Ebook Financial Crisis of Finland, Sweden, Norway and Japan
The U.S. subprime mortgage problem has triggered the turmoil in the global financial markets since the fall of 2008. The Japanese economy which gradually recovered form the long recession after the bust of the bubble in 1990 has also been severely damaged. The Nikkei Stock average has fallen down to the level of 7000 yen, a critical level, under which the Japanese financial system will almost collapse. The bubble and the bust of the bubble historically repeated themselves since the Great Depression in 1930s. The paper focuses on the bubble and the bust of the bubble happened in the period around 1990.
The aim is to analyze the cause of the bubble and clear the mechanism behind the emergence and expansion of the bubble, comparing Japan’s experiences with those of Nordic countries. Nordic countries realized the advanced welfare states with full employment policy and strong labor union policies. Their successful economic and social policies suddenly collapsed when they had the mounting nonperforming loans (NPLs) after the rapid increase of asset prices in the latter half of 1980s. Japanese economy also has the same experience, though the economic and social system is different. Japanese economy was on the verge of financial panic, especially in 1997 and 1998, when major financial institutions had failed. The Nordic countries successfully achieved renewed economic growth, while the Japanese recession had been prolonged. What are the common background factors behind the radical fluctuation of the asset prices?
The paper will be divided into two parts. In section 2, the paper will chronologically review the economies before and after the bust of the bubble in Finland, Sweden, Norway and Japan. The financial distress and deflation is rooted in the bubble economy of the latter half of the 1980s when the economy had experienced the financial deregulation. The review in Section 2 will clear how the economic bubble occurred, how the recession started with the collapse of the bubble and how the authority, government and central bank responded to its deterioration.
In section 3, on the full awareness of the chorological explain of the development of the crisis, the Vector Error Correction Model will be applied. Finland and Japan will be picked up because the statistical data of both countries are well equipped and easily accessible. The model will examine whether or not there exists a long-run equilibrium relationship between the money stock and economic activity, paying attention to the precautionary money demand caused by the financial anxiety.
The financial panics increase the financial anxieties among the people. People are expected to increase the precautionary money demand, facing the financial crisis. The rapid rise in the money demand might break out the long-run equilibrium relationship between the money stock and the economic activity. The survey data will be used to quantify the financial anxieties in both countries. The estimation results suggest that the cointegration property among money stock and economic activities still hold in both countries.
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