Question

Japans bubble economy in the time period 1985-1990.

• What did the government do during this time to either help or hinder the improvement of the economy? Consider what policies were put in place by the government. This is where you will discuss fiscal policy, monetary policy, and supply side policy (most countries don't actively use supply-side policy, so if the country you are focusing on did not use supply side policy, you don't need to discuss it here).
• What was the intended impact of these government policies? Note: government policies are not always effective, this is asking about the objective or goal of the government policies, not necessarily if these worked or not.A
• What was the actual impact of the government policies? As objectively as possible, were there policies effective or not? Why?

Answer 1

Bubble economy in Japan :-

It may be defined as a sharp rise in the price of an asset with the initial rise generating expectations of further rise and attracting new buyers generally speculators interested in earning huge profits .

Causes :-

The causes for formation of bubble economy were :-

1) Plaza Accord between Japan and other countries

2) Japanese currency appreciation

3) Japanese low rate interest policy

4) The land lease law

5) Financial Liberalisation

Government Policies :-

To correct the bubble economy the government intervened and adopted two types of policies :-

a) Monetary policy and it's impact :-

Policy :-

1) Appreciation of yen

2) The Central Bank decreased the discount rate from 5% to 2.5%. That is Zero interest rate policy

3) Introduction of expansionary monetary policy that is increase in government spending.

Impact:-

1) Appreciation of yen lead to short term recession.

2) The decreased discount rate was lowest in the Japanese history .

3) Expansionary monetary policy caused a large number of surplus capitals

4) There were fewer favourable investment opportunities so these surplus capitals were channelised into stock and real estate market causing asset prices to increase sharply.

5) Due to continuity of these policies the Japanese Stock Prices fell sharply which caused losses to almost all banks , corporations and firms

6) Following the stock market , the real estate market bubble was also burst

b) Fiscal policy and it's impact :-

Policy :-

1) Government used expansionary fiscal policy to control the bubble.

2) The government made large scale purchases of goods and services to prop up aggregate demand .(Refer the figure below )

Impact :-

It certainly helped the economy to come out of the bubble however the economy suffered a slowdown but not a severe slump