Japan's Financial Crisis and Economic Stagnation Research Paper

Japan's Financial Crisis and Economic Stagnation - Research Paper Example The sheer size of the cost, along with the interaction among the related economic problems, has made a decisive resolution of the problems politically difficult†2. Some economists blamed the macroeconomic factors for Japan’s crisis whereas others blamed microeconomic factors for that. In fact, Japanese ministry of finance and its lack of transparency, delay in changing monetary policy, lack of rules based regulations and its links to corporations & banks have led to economic stagnation & will be difficult to reform the system. Japan’s financial crisis and economic stagnation â€Å"Non performing debt in the banking sector hampered the growth and recovery of the whole Japanese economy†3. As in the case of recent global financial crisis, Japanese financial crisis also started from the banking sector. â€Å"Even though the share of loans to the manufacturing sector has been decreasing, Japanese banks have expanded their overall lending business since 1970. As a result, the outstanding amount of loans to the manufacturing sector has been increasing†4. The huge outstanding amount in the manufacturing sector caused severe problems in the functioning of the Japanese banks. No banks can operate effectively unless the lending and repayment achieve certain equilibrium or balancing. However, in 1980’s, Japanese banks struggled to function properly because of the huge amounts of its money blocked in the manufacturing sector. Manufacturing units in Japan became financially sounder in 1970’s which encouraged them to use the internal resources more frequently rather than relying on banks for everything. â€Å"Major Japanese manufacturing firms drastically reduced their reliance on bank loans in the late-1970s from more than 30% to less than 10%†5. In other words, manufacturing units stopped their transactions with the banks and at the same time they had shown little interests in repaying its mortgages. In an attempt to in crease the business, Japanese banks started to reduce the interest rates; however, the manufacturing units have shown little interests in taking or repaying loans which caused tremendous stagnation in the banking industry. Before the economic stagnation, Japanese banks sanctioned mortgages to all the people who approached them for assistance. People on the other hand have taken huge amounts of loans from Japanese banks and spent it for non-productive purposes. As a result of that Japan’s economic growth started to decline. â€Å"From 1985 to 1990, Japan experienced an asset bubble of unprecedented proportions. From 1990, the bubble began to burst. The bursting of this bubble left banks throughout Japan- both large and small- in financial distress†6. Real economic growth and strength of financial systems in any country are directly related. In other words, when real economy travel in one direction, financial system also travel in that direction and when the real economy travel in another direction financial systems also follow the same path. In other words, any problem occurs to either of one may affect the other one also. The above facts are true in the case of Japan also. Poor economy in Japan is hurting banking system in one way whereas poor performances of the banking system contributing heavily to the poor health of the economy in another way. There are certain