Video #7 - Emergency Measures for Japan's Economy

Monday, January 09, 2006

sources | lesson plan

BACKGROUND INFORMATION

The Bank of Japan recently announced that it would pump money into the banking system and increase government bond repurchasing in order to bring interest rates close to zero. But according to Forbes magazine: “…flooding the Japanese economy with cheap money doesn’t have the same stimulating impact it does in the U.S. Japanese consumers and businessmen don’t need to borrow money. They need to spend some of the money they have hidden under their mattresses.” And David Asher, a Japan expert at the American Enterprises Institute, suggests that by increasing liquidity while ignoring massive debt in the government, banking and business sectors, the Japanese central bank could actually lead the region into a Pan-Asian financial crisis similar to the one in the fall of 1997.

However, Bank of Japan Gov. Masaru Hayami said this easing would greatly expand Japanese banks’ capacity to lend. The move also calls for raising loan-loss reserves to 25%, with the central bank making up the difference with current reserves. But Japan already has the highest personal savings rate of any nation in the world, and the current overcapacity in manufacturing suggests that businesses will not borrow more money either, says Arthur Mitchell, a Japan expert at Coudert Brothers.

He adds that Japanese consumers have lost confidence in their government and financial system. “They are hoarding their money because of fears their pensions are in real danger and because the massive run-up in debt threatens other investment options,” says Asher.

The opinion of Forbes writers is that Japan is caught in a decade-long deflationary spiral, and they suggest that what the country needs is major economic structural reform. They recommend that bad debts should be written off and unproductive business assets eliminated. According to Forbes, entrepreneurship has not been encouraged in Japan, but needs to be. It adds that the government could jump start this new trend by offering investment tax credits, retraining employees, and setting up a 401(k) retirement savings system.

Despite its stated support for Tokyo’s new policy, the Bush administration is reportedly concerned with Japan’s plan to pump large amounts of yen into its banking system and the impact this policy may have on the U.S. economy and industrial firms. And Paul Blustein of the Washington Post reports that representatives of American manufacturers are far more negative about the news because the measure threatens to cause the Japanese currency to fall against the U.S. dollar, making Japanese goods cheaper and more competitive against U.S. products.

Alan Blinder, a Princeton economist and former vice chairman of the Federal Reserve, took a similar view, saying: “…It sure would be nice to see some growth coming out of Japan, so my judgment is this is good for the U.S. But is also stands to reason that this will cause the yen to depreciate, so if you’re trying to sell autos in Japan, or competing against Toyota and Honda in the U.S., you may not be so happy about this.”

“We think the yen is plenty weak the way it is,” said Frank Vargo, vice president for international affairs at the National Association of Manufacturers. He fretted that Japan is “trying to export its way out of its problems” instead of bringing about a more fundamental restructuring of its ailing banking system.

The yen has lost about 14 percent of its value in the past six months, hitting a 22-month low of about 123.5 yen per dollar. This, combined with the corresponding strength of the dollar against other curencies, is seriously eroding the competitiveness of the U.S.-made products.

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SOURCES:

“Japan’s Monetary Shift Risks Flameout.” Forbes, March 20, 2001. http://forbes.com/2001/03/20/0320global_print.html

Blustein, Paul, “Japan’s Economic Plan Could Hurt U.S. Companies.” Washington Post, March 21, 2001; Page E01.

Mann, Jim, “Exports Not the Answer, Bush Tells Japan.” Los Angeles Times, March 20, 2001. http://www.latimes.com/cgi-bin/print.cgi

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LESSON PLAN

GRADE LEVEL/SUBJECT: 10-12/Economics, International Relations, World History, International Bachelaurate Programs(IB), Current Events.

PURPOSE: To present activities to be used at a variety of classroom situations in order to enhance student understanding of the Japanese economy and its significance globally.

OBJECTIVES:

Students will be able to:

1. Explore the effects of the devaluation of the yen on the Japanese economy.
2. Analyze the effects of the devaluation of the yen on the U.S. economy.
3. List the steps taken by the Bank of Japan to stabilize the economy.
4. Evaluate the effect of the measures taken by the Bank of Japan on the Japanese economy.

MATERIALS:

1. Background information provided.
2. Resources on Japan available at your school’s Media Center and the Public Library
   System in your area.


3. Background information available through Internet “search engines”.

ACTIVITIES: May be assigned as group activities or as individual tasks. They may also be designed as preparation for related presentations either by individuals or groups.

1. Use charts and graphs to keep a record of the relationship between the yen and the dollar in the next month.
2. Use charts and graphs to keep a record of monthly trade between Japan and the U.S. over the next year (data available from the U.S. Commerce Department).
3. Draw conclusions from the data gathered during this time.
4. Research historical evidence of similar situations.
5. Make recommendations based on the conclusions drawn.
6. Write an editorial presenting your views based on the above information.
7. Simulate a high level meeting at the Bank of Japan to determine future fiscal policy based on the data gathered
8. Simulate a high level meeting of the U.S. Treasury, the State Department and the White House to determine future U.S. economic policy toward Japan.

EVALUATION:

Individual assignments should be graded by the teacher using established criteria.

Group activities, presentations and projects may be evaluated by teachers and students using the following criteria and scale:

Content Creativity Clarity

1=Superior (A) 2=Excellent (B) 3=Good (C) 4=Fair (D) 5=Poor (F)

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