Investment Case

1. Environment

Japan was the second largest economy after the United States from 1968 to 2010. From 1956 to 1973, its economy grew at an average rate of 9.2% per year and after that the growth slowed down. In 1985, the United States devalued the dollar as a result of which yen appreciated significantly relative to dollar. The rising yen contributed to Japan’s economic contraction. So, the Bank of Japan (BOJ) lowered its official discount rate from 5.0% to 2.5% to stimulate economy. However, the low interest rates encouraged investors to invest in risky corporate debt securities and real estate to earn higher yields which led to the financial bubble. To deal with this situation, the Bank of Japan raised interest rates from 2.5% to 6.0%. The investors, however, speculated that interest rates would increase further and so their confidence was down. The stock market fell drastically and land prices also fell. In the wake of this situation, the Bank of Japan (BOJ) again reduced interest rates to restore the economy. But as the situation was not improving, the central government increased expenditures on projects like infrastructure, public works, supporting struggling firms, etc. to stimulate the economy. This increase in expenditure caused significant budget deficits and led the central government to borrow to finance its spending. Then, the 2007-2008 financial crises reduced the demand for Japanese exports and hurt the economy seriously. So, the Japanese government increased their spending further, and the deficits also increased, from 6% in 2007 to over 14% of GDP in 2009. By 2010, the economy started improving until March 2011 when a devastating earthquake and tsunami caused damages estimated at $250 billion and $309 billion. The Japanese government had to respond to this and spent for reconstructions which impacted the budget significantly and added to the country’s debt burden. By the end of 2011, Japan’s general government