OPINION | The story of Japan’s economy — Deflation and economic stagnation By Andrew J. Masigan READ:
This came on back of industrial goods exports and the strengthening of the yen. By the late 1980s, Japan wasrmly positioned as the second largest economy in the world. Its gross domestic product was more than that of the Soviet Union and West Germany combined, the 3With its newfound wealth, the Japanese went on a spending spree. Not only did they snap-up corporations and historical landmarks worldwide, but they also indulged in luxury spending.
Economists fear deflation because falling prices is a symptom of weak consumer spending, which is a major component for economic growth. Companies respond to falling prices by slowing down production, and this leads to layoffs and salary reductions. This, in turn, results in lower household incomes. Less money in the hands of the citizenry results in a further decline in demand for goods and services. With this, prices drop further. Deflation is a self-consuming cycle.
Japan had no choice but to compete in the higher spectrum of the market or in technology driven goods. In this arena, it found itself in stiff competition with the United States, France, Germany, and the United Kingdom. Mass market Japanese brands like Toyota, Sony, and the like established manufacturing plants overseas where production costs were lower. Japan lost the multiplier-effect of benefits typically enjoyed when factories are based in the motherland .
The quantitative easing program was so massive that the Japanese government owned $434 billion worth of bonds and stocks at one time. First, unlike the quantitative easing program of the US that took place over three years, that of Japan spanned 20 years. Its effect was too gradual to make an impact. Second, due to Japan’s aging population, the country did not register any change in productive capacity since the 1980s. Third, unlike American corporations that customarily use excess liquidity to expand their businesses, Japanese companies prioritize giving back to its shareholders.
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