The Lost Decade Essay Example | Topics and Well Written Essays - 2000 words

The Lost Decade - Essay ExampleAs a result, in that respect was trade surplus and step-upd liquidity for banks therefore making credit easily available and cheap. There was also increase in asset prices such as real estates, stocks and land. Banks use inordinateness liquidity to lend loans backed by real estates or land as corroborative and when eventually the ministry of finance raised interest rates in 1989, the asset bubble burst resulting in the collapse of the financial markets and economic growth stagnation. There are several factors which can be attributed to the recession. almost scholars like Ito believe that the situation could have been avoided if lonesome(prenominal) the government had taken measures urgently. The Bank of Japan (BOJ) and ministry of finance(MOF) and Nipponese banks took a long time to acknow guidege the existence of the problem hence took long to respond and this led to worsening of the problem (Saxonhouse & Stern, 2004). Increased speculation is also viewed as a contributing factor to the alienated decade. Due to high prices of land, stock and real estate, banks thought that the prices would continue to rise thus instead of reinvesting the excess liquidity, they loaned it with real estate as a collateral without foreseeing any risks. As prices continued to increase, the companies continued to induce more loans backed by assets and invested in stocks and securities and the banks offered loans without considering creditworthiness of the loanee. By the time the bubble bust, most banks had little or capital reserves (Callen & Ostry, 2003). Callen and Ostry (2003) observe that the economic slowdown was a result of massive savings repayable to demographics of aging population. This resulted in over reliance on traditional bank loans as opposed to aftermath of stocks and bonds in the capital market to acquire additional financing. The relationship of banks and corporations led to lowering of lending standards conduct to incr eased risks. The shareholders of commercial banks were mutual life insurance companies which were managed by representatives selected by the management hence there was no regulations to operate efficiently. The banks therefore were lending money without a profit maximization motive thus increased lending risks. The MOF had also undergone deregulation hence was not providing the banks with regulatory rents hence they turned to nonaged and micro enterprises and gave the loans against real estate collateral at low interest rates (Syed et al. 2009). The government institutions were acquire annual subsidies and hence were not keen on making profits hence lack of catch in lending activities. The government response policy in 1997 of increasing habit tax is the causation for continued crisis which had already began to ease (Syed et al. 2009). The government underestimated the depth of the crisis and began strategies to reduce budget deficits by increasing consumption tax. This resulte d in increased consumption of durable goods by consumers as they speculated the increase leading to inflation (Nanto, 2009). The conjunction banking model of Japan also prolonged the crisis since the banks were reluctant to write-off non-performing loans and instead opted to continue lending to defaulters. The increase in interest rates in 1989 by the MOF led to the bursting of the bubble. The impact was felt not only by the banking system and other financial