The presentation discusses the Japan economy's saving patterns and how it has been affecting the economy. Specially the formation of Asset bubble and its subsequent burst. Also how has the economy fared out in the last 2 decades.

1. TARIN PODDAR – A 036
Saving Pattern & how it has
been impacting the
Japanese economy

2. TARIN PODDAR – A 036
In the following slides I have discussed the Japan economic boom and post crises and
what led to the happening of the same.
Saving rates of the Japanese people played a major role in the creation of the bubble
as well as post bubble crises.
In the following 3 slides - I have given a line by line argument of what are the causes
of the major happenings in Japanese economy in the post WWII era – specially
focusing on the 1989 bubble and post crises and what circumstances were
responsible for it.
After 3 slides of discussing the major sequential happenings, I have shared some
relevant graphs with explanation :
1. Saving Rates comparison of Japan and USA (year by year analysis of how Japan’s
saving rates were almost double that of USA throughout the period starting 1960
to the bubble in late 1980’s)
2. Fluctuations in Japan Interest Rates in the last 35 years (how they were high till
the period pre-bubble and how they hit bottom post bubble burst)
3. Depletion in Saving rates in Japan post bubble-burst (how Japan’s saving rates
went low and low post bubble-burst compared to constant rates in other major
economies of the world)

3. TARIN PODDAR – A 036
• Post world war 2 – Japanese government imposed a series of tariffs and policies to INCREASE
SAVINGS AND REDUCE IMPORTS
• This led to increase in money with BANKS
• Increased LOANS AND CREDITS because large sums of savings money with banks
• This led to huge investments in technology and capital advancements – easier loans – increased
money supply
• Improved efficiency – reduced prices compared to Rest of the World
• Leading to TRADE SURPLUS
• In 1985 Japan had a $50 billion trade surplus with USA i.e 33% of total US trade deficit
• Appreciation of YEN

4. TARIN PODDAR – A 036
•Optimism and lucrative financial assets and markets
•Overconfidence as companies performed extremely well – stock prices rose - banks
started lending riskier loans to people and companies
•High amounts of money readily available for Investments
•Equityprices and Land prices reached an excessively high level (as high as $20,000 per
square foot in some areas of Tokyo)
•Government recognizes the need to intervene and stop this huge bubble from inflating
further, hence they decrease the money supply by increasing the interest rates
•Bubble Bursts as money supply reduces because demand suddenly crashed
•Land Prices and equity prices CRASH
•People start selling their investments at lower prices leading to Deflation

5. TARIN PODDAR – A 036
• Many people unable to repay the loans – leading to loss of savings in banks – collapse of
banks
• Government bails out the banks to stabilize the economy
• DEFLATION in the economy
• Government tries to recover from the Deflation by reducing interest rates and increasing
money supply but this leads to LIQUIDITY TRAP
• Confidence in the people shrunk. Bearish about the economy, people feel there will be
further deflation – hesitation in consumption and investment – feeling that money value
will rise in future with deflation
• No trust in banks and economy – savings reduce – people preferring to keep money at
home with bearish mindset
• Money going out of Japan and industry losing their competitive edge – further weakening
the economy by reduced trade and increased competition

6. TARIN PODDAR – A 036
Source: NBER Macroeconomics Annual 1986, Volume 1
Volume URL: http://www.nber.org/books/fisc86-1
(Comparative graph - USA JAPAN saving pattern)

7. TARIN PODDAR – A 036
The graphs compares the saving rates in Japan to that in USA for the years pre
bubble-burst.
The graph very well explains how Japan’s savings rates were almost double
that of US leading to :
1. Huge Saving money with Banks
2. Huge Lending
3. Huge Investments in R&D and industries
4. Improvement in Japanese industries and making them efficient compared
to the rest of the world
5. Huge exports
6. Trade surplus
7. Expansion of economy and financial sectors of the economy
8. Appreciation of currency
9. Bullish behavior and optimism
10. Formation of Bubble

8. TARIN PODDAR – A 036
Source: http://www.tradingeconomics.com/japan/interest-rate

9. TARIN PODDAR – A 036
1. The graph explains how the Japan interest rates used to be higher till late
1980’s when during the boom period they had gone down.
2. The sudden rise in the interest rates in early 1990’s was to burst the huge
asset price bubble which had increased price levels to an enormous level.
3. To bring down these price levels and to reduce demand the central bank had
increased interest rates.
4. But faced with continued deflation, the central bank had to decrease the
interest rates in late 1990’s to increase demand and spending.
5. But although the interest rates were decreased to ground bottom, the
economy failed to revive because of LIQUIDITY TRAP.
6. People’s sentiment was bearish and didn’t want to spend more as they feared
further deflation.
7. Since then the interest rates have remained very low but however haven’t
translated in higher spending and economic growth. This is a situation of
LIQUIDITY TRAP where monetary policy become ineffective.

10. TARIN PODDAR – A 036
Source: http://www.oecd-
ilibrary.org/docserver/download/fulltext/3011041ec022.pdf?expires=1346167874&id=id&accname=free
Content&checksum=D8121E558DABB1250B2F0BC2095402DC

11. TARIN PODDAR – A 036
1. The graph explains how Japan’s saving rates have fallen from a high in the last
20 years compared to other major economies where the trend has been more
or less steady and constant.
2. This is because of reduced confidence in the banks as they fear banks
collapsing.
3. This is also because of very low interest rates in the last 15 years which means
there is less incentive to save money in banks.
4. A part of the reason for fall in saving is also deflation as the people feel price
levels will further decrease in future leading to increase in value of money.
People prefer keeping money with them in hope of spending in future instead
of saving in banks which already have very low rates of interests.