РефератыИностранный языкUnUntitled Essay Research Paper The Economy of

Untitled Essay Research Paper The Economy of

Untitled Essay, Research Paper


The Economy of Japan had experience a tremendous growth since the end of


the Korean war. The growth of GNP in 1967 and 1968 was above 10 % (double


digit growth period) which exceed countries such as Britain, France and Germany.


The economy experienced a boost is due to many reasons, such as: enlargement


of industrial facilities, massive adaptation of western technology and education,


lower the military expense to 1% of GNP, relation with power nation, human


resources and their spirit to achieve “zero defect program”. But after the


first and second oil crisis that occur from 1973 onward. The economy move


downwards partially due to the poor management of economic policy. Although


the government had attempt to adjust the economic policy but the recovery


was slow. As the soaring of yen continues the demand for export has increase


tremendously. With the concern of the United State of this problem, president


Reagan and the G5 have signed an agreement with Japan called “Plaza Agreement”


, the agreement stated that the exchange rate of Japan and Deutschmark can


appreciate against the U.S. . Since then the yen value began to appreciate,


Japan was going through a period of trade balance adjustment. While Japan


is prepare to go through a period of trade balance adjustment, it will also


suffer a period of recession, so the government strongly encourage business


activities to strengthen the economy in order to prevent backwash effect.


It was this event which boost up the GNP and raise the exchange rate. With


this exchange rate advantage it stimulate business activity on housing and


stock investment which created a bubble economy. During this period almost


the entire country was involve in land speculation or other speculate activities.


In this essay it will prove that land speculative activities had create many


negative impacts to the Japanese society and economy. Firstly, it will describe


the cause of land speculation. Secondly it will discuss on the society and


political effects in Japan and lastly it will focus on the economy effects,


more over it will include the aftermath when the bubble collapse.The root of this bubble economy is due the wave of land speculation. The


wide spread of land speculation activities were mainly because it is profitable.


The speculative transactions in assets grew and grew and many believe that


this will last for very long period of time. One of the reason that leads


to massive investmentin the risky activities is because of the success of the Japanese in the


international market during 70*s – 80*s. Many Japanese enterprises and business


man had become very wealthy. These people have a large sum of equity to invest.


Some of these people have focus on risky asset such as stocks and land, therefore


many of the regular ventures were left behind. One of the major cause of


the massive transaction in the land market was due the incremental of loans


by banks. Financial institution was very positive in lending money to the


enterprise. This enhance the accessibility to the land speculate market.


Each size of this loan is very large. This is because the size of mortgage


in Japan financial institutions are based on the collateral, (house) while


in North America the size of the mortgage is based on the borrower*s income


stream. Therefore the size of loan can be obtain by borrower is larger in


Japan than North America. Also 62% of Japanese households own the home that


they live and in average the value is near 4 million yen. Therefore there


are lots of potential investors. And during the period of speculative activities,


borrowers increase the value of their loans as the value of their collateral


increases. Since asset is highly liquidate, the number of potential speculators


are high and borrowers in Japan were able to get a larger size loan on real


estate therefore speculative activities sink into the level of common home


owner and large enterprise. Beside the method of calculating mortgage size,


another reason why the size of loan was so large is probably that both the


bank and the investor were behind the land speculation activity (banking


scandal). Investors were paying some key money (sort of a bribe) to financial


institution in order to obtain a larger size loan. Therefore many financial


institutions were over loan during this period. Another form of raising cash


flow for the speculate market was by braking down a loan that obtain from


a large financial institution to a specific enterprise, then lend a small


piece of this loan to those who was not eligible to obtain a loan from the


bank. These companies that act as the funnel will earn a certain amount of


interest from these smaller companies (branch effect). Therefore all classes


of companies and society can easily access in the speculate market. Other


large corporate, construction company, organize crime group and even temple


(religious) were also involve in land speculation. Another encouragement


to the speculative market was because the government (liberal democratic


party) had originally lower the capital gain tax in the early 80*s. Therefore


the profit for owner to resale their land was large.


Flaws in government policy also indirectly allow investor to get away of


property tax expense. For example some land owner could just plant little


crops over a large piece of expensive vacant land in urban city and declare


them as agriculture land. As a result they will be tax very little. Therefore


the incremental of land speculative activities were due to over size loan,


high accessibility to the land speculative market and indirectly by the


government flaws.During the peak of the land speculation there is a quite interesting study


of land price in Japan. (1) “If you sell the entire property of Tokyo you


can actually buy the entire United state and by just selling the surrounding


land of the Imperial palace you can buy Canada.” Although it might of been


a little over exaggerate, but the point is that the land value in Japan compare


to North America is much higher. Since there is no one side of a coin, Land


speculation had create many social problems in Japan. Firstly, land speculation


had rise the rent and housing cost tremendously. As a result many young couples


and low income families were unable to form their own house hold. In average


the cost of a house in Tokyo had raise to about 500 million yen. The younger


group with low income cannot afford it and the mid age workers may also not


able to afford it. Primary is because they would have to give up at least


three-fifth of their income in loan repayment. Also if they have a relatively


low amount of down payment, there working age may not be long to repay a


mortgage. The longer the amortization period, the larger the amount of interest


they bare. The white collar had become the slavery or sacrifice of the never


ending mortgage payment and high cost of housing. In 1990 the births live


in Japan was 1.2 million, in fact the number is the lowest since 1893. Many


analysts believe that one of the reason that lead to this slow growth of


population could be create by high house prices. So Japanese people have


stopped having children and large family is rare. Therefore this is one of


the causes of Japan is running our of Japanese. This is also a very big social


issue of the modern Japanese society but the precedent of the slow growth


of population has now move from high housing cost to other social problems.


During this period, there were lots of cases regarding on the robbery and


suicidal in the police force.(1) – Wood, “The Bubble Economy”, Sidgwick & Jackson, London 1992 pg.


50


This was mainly because of the heavily debts that these police bare and they


have no other choice than to attempt to go above the law. Due to the financing


problems in the real estate market, it leads to the founding of what is program


call “2 generations mortgage plan”. The founding of this plan was propose


to suit the majority of the white collar in the Japanese society. This plan


was develop since 1983 but it became more useful from 1985 onwards and the


qualification of this program must be father-son that plan or already living


together. (son must be older than 20 and must repay the loan by the age at


70) The size of the mortgage is determined by the borrower, interest is flexible


and the applicants must purchase an life insurance in order to protect the


risk of un collectible due to death. (Pay by the bank) Husband and wife can


also join this program . Banker said that the applicant may able to repay


this loan in 40 yr. and this type of program also encourage a bonding


relationship between father and son. On one side this program may allow a


regular income worker to be a home owner but on the other side this person


will bare a debt for the entire life and passes on to the next generation.


Moreover it may limit on the consumption of the borrower on other composite


good. The booms in land prices also discourage people’s incentive to work.


(2) “Because if any lucky individuals inherited or own a piece of land in


metro Tokyo, they will suddenly gain a net worth of 250 to 300 million yen.”


This amount of money is equivalent to honest man*s life time income plus


retire pension. Since may people get rich during this period, the number


of middle class income in Japan had tremendously increase. Under these


circumstances, many believe they have already achieved the good life therefore


people lose the incentive to work hard and get ahead. Therefore it will distort


the social structure in Japan and create many problems to the government


(taxations). Since the sacrifice and cost of home ownership is so high therefore


many Japanese had prefer to rent. Since the demand of rental market increase,


it also attracted many investor and speculator. Therefore tenants also suffer


from the incremental raise of land price. In Japan, young couples, low income


group and the elderly participated as the major group of tenant in Japan.


During this period, owners were looking to sell their property for high return


and in order to force the tenant to move (after tenant moves landlord can


chose higher quality tenant or resale the property for a larger profit) rent


rises extremely high. Many elderly were unable to afford such high rent so


(2) – Wood, “The Bubble Economy”, Sidgwick & Jackson, London 1992 pg.


61many were force to move. As a result many had become homeless. In some cases


tenant refuses to move so some owner will hire organize gang group to force


them out. Some of these unfortunate tenants will give up the hope in home


ownership in the core and move further and further away from the center.


Therefore many of them will spend over 2 to 3 hours to commute from their


place to work. So either way, home owner ship and tenants suffer from the


raise of housing price. The natural populations are not the only civilian


of this incident. Many foreign students also suffer from the housing problem.


(3) “In 1986, there was a statistic taken over a total number of 8116 foreign


students. Apparently only 17% lives in an adequate resident facility.” The


primary reason was due to the cost of rent, high exchange rate and lastly


it was because the local people do not wish to rent their property to foreign


student. Student associate had propose to built new resident housing but


due to the heat of land speculation (create an increase in the demand of


land) and high construction cost, the new residential housing will be very


costly. Therefore this new construction will probably raise the rent 2 to


3 times. While the housing problem continues for foreign students from 80


onward the Japanese government had still declare that they (4) “expect a


total of 100,000 new foreign student will be coming in during the 21st century.”


This reflects that the government has pay very little awareness not only


on the natural population but also foreign student. Beside foreign students


and the natural population,


another group that affects by the high land prices was foreign ambassador.


As the price continued to rise (specially in Tokyo), the ambassadors of the


lower wealth countries (such as Africa or Uganda ) were force to move their


location away from Tokyo due to high rent. Although this problem was reflect


to the Japanese government but it was remain un solve. Other side effects


of the land speculation was the new residential construction during that


era. In (thousand leaf city) many of the new construction area no longer


have a large plain or play ground that similar to a traditional residential


area.(3) – Cao Man Kit, “The Life of Foreign Student in Japan”, Ming Chang, H.K.


1991, pg.160


(4) – Cao Man Kit, “The Life of Foreign Student in Japan”, Ming Chang, H.K.


1991, pg. 167In one of the Japanese newspaper there is an advertise article that describes


their forecast on the living condition of the Japanese in the 21st century.


(5) “The husband should not return home until weekend, during weekdays just


live in worker*s resident near their workplace. This resident housing should


be similar to hotel where it has an into desk that can wash your cloths,


postal service and take your message. Their home should be in some rural


or less urban area that 100 km away from work.” This reflected that the rise


of land value did not just only effect the affordability of the housing but


also distort the lifestyle of the Japan workers as it had reflect in the


earlier incident of the 2 generations mortgage. (6) “During the bubble economy


period the zoning regulation in Tokyo has revise to allow builder to built


more capital on the piece of land. So this indirectly rises the potential


of building space in Tokyo. It will again raised the real estate value, property


taxes and traffic congestion level of the area.” According to the (7) “National


Land Agency statistic, about half of firms surveyed in the mid to late 1980s


responded that they had no development plans for the land that they acquired.”


They rarely built homes or apartments, but instead constructed office buildings


that would bring in steady revenues. From the developer*s point of view,


houses and apartment are the least profitable projects. So land would almost


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never allotted for housing”. With land speculation and the shortage supply


of new construction on housing the Japanese residents are very difficult


to find an affordable place to live beside the houses that are very far from


work place. In the current Japan election the percentage of participant voters


in Japan has drop below 60% of the total population and the liberal democractic


did not receive 50 % of the seat through election. This percentage was the


lowest since WWII and mainly was because the populations in Japan no longer


believe the liberal democratic party can bring them back from recession.


Also they did not have a good control system during the bubble economy, failure


of the recovery program after the bubble splash.(program such as expansion


in public investment, lowering the interest rate and series of economic counter


measure but the yen is still pretty high which discourage export) In more


specific, during the bubble economy the government did not really propose


(5) Cao Man Kit, “The Strategic of Japan Enterprise”, Ming Chang, H.K. 1992,


pg. 68


(6) Mc Millian Charles, “The Japan Industrial System”, Berlin, New York,


1996 , pg. 56


(7) Wood, “The Bubble Economy”, Sidgwick & Jackson, London 1992 pg. 89an effective tax law until 1990. (National Land Value Tax- prohibitive tax


on profits from the sale or transfer of land national land law 1974) This


revitalizes the local property tax and assessment ratio for the fixed asset


tax. Another official policy was issue during 1990 was through the financial


market in which the government regulates on the loan activity. This eventually


slow down the loan activities largely in 1991. But still the government really


lagged their response for those who already suffer for 5 years of high housing


cost. More over during the period of bubble economy, many politics were either


involve in land speculation or was bribe by organize gang group and large


enterprise in order for these people to be more conveniently to have more


benefits in the land market. One incident is involve by a business man Kyowa


and a cabinet minister Fumio Abe, where Abe sold the details of where a new


road construction in Hokkaido in return for 480 million yen. Political scandal


was expose to the public not long after the bubble economy was splash. Lastly,


most of the asset of the politicians are in the real estate market therefore


neither the bank or the officials admit the fall in land prices. So when


this incident was expose to the public, the prices of land fall sharply around


50 %. And mainly because of the period of cover up. So many big and small


investors suddenly woke up from their happy dreams and face the horrible


reality. With the above reasons the government has lost the trust of many


Japanese. Therefore the land speculate activities had also effect the image


of the strong liberal democratic. During the bubble splash period, many


pre-graduates and graduated university students were unable to find jobs


in the labor market due to the diet all companies therefore many students


were frustrate about their future. Therefore the supply of the labor market


is distorted by the bubble burst. Therefore you can see that the land speculation


activities had create many social problems to the Japan society during the


bubble period and after the bubble burst.During the bubble period the economy was strongly boost by the sudden rise


of land value and stock market. On the other hand the after math of the bubble


splash was a pain for the economy. In general we will look at the effects


on the rise and fall of the Japan*s economy.


In 1985 the trade balance in Japan need to have adjustment therefore the


government declare that it needs some force to grow in order to prevent recession


during this adjustment period. (8) “In 1989 the GNP has increased by


481,000,000,000,000 yen and this was mainly due to the speculate market.”


(People put their profit from land to stock market or vice versa) Many companies


were mainly focus on the speculate market. (9) “The Tokyo Stock exchange


soared to almost 40,000 points, the value of stock and land was far above


the real value and value of property was not rise due to its demand but was


due to speculation. Eventually when the bubble splash, the vacancy rate went


rocket high due to lack of demand. Many companies had to go on a strict diet


to survive, and they made deep cuts in expenditures for entertainment,


advertising, communications and much else.” And the above statement is the


general picture of what happen during the bubble economy. During the golden


period of land speculation, many investors know that the land market in Japan


was limited (due to the potential and limited geographic area) so they began


to purchase land over sea in Hawaii. (10) “The Non water front housing price


in Hawaii during 1987 went up by 51 % and the water front housing price went


up more than 100%.” This resale land market in Hawaii was primarily between


the Japanese; in 1987 the land prices was estimate has rise over 60.2% and


many tenants have suddenly realize that the rent has tremendously increase


and cannot afford it, so many people have no place to stay (especially the


elder). There are several reasons that Japanese wants to invest in Hawaii


such as; the waterfront view is similar to Japan so it will be a good place


for vacation and retirement, the distance between Japan is relatively close


( 3 hours trip by plane) and massive left over of equity and advantages in


the exchange rate that has tremendously increase the nominal value of their


equity so it is an encouragement for investment. Therefore the wave of land


speculation did not only distort the land market in Japan but also affected


foreign country.(8) Iwami Toru, “Japan in International Financial System”, MacMillian Press,


New York 1995, pg. 135


(9) Iwami Toru, “Japan in International Financial System”, MacMillian Press,


New York 1995, pg. 135


(10) Kenneth V. Smith, “Inman News”, June 1996 Version, Section B4 email


address: InmanNews@aol.com


Looking back at the Japanese economy (11) “in 1987, 77 out of the top 100


most heavily taxed people were involve in land speculation (either have resale


their lands or have large land properties). This created a very unhealthy


economy because most of the economy is depend on the land market and if any


thing happen to the land market, it will distort the economy greatly. (12)


“In 1989 the top 100 most heavily tax people 95 of them were involve in land


speculation.” Therefore the situation was worst in the later period this


is mainly because of the profitability in the land market. Since many enterprises


only focus on speculate market therefore the real growth of GNP of the country


was only 4 to 6 %. The growth of the economy was mainly on the nominal sector.


The increase in nominal GNP has created massive appreciate of yen, which


had tremendously affect the export businesses and the manufacture industries.


(the nominal price of the good has increase therefore foreigner has less


interest on Japan goods but this mainly effect small and medium enterprise)


While some export business was not doing too well, consequently the workers


are not getting an appropriate rise in income. (13) “In 1986 (Nissan) several


of the high executive had experience an income cut by 5 to 10% and many of


them are very frustrated because most of these people were in their 40*s


and have to pay for mortgages and children*s tuition. In later years Nissan


had announced to cut 500 in order to balance out their lost.” Therefore large


manufacture as Nissan was not doing so well during this period. This was


worst in the case of the small and medium enterprise. Many small and medium


size export companies had contract or even close down during the mid 80*s


and as the wave of income cuts continued, every level and class of the employees


were involve. On the other hand the high exchange rate was really an advantage


for importer (same value buy more) such as energy, petroleum and primary


material. These companies were suddenly becoming so wealthy and the income


of their employees were much higher compare to those working in the export


enterprise. Therefore there was a large gap on the profit and income between


the two distinct groups of company and it was very unhealthy for the white


collar.


(11) – Iwami Toru, “Japan in International Financial System”, MacMillian


Press, New York 1995, pg. 178


(12) Iwami Toru, “Japan in International Financial System”, MacMillian Press,


New York 1995, pg. 178


(13) Cao Man Kit, “The Strategic of Japan Enterprise”, Ming Chang, H.K. 1992,


pg. 135


This period of high exchange rate continues until the bubble burst. The decline


of the bubble economy occurs during the Gulf war period, the economy in Japan


was very quite and at the same time the government had tighten their policy.


(Both tax policy and restriction in loans) As a result, the land speculation


market and land prices fall continuously. The real estate market is totally


frozen. The National Land Agency measures that land price of Tokyo and Osaka


has dropped 30 to 50 percent. (Total land wealth is near 2000 trillion yen


which is really a lot) Many real estate properties were unable to be resale


and at the time many companies were unable to pay such high interest payment


therefore many of them went bankrupt. While the banks rarely make any loan,


many companies cut back in their capital spending. In fact this had dampen


the recovery of economy. Most of these companies that went bankrupt were


either small or medium size enterprise which lack of its separate bank center.


Large enterprises with separate bank center also suffer from non performing


loans by the borrowers (small and medium size enterprise). Others large lending


institution also suffer largely, since the major economic powers at the bubble


period was on the land market therefore any decline in land values would


strongly influence the balance sheets of Japan*s lending institution. As


reported in June 18 1996 The News Times International News that the (14)


“parliament approves a $ 6. 3 billion bailout for bankrupt housing lenders.


The vote clears the way for the establishment of an institution to liquidate


the assets of the housing lender which collapsed under bad loans made to


real estate speculators before Japanese land prices plummeted in the early


1990s. The seven companies are believed to have more than $65 billion in


bad debts.” This $.6.3 billion is only a piece of the big picture because


(15) “the Finance Ministry said that Japan*s financial institutions held


about $324 billion in bad loans as of March 31 1996. Analysts believe the


total could be considerable higher. The government in recent days has been


working to persuade banks and farm cooperative to agree to take on a bigger


share of the bailout burden


to reduce the cost to taxpayer”. According to a current financial post in


Tokyo: (16) “Most of the financial banks declare yesterday that with the


experience of deficit in last year, this year (ended till September) they


had turn deficit into net profit.


(14) – Kenneth V. Smith, “Inman News”, June 1996 Version, Section B4 email


address: InmanNews@aol.com


(15) – Kenneth V. Smith, “Inman News”, June 1996 Version, Section B4 email


address: InmanNews@aol.com


(16) – Herman Li, “Sing Tao News”, November 23 1996, Toronto, Section B 12Banks had systematically write off many of the un collectible accounts. But


their revenue is still not very high because of low interest rate and the


incremental of bad debts. Therefore financial institution will still probably


experience quite a long period of recession.” Therefore residue effects of


the land speculation spill over still continues. Land developers also suffer


largely. Before the land market crash was expose to the public, there were


nearly 1,200 golf course was either approve or under construction. Many


pre-member ships were sold but unfortunately many of the construction are


never finish because of banks were pulling back the loan. At peak, the total


value of golf member ships market in Japan was near 200 billion for 1,700


golf courses. Therefore closing down 1,200 golf course construction was quite


a lost for the economy. Another aftermath of the bubble burst is the high


vacancy rate in the office buildings in Tokyo. During the late 1980*s, the


new constructing rate (for the office buildings) was double compare with


the tradition. After the bubble burst, the value of asset decreases and demand


for space also decreases. Therefore many office buildings are unoccupied.


As you can see, the after math of the bubble burst did not only affect the


business enterprise, government but also the grass root people. (17) “In


last year the economic growth rate was only around 1% or less and the government


had introduce economic revitalization policies such as lowest ever interest


rates and increased public investment but judging by the fact that consumer


demand has cooled off and capital investment by the corporate sector is not


making headway as expected therefore the outlook for economic recovery in


Japan remain hazy”. The bubble bursting has affected everyone in Japan. (18)


“The country has clearly become a victim of the same wrenching process of


debt deflation that had already been visible for several years in so many


other economies. Japan faces the reality of outright deflation in terms of


falling prices. With all that implies for companies inability to maintain


their profit margins. Japan was facing by the autumn of 1993 an unpleasant


combination of excess production capacity, falling demand and a rampantly


high yen. By August 1993 wholesale prices were declining at an annualized


rate of 4.2 percent.” Once again you can see that many Japanese are not very


optimistic about the future economy.


(17) Wood, “The Bubble Economy”, Sidgwick & Jackson, London 1992 pg.


205


(18) Wood, “The Bubble Economy”, Sidgwick & Jackson, London 1992 pg.


206Therefore you can see that the land speculation had create many negative


impacts to the Japan economy not only during the bubble period but also after


the bubble burst.

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