A Minskian Analysis of Japan's Lost Decade(ZT)

'It' Happened, but Not Again: A Minskian Analysis of Japan's Lost Decade
MARC-ANDRE PIGEON Bard College - The Levy Economics Institute June 2000 Jerome Levy Economics Institute Working Paper No. 303
Abstract:      This paper asks two questions. First, can we explain Japan's ongoingfinancial crisis by means of an institutional analysis similar to theone Hyman P. Minsky applied to the U.S. economy during thepostwarperiod? Second, what are the implications of this analysis for what isgoing on in theCanadian and U.S. economies today. To answer the firstquestion, we develop an interpretation of Japan's postwar history andparticularly the evolution of its financial institutions that webelieve fits Minsky's institutional analysis. We begin by identifyingthree broad periods in Japan's postwar economic history through 1990.We label the 1945 to 1972 period as "stable," thanks in part to tightregulation of the financial and trading system. By the early 1970s andthrough the end of the decade, however, these systems were under severestrain for both internal and external reasons. Internally, Japan'slargest companies were relying less on bank credit to financeinvestment and trade and more on retained earnings. This affected thefinancial system by reducing bank profitability and forcing banks toseek business elsewhere, notably in the real estate sector. Externally,Japan suffered from the collapse of the Bretton Woods exchange-ratesystem, increasing trade tensions with the United States that led to"forced" deregulation, and what were two very difficult oil shocks fora country unusually reliant on oil imports. During the last period,from 1980 to 1990, Japan's economy easily outperformed the OECDcountries, leading to yet more pressure from abroad to deregulate andstimulate domestic demand. Ultimately, we suggest that the country'sfinancial system was not able to adapt adequately to a rapidly changingdomestic and international setting. This created a powder keg forill-considered fiscal and monetary policy (surpluses and high interestrates) and fertile ground for the financial crisis that took root in1990 and persists to some extent today. To answer the second question,we draw parallels between events leading up to Japan's 1990 stockmarket crash and events in the United States and Canada today, withparticular emphasis on the current policy stance in both countriestoward budget surpluses and inflation. We argue there are good reasonsto be concerned that history may be about to repeat itself.
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	Suggested Citation Pigeon, Marc-Andre, "'It' Happened, but Not Again: A Minskian Analysis of Japan's Lost Decade" (June 2000). Jerome Levy Economics Institute Working Paper No. 303. Available at SSRN: http://ssrn.com/abstract=240286 or DOI: 10.2139/ssrn.240286