The 30 years of the Heisei era are about to end amid a moderate economic recovery after the nation’s economy survived a number of crises.
Nevertheless, the flow of money, regarded as the lifeblood of the economy, remains stagnated with prolonged deflation.
It is desirable for the nation to explore a path for full-fledged growth in the upcoming Reiwa era in light of the lessons learned from the Heisei era.
Price of procrastination
The Nikkei Stock Average hit a record high of 38,915 on the final trading day of 1989, the inaugural year of the Heisei era. Land prices were also surging, with Japan’s total amount of land assets reaching ¥2.45 quadrillion, double the current figure.
This economic bubble burst all too quickly. After the Bank of Japan raised official discount rates and the Finance Ministry started total volume control on real estate loans, land and stock prices plunged, sending the nation into a recession.
Such an excessive economic bubble cannot be ignored, but the failure to seek ways to achieve a soft landing leaves regrets.
The collapse of the bubble economy caused a nonperforming loan problem due to a decline in asset values. In 1992, then Prime Minister Kiichi Miyazawa insisted that the nation be prepared for a crunch with the use of public funds.
However, optimistic views that the problem would be solved by an economic recovery prevailed in the financial industry, which had been protected under the so-called convoy system. Swayed by public opinion against the use of taxpayers’ money to rescue banks, the government fell behind in taking sufficiently drastic measures to tackle the issue.
Catering to the public’s wishes can distort policy decisions in some situations. That may be a lesson for the future.
During the financial crunch of 1997 and 1998, nonperforming loans finally exploded. Financial institutions, such as Yamaichi Securities Co. and the Long-Term Credit Bank of Japan, Ltd. went under in succession. Banks increasingly became reluctant to lend, a trend that led to a deflationary economy in which prices of goods and services fell.
It is apparent that procrastination in solving the problem worsened the situation. The importance of a swift response should be kept in mind.
The next crisis was a shock sparked by the 2008 collapse of Lehman Brothers. Initially, the government and the BOJ perceived the matter as just a “U.S. crisis.”
However, Toyota Motor Corp. and Hitachi, Ltd. posted massive losses, hit by sharp drops in their exports. Dismissal of temporary workers in the manufacturing industry also became a social issue. Once again, the position of sitting by idly, taken by the government and the BOJ, is a matter that should be reflected on.
The government and the central bank have finally begun to cooperate closely to deal with the situation. An economic policy command system centered at the Prime Minister’s Office has been established. The system’s effectiveness will be tested when a crisis emerges.
Businesses could not adapt well to the changes of the times, either. Above all, a downtrend is conspicuous among electrical manufacturers.
Amid a sharp rise in the value of the yen, they continued to stick to the system for undertaking on their own both the development and production of products ranging from semiconductors to household electrical appliances. They failed to proceed with the selection and concentration of projects and suffered setbacks in cost competition with their South Korean and Chinese counterparts. They are called on to carry out reforms to regain vigor in the digital field.
The exhausted corporate performance exerted influence on the employment situation as well, causing a sharp increase in the number of non-regular workers who were employed for temporary labor adjustments. Firms are responsible for improving the treatment of non-regular workers by carrying out work style reforms.
There were also periods of economic recovery during the Heisei era. The Izanami economic boom, which lasted from February 2002 to February 2008, is the longest span of economic expansion since the end of World War II. The current business recovery, which started in December 2012, is nearing this record.
The current cycle of business recovery is described as tepid and something that cannot be felt because the growth rate is low. But corporate achievement has turned for the better and the employment situation has improved significantly. For example, the ratio of active job openings to job applicants has exceeded that recorded during the bubble economy period.
These could be results of the Abenomics economic policy implemented by the administration of Prime Minister Shinzo Abe. The BOJ’s “different dimension” monetary easing and the government’s expeditious fiscal policy caused the yen’s weakening and high stock prices.
However, this did not dispel the deep-seated deflationary mind-set, and businesses adhered to a defensive management stance. They prioritized repayment of debts, considering that they could be regarded as being at risk of bankruptcy if they continued to be saddled with a huge amount of debt. They have accumulated cash reserves as their business results recovered.
In the case of the household economy, too, it is more advantageous to hold money than to invest and spend under the deflationary situation when the value of cash and deposits is rising.
Use dormant funds
Internal reserves accumulated by companies surged during the Heisei era, approximately quadrupling, while cash and deposits held by individuals swelled to more than double. Putting these accumulated funds to active use is the biggest challenge left unresolved from the Heisei era.
How can a virtuous cycle of consumption and investment expansion be realized? If an enormous amount of dormant funds is to be used, it will require joint efforts by the private and public sectors.
The “Fourth Industrial Revolution” through the utilization of such technologies as robotics and artificial intelligence is a promising field of growth. Businesses are called on to invest aggressively and aim for technical innovation with the initiative taken by the private sector. Investments in energy-saving projects to deal with manpower shortages will be indispensable.
Support measures by the government, such as deregulation, will be necessary to facilitate the flow of funds into growth industries. To activate funds held by individuals, it is essential to alleviate their anxieties about the future. The government must tackle the task of stabilizing the social security system and achieving fiscal reconstruction.