1.1 AN OVERVIEW OF JAPAN’S ECONOMY

After the devastation of the Second World War, Japan’s economy saw rapid progress propelled by the highly successful car and consumer electronics industries. Its economy is the world’s third largest one and it is a major aid donor and a source of global capital and credit. This success story, however, started losing steam in the 1990s and was further precipitated by the 1997 Asian financial crisis and bouts of recession (BBC Website 2014). This was primarily due to mounting debt burden that successive governments could not address effectively. The public debt ratio has risen steadily for two decades, to over 200% of GDP (Jones & Kim 2013). After two severe shocks – the 2008 global financial crisis and the 2011 Great East Japan Earthquake – Japan fell into recession for the third time in five years. One of the biggest challenges also facing the economy is meeting the huge social security costs engendered by an ageing society In this light, the new government’s resolve to revitalize the economy through a three-pronged strategy combining bold monetary policy, flexible fiscal policy and a growth strategy, is most encouraging (Milton 2014).

1.2 THE 2011 CRISIS

On March 11, 2011, a magnitude 9.0 earthquake struck off the east coast of Japan. The earthquake sent tsunami waves rushing into the coast of Japan and rippling out across the entire Pacific basin. An estimated 28,000 were dead or missing, and at least 500,000 were displaced (NASA 2011). To make things worse, radiation contamination was added to their concerns. The earthquake and resultant tsunami were bad enough; it also caused a radioactive leak at the Fukushima nuclear power plant. Japan’s nuclear industry supplied a third of the country’s electricity. In total, 11 of Japan’s 50 nuclear reactors were closed immediately following the earthquake. The capacity to produce electricity was reduced by as much as 40%, and has remained at less than 80% of pre-quake levels. TheWorld Bankestimated that Japan’s disaster would cost between $100 billion – $235 billion, and take five years to rebuild (ABC NEWS 2011). The quake-hit Japan’s north-east section is responsible for 6-8% of the world’s third largest economy. Many wondered if Japan would need to sellU.S. Treasuriesto pay for rebuilding. However, Japan didn’t need to because it was able to finance the rebuilding program from its people’s savings. Although the Bank of Japan provided marketliquidity to ensure the stability of financial markets, the long-term impact has been negative to the country’s struggling economy (Nanto et al. 2011).