WHAT WENT WRONG???

Asset Bubble Crisis & Poor Financial Governance

GIRISH TEJWANI (B-41)

18/10/2011

WHAT IS ASSET PRICE BUBBLE CRISIS?

The enthusiasm of market participants, AND inconsistent projection of fundamentals, resulted into ASSET BUBBLE CRISIS.

Also called as EUPHORIA

18/10/2011

REASONS: 1985- Yen Appreciated- Exporters Suffered. Jan 86-Feb 87- Easing of Monetary Policy by Japan Govt. This led to rise in Real Estate and Stock Markets Price rise. 1989-90:- Govt. responded by Tightening of Monetary Policy - Market Collapsed.
S o u rce : - h t t p: / / w iki.mises.org /wiki/Ja panese_asset _pric e_bubbl e

18/10/2011

EFFECTS OF ASSET BUBBLE:Nikkei- Stock Market Index fell more than 60% from a high of 40,000 at the end of 1989 to under 15,000 by 92. Unemployment rose from 2.8% in 80s to 4.7% at the end of 2000. Japans gross consumer debt increased seven -fold from 9 trillion yen in 1979 to 67 trillion in 1991. Real Estate Prices Fell. Japan Banks Suffered.
18/10/2011

SOLUTION AS PER KEYNESIAN POLICY

When the economy is in liquidity trap, restrict government lending directly to business instead of creating liquidity in the banking system.

18/10/2011

FALSE MEASURES TAKEN BY JAPANESE GOV T:Overall during the 1990s, Japan tried 10 fiscal stimulus packages totalling more than 100 trillion yen, and each failed to cure the recession and had put Japan in poor fiscal shape. Tax Cuts in 1994 & in Jan, 98.which led to loss of 2 trillion yen to the exchequer. The Stimulus packages led to rise in public debt to exceed 100% of GDP(highest in G7).

18/10/2011

MEASURES-FISCAL INVESTMENT AND LOAN PROGRAMME (FILP)

It is Off-budget branch of the Japanese Government worth about 70% of the spending in the General Account Budget. Procedure1. Collection of money through Post Office Savings Account, 2. Allocation of this money through the Ministry of Finance Trust Fund Bureau and its various agencies

18/10/2011

FILP CONTD: Much of it was not allocated according to market based consumer preferences but to the most politically connected businessmen. Also because loans are highly riskly, Japans fiscal condition deteriorated further. Including FLIP, Japans Debt was estd to exceed 200% of GDP in 2001.

18/10/2011

INCORRECT ACTION: Overall, between 1991 and 2000, the construction industry received orders from the government valued at 59,054.7 billion yenthis sum is 30.12 per cent of the total value of all construction industry orders for that period. Political voice of the Agricultural lobby Strong and hence governement implemented wide array of import quotas and price support programs. These didnt allow Japan to come out of Recession.

18/10/2011

BANKS IN DOLDRUMS: Increase in Money Supply This led to lot of bad loans/problem loans. Drop of Real Estate & stock prices have put many borrowers out of the business. Financial Services agency estd problem loans to an extent of 31.8 trillion yen- which was an underestimate of the extent of the problem.

18/10/2011

10

CONTD: Banks that invested in the real estate boom have seen values fall 80 percent from 1991 to 1998. Banks invested in the stock market have seen the Nikkei average drop from 40,000 yen in 1989 to under 12,000 yen by March 2001.

18/10/2011

11

HOW JAPAN BOUNCE BACK?

Junichiro Koizumi
elected as PM on April 26,2001. Mr.Koizumi elected

Economist Heiz

Takenaka
as Minister of State for Financial Services and head of the Financial Services Agency (FSA) to fix the country's banking crisis.
18/10/2011

12

MEASURES BY MR. KOIZUMI & TAKENAKA

Privatization of Post. Shift from traditional agrarian base to being more urban. Slowed down subsidies for infrastructure & industrial development in rural areas Promoted Exports. THIS MEASURES LED JAPAN TO BECOME STABLE

18/10/2011

13

VOTE OF THANKS
PROF. MRS. SUJATA PANDEY

18/10/2011

14

18/10/2011

15