Question

Japan's bubble economy- What could Japan have done after the bubble economy to get their economy back on track. What the government could have done differently that would have positively impacted the macro economy.

Answer 1

First, we began by how the bubble was created. Postwar, Japan had more savings which led to higher deposits in banks and the creation of loans.  Japan's bubble economy was created by rising in the prices of assets and an increased in economic activities which increased the aggregate demand in the economy. This further led to increased expansion in loans and credit. This gave rise to reckless behavior like higher speculation in stock markets or excessive investments.

This overconfidence was the reason behind the financial crisis in Japan. The reckless and over lending turned to lenient rules. If the central bank would not have been so linenint , there would not have been such a situation in japan.  Banks took more risks because most of the funding was done by the Yen from capital markets, combined with this was the loose monetary policy.

The Bank of Japan should have tightened the monetray policy and should not have turned a blind eye to the increased speculation. This would have not led to the increased loans and the creation of aaset bubble whihc when bursted led to the creation of crisis in the economy. The action which was delayed should have been taken in due time by the central bank.

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