Japan's Economic Crisis the Economic Thesis

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Employment for life and other inefficiencies valued by the Japanese public were becoming threatened. This had the effect of shocking consumer confidence, but the corporate world became stuck, knowing that the systems would need to be changed but seemingly unwilling to make those changes. The banking system would need to be purged of its bad debts. That the economic crisis in Japan lasted so long was a result of resistance to making the necessary structural changes in order to modernize the economy. These structures, designed to bring Japan strong economic growth, had lost much of their value in the wake of the economic crisis.

These structural issues contained the Japanese economic crisis mainly to the Japanese market, but there were some impacts on the global economy. In the aftermath of the Asian economic crisis in 1997, Asian economies were in need of leadership. Japan was the region's largest economy but was in no position to provide that (Noland et al., 1998). Japan had pledged aid; with a weak yen this aid was insufficient to restore balance to Asia's other crisis-stricken nations. The impacts were also felt in the United States, particularly in sectors such as automobiles where the two countries have strong trade ties. Japan's weakness, however, remained primarily a Japanese issue (Krugman, 1998).

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The economic crisis in Japan was perpetuated by weak domestic demand. International demand was still strong despite the threat of U.S. action to reduce its current account deficit with Japan (Noland et al., 1998). The weakness in domestic demand was in turn perpetuated by government and business reluctance to make the necessary structural changes. The weak attempts at stimulus, such as cutting already rock-bottom interest rates to zero, were insufficient because they failed to address the issues at the heart of the crisis.

Despite the stagnated GDP, the Japanese people continued to work and make money. They were, however, saving that money rather than investing it. In order to spur domestic demand, the government needed to make a sweeping series of structural changes to the economy in order to modernize it. Moreover, some inflationary pressure would need to be created in order to stop the deflationary cycle and liquidity trap.

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