Why JAPAN never became a Superpower?

In the 1960s, Japan was growing at the rate of 12% per annum. But between 1995-2002, the annualized growth rate of Japan's GDP was only 1.2%.?

So let's try and understand what exactly brought the economy of the land of the rising sun into darkness:

In n 1979 when the central bank of Japan lowered its interest rates after the second oil crisis in history which was led by the war between Iraq and Iran.?

These lower interest rates enabled the country to invest more in R&D and the Bank of Japan guided the financial institutions while extending credit to ensure judicial growth among all sectors of the economy.?

Industries like automobiles, electronics, and telecommunication grew in this era and Japan surpassed the US in terms of economic growth.

In the 1980s, Japan was on its way to beating the US and becoming a superpower with companies like Toyota and Sony swallowing the global markets.

This rally was complimented by the "Plaza Accords" which were signed in 1985.?

In the Plaza Accord, 5 industrialized nations, including the US and Japan, agreed to depreciate the value of the US dollar and appreciate other currencies.

So, the Central Bank of Japan sold its US dollar reserves to increase the value of the Japanese Yen.?

This had 2 implications-

???? it reduced the exports of the country.

???? it increased the relative wealth of its citizens.

And hence, imports increased.?

Central Bank lowered the interest rates even further to counter the Japanese Yen and this increased the demand for home loans and company borrowing.

As a result, the price of real estate and stocks went through the roof.

With increasing wealth, savings increased and so did their investments.

But in 1989, without realizing its severe consequences, the Bank of Japan increased the interest rates to wipe off the excess money from the market.

And this popped Japan's equity & real estate bubble.?

In the 1990s, the Japanese economy faced 2 problems:

1. Debt deflation- with the burst of the housing bubble, real estate prices fell.

This left people with massive loans and de-valued houses.

To repay their debts, people started saving more and reduced their consumption.?

As a result, demand for consumer goods fell down and with the same level of supply, the general price level of the economy fell too.

2. Banking crisis: The balance sheet of banks got affected in the process because they were the ones who extended the loans.

With deflation, people couldn't pay their dues & that led to bad loans.

This affected the financial well-being of banks & they had to stop extending credits and it got harder for them to mobilize their capital and this again affected the economy.

In 1997-98, 7 major financial institutions failed and the central bank decided to re-capitalize and bail out the banks so that they can play their most important role- MONEY CREATION.?

This move by the central bank of Japan enabled the banks to support the economy from their end.

But now the entire burden of these bad assets fell on the balance sheet of the government of Japan.

Govt had to increase taxes on consumer goods to earn more revenue and increase inflation.?

The Govt of Japan wanted its citizens to spend more, but that didn’t happen because Japanese people were saving more for their future in times of crisis.

In an effort to turn deflation into inflation, govt. reduced unemployment and increased the money supply in the economy by printing more money. - QUANTITATIVE EASING

Things were looking a little better for Japan in 2006, when inflation rose a little bit but the crisis of 2008 hit the economy again.

Japan was even more affected by the US itself, as they rely more on their exports- especially automobiles.?

So fall in global demand resulted in the fall of their economic growth and their inflation still didn’t meet the mark.

As a result, another decade ended with deflation and stagnation for the country.?

To revive their economy, the Central Bank of Japan used the same old methods- printing more money, reducing interest rates (negative now), and more govt. spending etc., but in a more amplified version.

But This still didn’t work well for the economy because the economic policies remain ineffective as people tend to save more with the increase in income.

And Japan lost 1 more decade in the same situation- STAGNATION and DEFLATION.

That’s the reason why Japan could not become the world’s biggest economic superpower.

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