Saving Pattern & how it has been impacting the Japanese economy

TARIN PODDAR – A 036

In the following slides I have discussed the Japan economic boom and post crises and what led to the happening of the same.

Saving rates of the Japanese people played a major role in the creation of the bubble as well as post bubble crises.

In the following 3 slides - I have given a line by line argument of what are the causes of the major happenings in Japanese economy in the post WWII era – specially focusing on the 1989 bubble and post crises and what circumstances were responsible for it.

After 3 slides of discussing the major sequential happenings, I have shared some relevant graphs with explanation :

1. Saving Rates comparison of Japan and USA (year by year analysis of how Japan’s saving rates were almost double that of USA throughout the period starting 1960 to the bubble in late 1980’s)

2. Fluctuations in Japan Interest Rates in the last 35 years (how they were high till the period pre-bubble and how they hit bottom post bubble burst)

3. Depletion in Saving rates in Japan post bubble-burst (how Japan’s saving rates went low and low post bubble-burst compared to constant rates in other major economies of the world)

TARIN PODDAR – A 036

• Post world war 2 – Japanese government imposed a series of tariffs and policies to INCREASE SAVINGS AND REDUCE IMPORTS

• This led to increase in money with BANKS

• Increased LOANS AND CREDITS because large sums of savings money with banks

• This led to huge investments in technology and capital advancements – easier loans – increased money supply

• Improved efficiency – reduced prices compared to Rest of the World

• Leading to TRADE SURPLUS

• In 1985 Japan had a $50 billion trade surplus with USA i.e 33% of total US trade deficit

• Appreciation of YEN

TARIN PODDAR – A 036

•Optimism and lucrative financial assets and markets

•Overconfidence as companies performed extremely well – stock prices rose - banks started lending riskier loans to people and companies

•High amounts of money readily available for Investments

•Equity prices and Land prices reached an excessively high level (as high as $20,000 per square foot in some areas of Tokyo)

•Government recognizes the need to intervene and stop this huge bubble from inflating further, hence they decrease the money supply by increasing the interest rates

•Bubble Bursts as money supply reduces because demand suddenly crashed

•Land Prices and equity prices CRASH

•People start selling their investments at lower prices leading to Deflation

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• Many people unable to repay the loans – leading to loss of savings in banks – collapse of banks

• Government bails out the banks to stabilize the economy

• DEFLATION in the economy

• Government tries to recover from the Deflation by reducing interest rates and increasing money supply but this leads to LIQUIDITY TRAP

• Confidence in the people shrunk. Bearish about the economy, people feel there will be further deflation – hesitation in consumption and investment – feeling that money value will rise in future with deflation

• No trust in banks and economy – savings reduce – people preferring to keep money at home with bearish mindset

• Money going out of Japan and industry losing their competitive edge – further weakening the economy by reduced trade and increased competition

TARIN PODDAR – A 036

Source: NBER Macroeconomics Annual 1986, Volume 1Volume URL: http://www.nber.org/books/fisc86-1(Comparative graph - USA JAPAN saving pattern)

TARIN PODDAR – A 036

The graphs compares the saving rates in Japan to that in USA for the years pre bubble-burst.

The graph very well explains how Japan’s savings rates were almost double that of US leading to :

1. Huge Saving money with Banks2. Huge Lending 3. Huge Investments in R&D and industries4. Improvement in Japanese industries and making them efficient compared

to the rest of the world5. Huge exports6. Trade surplus 7. Expansion of economy and financial sectors of the economy8. Appreciation of currency9. Bullish behavior and optimism10. Formation of Bubble

TARIN PODDAR – A 036

Source: http://www.tradingeconomics.com/japan/interest-rate

TARIN PODDAR – A 036

1. The graph explains how the Japan interest rates used to be higher till late 1980’s when during the boom period they had gone down.

2. The sudden rise in the interest rates in early 1990’s was to burst the huge asset price bubble which had increased price levels to an enormous level.

3. To bring down these price levels and to reduce demand the central bank had increased interest rates.

4. But faced with continued deflation, the central bank had to decrease the interest rates in late 1990’s to increase demand and spending.

5. But although the interest rates were decreased to ground bottom, the economy failed to revive because of LIQUIDITY TRAP.

6. People’s sentiment was bearish and didn’t want to spend more as they feared further deflation.

7. Since then the interest rates have remained very low but however haven’t translated in higher spending and economic growth. This is a situation of LIQUIDITY TRAP where monetary policy become ineffective.

TARIN PODDAR – A 036

Source: http://www.oecd-ilibrary.org/docserver/download/fulltext/3011041ec022.pdf?expires=1346167874&id=id&accname=freeContent&checksum=D8121E558DABB1250B2F0BC2095402DC

TARIN PODDAR – A 036

1. The graph explains how Japan’s saving rates have fallen from a high in the last 20 years compared to other major economies where the trend has been more or less steady and constant.

2. This is because of reduced confidence in the banks as they fear banks collapsing.

3. This is also because of very low interest rates in the last 15 years which means there is less incentive to save money in banks.

4. A part of the reason for fall in saving is also deflation as the people feel price levels will further decrease in future leading to increase in value of money. People prefer keeping money with them in hope of spending in future instead of saving in banks which already have very low rates of interests.

TARIN PODDAR – A 036