Name: NGUYEN Xuan Binh

ID: 12418064
Japanese Economy
Professor Nakagami Masafumi
Quiz 1
Questions

1. In the early 20th century, a bank could fail even if the manage is well. Explain the reason.

Banks in Japan as well as around the world could face liquidation during the early 20th century,
even though the management was efficient. This was due to external factors. These were some of
the several external factors:

+ World War I & Gold Standard Policy

When WW1 ended, the postwar recession caused the bubble economy in Japan to collapse.
Throughout the 1920s, Japan went through a series of recession and several banking crises.
Soon, Japanese prices converged to the world level. Unfortunately, the international gold
standard and the fixed exchange rate system were destroyed by WW1, and the Japanese yen
started to float in 1917. As a result, many banks suffered from this monetary policy and faced
bankruptcy (World War I and the 1920s: export-led boom and bust).

+ Bailout of banks and industries by central bank

Thoroughout the 1920s, instead of investing on thriving businesses, the Bank of Japan instead
provided emergency loans to dying banks and industries to avoid further bankruptcies and
unemployment. Although this policy can solve the short-term problem, it caused many private
banks to close in the future (From 2000 banks in 1919 to 625 banks in 1932).

+ Natural disasters

In Japanese case, after the Great Kanto Earthquake in 1923, the Bank of Japan (BOJ) introduced
a special treatment facility for the devastated area. The BOJ hoped to rescue solvent but illiquid
financial institutions, but this treatment was abused by banks that were already in financial
distress, creating a start of a looming financial crisis. As a result, many bank failures in Japan
occurred during the financial crisis in the early 1930s (Shizume, 2016).
 2. During the Showa panic, many Japanese producers tried to maintain their revenue despite
the steady decrease in prices. Their behavior caused an additional price decreases in the
market. Explain this situation using demand and supply curves.

Price

Supply
Equilibrium This graph is the normal state of
Point economy, which has the market
Market price and the adequate amount of
Price goods and services to satisfy the
needs of the population.
Demand

Quantity
Quantity Traded
In Market

Price

During the Showa Panic, due to the

deflation policy adpoted by the
Hamaguchi Cabinet and the Black
Thursday stock market crash in the
Supply U.S, Japan suffered from deflation
during 1930-1932. In order to maintain
the same revenue agaisnt the ever-
Demand falling prices in the market, producers
had to increase their output.
Quantity

Price
Because the output of the same goods
overly exceeded the demand, their price
was forced to decrease further in order to
be brought by consumers. The
consequence was the price was stuck in a
Supply downward spiral. Deflation causes the
intersection of supply and demand move
downward along the demand line.
Demand

Quantity
 3. The Japanese economy experienced deflation in the 1930s. Explain why deflation makes
it difficult for a company to be profitable.

Deflation has occurred in several economies around the world such as the 1997 Asian financial
crisis and 1837 Panic in the US. It caused many adverse tolls upon the economies, where
businesses were the most heavily affected. Businesses during Showa Panic in the 1930s also
suffered from deflation.

Deflation have the following effects on companies and businesses:

1. Decreased Profits
Companies must reduce the prices of their products to be competitive and sellable meanwhile the
costs of making products stay the same. As a result, the more they reduce their prices, the more
their earned revenues shrink, despite their efforts to improve the efficiency in production and
marketing. The by-product of this effect is that the salaries of workers are gravely reduced and
many workers are made redundant.

2. More savings and less spendings by consumers

Because the value of currency decreases during deflation, consumers can buy more products with
the same amount of cash. Allthough in theory, consumers will spend more as the price has
decreased, in reality, they saved money for the future because their money will grow simply
without doing anything. Thus, the products made by companies will be bought less and the
revenues also decrease. In fact, consumers are also workers and at their work. During deflation,
their salaries is also cutback and they have to be more careful with their spendings as well.

3. Increased Liabilities
When a market suffers from inflation, the claims of credit lenders against the assets of companies
start to shoot up. Because the value of assets decreased, companies have to sacrifice more assets
for the same amount of debts incurred. In the extreme case, if borrowers were unable to pay back
their debts, the lenders will have no choice but to seize their properties, leading the borrowers to
go to bankruptcy.

 It is difficult for companies to earn profits during deflation

References
Shizume, Masato, Financial Crises and the Central Bank: Lessons from Japan during the 1920s,
November 2016.
World War I and the 1920s: export-led boom and bust. Retrieved from
http://www.grips.ac.jp/teacher/oono/hp/lecture_J/lec07.htm. Accessed 2019/24/2.