An exploration of structural, cultural and institutional factors behind the Japanese recession, 1990-2000

This paper analyses the causes behind the Japanese economic downturn which started in the 1990s and investigates the failure of both fiscal and monetary policy to remedy the recession. The author asserts that the Japanese economy was due for recession when two factors occurred to precipitate it, the asset price bubble and the banking crisis. However, a recession would have occurred even if these events had not transpired, because of a number of structural factors. The recession was then prolonged by the existence of the liquidity trap . The inevitability of the recession stems from the fact that the Japanese economy had outgrown its entire modus operandi. The previous economic structure was one that produced for the purpose of exporting. However, a higher yen and declined profitability reduced Japan\u27s ability to export. Local markets could not absorb the excess capacity because of high savings rates and an aging population. Producers became unable to remain competitive given the glut of over-investment and the rigid labour market, caused by a corporate culture dedicated lo protecting labour rights. The Japanese case exhibits that the unique structural and social aspects of an economy can often come to dominate or overwhelm even the best intentions of policy makers. Japanese policy makers were too preoccupied with traditional economic theory to envisage an alternative solution. Japan\u27s unique cultural and institutional aspects combined to nullify otherwise viable macroeconomic policy