root in the economy. In fact it may be culturally incompatible.
Then what might be blamed for the economic crisis?
It might be the international economic forces that have driven the Asian economies to bad and hasty globalization. These countries were forced to have hasty financial liberalization, which opened up their domestic credit market to the international (American) financial institutions.
These institutions moved a massive amount of funds into the Asian countries, and putt them out of the countries around the time of the Crisis. Some argue that it was this hot money that caused the Asian financial crisis. They also have benefited from the post-Crisis restructuring of the financial system in the Asian countries.
Some authors argue that in fact this kind of imposed western-style ‘wrong’ financial reforms has hindered the recovery of the Japanese economy.
http://mercury.soas.ac.uk/economics/workpap/adobe/wp116.pdf
(Compare) "Financial Globalization: Manna or Menace? The Case of Mexican Banking" outlines how Mexico's mid-1990s Tequila Crisis resulted in political pressure to open the nation's banking system to foreign owners. After decades-long proscriptions on any but the smallest foreign footholds, about four-fifths of Mexico's banking assets are now controlled by foreign firms. http://www.dallasfed.org/latin/annual/2002/clae_ar02b.html