what kinds of things led to japans economy downfall in the 1990's?
- SeriousCat ^-.-^Lv 41 decade agoFavorite Answer
I can't answer what led to the downfall, but I can answer why it stayed there. You might find it interesting.
Zombies! Economics of the Living Dead:
The central bank of Japan lowered the wholesale interest rate to 0% (yes, you can check it yourself), making retail interest rates less than 3% per annum, in order to stimulate investment and hence economic growth. However, what actually happened was that investment slowed because of the increase.
The Japansese economy was plagued with what were dubbed 'zombie' firms; nearly insolvent, heavily debt-ridden firms that were able to survive by paying the meagre interest rates on loans borrowed to finance their debt. Even though such companies were weak, they did have customers and so took up a portion of the market share. This prevented financial healthy and competitive companies from overtaking the market, so the low interest rates stifled competition in the economy.
Economies Need Recessions:
Truth be told, economies need recessions in order to weed out weak firms and allow the resources and consumers of the economy to fllow to the competitive firms. Of course nobody likes a recession, but as the Japanese learned the hard way: it's even worse to stay in one.
A personal guess...
I think the downturn of the Japanese economy can be attributed to a variety of factors, such as the Asian Financial Crisis of 1997 (beat up alot of East-Asian economies - only South Korea was relatively unaffected), as well as Japanese Cronyism (or 'helping out' buddies too much in the business world - a problem quite prevalent in China and Hong Kong as well), which would have decreased competition within the economy. The low interest rates didn't help the situation (they weren't very high to begin with).Source(s): Japanese Economic Journal, "Economics of the Living Dead" by PhD Takeo Hoshi.