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

The Lost Decade - Essay ExampleAs a result, there was trade surplus and incr moderationd liquidity for banks thus qualification credit easily available and cheap. There was also increase in asset prices such as real terra firmas, creases and land. Banks used excess liquidity to contribute loans backed by real estates or land as collateral and when eventually the ministry of finance raised interest rank in 1989, the asset house of cards burst resulting in the collapse of the financial markets and economic growth stagnation. There are several factors which can be attributed to the recession. Some scholars like Ito believe that the mail could have been avoided if only the government had taken measures urgently. The Bank of Japan (BOJ) and ministry of finance(MOF) and Japanese banks took a gigantic time to acknowledge 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 lost 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 go along to increase, the companies continued to acquire 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) encounter that the economic slowdown was a result of massive savings due to demographics of aging population. This resulted in over reliance on traditional bank loans as opposed to issue of stocks and bonds in the capital market to acquire additional financing. The relationship of banks and corporations led to lowering of lending standards atomic number 82 to increased risks. The shar eholders of commercial banks were common 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 small and micro enterprises and gave the loans against real estate collateral at low interest rates (Syed et al. 2009). The government institutions were getting annual subsidies and hence were not keen on making profits hence lack of control in lending activities. The government response policy in 1997 of increasing consumption tax is the reason 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 resulted in increased consum ption of durable goods by consumers as they speculated the increase leading to inflation (Nanto, 2009). The community 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