June , 2024
Japan’s economic crisis and its impact on India
20:09 pm

Dr. Rajiv Khosla

Japan’s economic crisis, ongoing for nearly four decades, continues to deteriorate with no clear end in sight. The more efforts are made to pull the economy out of recession, the deeper it plunges. Between April 26 and 28 this year, the Japanese yen experienced a sharp decline, reaching a 34-year low against the dollar. The yen’s value fluctuated around 156 to 158 yen per dollar, and on April 29, it briefly surpassed 160 yen per dollar. During the same period, the yen stood at 171 per euro. In 2023, Japan lost its status as the world’s third-largest economy to Germany due to the weak yen. Notably, China had already pushed Japan to third place in 2010. This article explores why Japan, once a strong economy in the 1960s and 1970s, has dramatically declined over the past four decades and examines the implications of Japan’s latest economic developments for India.

Japan - The Superpower of the 1960s

On December 7, 1941, during World War II, the Japanese Air Force launched a massive air strike on Pearl Harbor in Oahu Island, Hawaii, causing significant loss of life and property. A day later, on December 8, the American Congress declared war against Japan. In retaliation, the US dropped atomic bombs on Hiroshima and Nagasaki on August 6 and 8, 1945, respectively, killing millions of civilians. Despite this devastation, war-torn Japan began rebuilding its economy in the 1950s and 60s. Utilizing the best minds and the latest technology, Japan’s industrial output soon gained a reputation for superior quality and affordability. “Made in Japan” became synonymous with quality, and Japanese goods were in high demand worldwide. Companies like Mitsubishi, Honda, Nikon, and Sony emerged as global leaders in cars, cameras, and electronics.

On October 6, 1973, Egypt and Syria attacked Israel on Yom Kippur, leading to the Yom Kippur War. Although America supported Israel, the real beneficiary was non-participant Japan. By 1972, 83% of US oil and gas imports came from the Middle East. On October 17, 1973, Arab oil producers imposed an oil export embargo against Israel’s allies, particularly the US. The embargo, lasting until March 1974, caused widespread inflation, with the US and Europe suffering the most. American consumers, facing high fuel prices, turned to Japan and West Germany for more fuel-efficient cars, boosting Japanese exports. This period marked significant economic growth for Japan, as the weak yen made Japanese goods more attractive in the US market.

The fall of a great power

In 1981, American car manufacturers sought protection from cheap Japanese imports, leading to a quantitative ban on Japanese cars and a 45% import tariff on Japanese motorcycles in 1983. To counteract these tariffs, Japan’s central bank offered loans at low interest rates. However, the significant turning point came with the 1985 Plaza Accord. To address the strengthening US dollar and declining US exports, an agreement was made between West Germany, France, the US, Japan, and the United Kingdom to weaken the dollar. By 1987, the dollar had depreciated by 50%, while the yen and other currencies appreciated by 50%.

This appreciation of the yen, combined with low interest rates, turned Japanese savers into investors. By 1989, the Nikkei stock index had tripled since 1985, and Tokyo’s land prices were 3.5 times higher than in Manhattan. To combat inflation from this asset bubble, Japan’s central bank raised interest rates, leading to a vicious cycle of low investment, high unemployment, and reduced demand. The 1990s were a lost decade for Japan, marked by recession and stagnation. CSince the outbreak of the Russia-Ukraine war in February 2022, global central banks have raised interest rates to curb inflation. However, Japan has kept rates low to avoid making credit too expensive, resulting in a sharp outflow of foreign exchange and a declining yen. Today, Japan faces a dilemma: save the economy by keeping interest rates low or protect the yen by raising rates.

Impact on India

India has taken advantage of Japan’s low interest rates, raising significant debt from the Japan International Cooperation Agency (JICA). Between 2010 and 2020, Japan provided 3.1 trillion yen to India for various projects, including sewage treatment, roads, bridges, metro projects, dedicated freight corridors, and the Mumbai-Ahmedabad high-speed railway. Indian banks, including the State Bank of India, have also taken loans from Japan. Any increase in Japanese interest rates to protect the yen will affect India, making the yen more expensive and increasing India’s repayment costs. In summary, Japan’s prolonged economic crisis and policy decisions have significant implications for its own recovery and for countries like India that are financially intertwined with it.

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