At the heart of Japan s economic woes are the country s banks, which are yet to clear their balance sheets of bad loans derived from a financial crisis that struck a decade ago. The amount even overshadows the total amount of capital held by the banking system, which is 60 trillion yen. On purely economic terms, the country s Financial Services Agency should close or merge half the Banks in Japan, notes the policy brief. Though the political reality will prevent this, the FSA must make clear to the public that the Japanese banking sector must shrink. In an attempt to prop up consumer confidence and deal with the mounting problem of deflation, the Bank of Japan recently announced a zero percent interest rate policy.
Deflation occurs when the value of goods and services falls.
Japan is the first industrialised country to have experienced real deflation since the 1930s. Its economy has been hurt by deflation which causes people to defer spending, knowing that their money will be worth more in the future, resulting in slow spending. The last two years have seen the prices of goods and services fall by about one percent each year in Japan. Japan s other pressing problems include a huge public debt. Government attitudes continue to be steeped in conservatism despite claims that it is pursuing reforms to enable greater foreign investments and deregulating industry in what has traditionally been a very closed economy, says Akio Mikuni, a Japan analyst.