Hey guys! Do you know that from 1960 to 1980, Japan was one of the fastest-growing nations in the world? Japan was the most innovative and had the second-largest economy in the world, just behind the US. But in 1990, something terrible happened: the economic bubble finally burst, almost putting an end to Japan’s economic growth. Millions lost jobs, companies bankrupted in crisis, Japan’s economy still struggling to recover, impact felt long term. Ever since the economic bubble burst, Japan’s growth has been stagnant for decades known as the “Japan’s lost decade.” So let’s find out what exactly went wrong with Japan’s economy.
Table of contents
- From Ashes to Affluence
- New York plaza accord
- The countdown begins
- The crash
- Lost decades
From Ashes to Affluence
So let’s start from the beginning. After World War II, the US devastated Japan’s economy. US saw it as an opportunity to turn Japan into its bulwark in Asia against the growing influence of communism.. With that in mind, they planned to turn Japan into an industrial giant. So what they did was, in 1949, the US set the Japanese yen extremely low against the dollar, which would make Japanese goods cheap for the US, and they could absorb all the imports.
After 1952, Japan experienced astounding growth of an average 10% for the next two decades. Japan’s cost effectiveness, motivated people, industrialization policies, and the Keiretsu system (different companies come together and share resources with each other and protect themselves from outside competition) contributed most to Japan’s growth.
Japan’s central bank also played a significant role in the development of its nation. They came up with a policy called Window Guidance, an informal tool in which they encouraged commercial banks to provide finance to specific sectors like shipbuilding, coal, and steel production because these sectors were crucial for the economic growth of Japan, and these sectors also attract most foreign investment.
By the 1980s, Japan had become one of the most powerful and influential economies in the world. Their GDP per capita had gone up from $475 in 1960 to $25,800 in 1990, which is really impressive. After a trade deficit of $10 billion in 1980, Japan reached a record trade surplus of $70 billion in 1987. Japan’s manufacturers had successfully captured the market for television, cars, and bikes in the US. Now the US has realized Japan’s potential and if they do not strike back, Japan will take over the world.
New York Plaza accord
Before 1985, a plan was already in place to slow down Japan’s growth. In 1985, the G5 Nations, which are France, Germany, the United States, the United Kingdom, and Japan, met at New York’s Plaza Hotel. The main purpose of this meeting was to appreciate the Japanese yen’s value against the US dollar. This would make Japanese goods expensive for the US, which would eventually hurt Japan’s exports, but Japan agreed to this. But the question arises: why did Japan agree to something like this that could damage their economy? Well, there are mainly three reasons behind it:
1) External pressure: The US and other countries were putting pressure on Japan to reduce trade surplus and appreciate its yen because they saw Japan as a threat to the world economy. Japan agreed to their conditions because they wanted to maintain a healthy relationship with the United States.
2) Internal pressure: Domestic industries and consumers in Japan were pressuring the government to strengthen the yen in order to benefit from cheap imports.
3) Economic strategy: Japan’s policy of maintaining a strong yen aimed to spur innovation and encourage structural reforms, leading to a more competitive economy.
The countdown begins.
This was the point in time when Japan’s central bank made a blunder. They decided to cut down on interest rates from 5% to 2.5% to increase consumer spending and boost manufacturing. But they were unaware that this blunder would cost them an economic slowdown. Now, the investors borrowed money from the bank to invest in real estate because the debt in Japan was cheap, and this led to an increase in land prices due to the country’s dense population. The stock market also reacted to increasing land prices and soared by 240% between 1985 and 1989, with land prices up by 245%. Increasing land prices allowed Japanese companies to boost their profits by showing that their value of land holdings had increased and boosting share prices.
source: ResearchGate
Amidst all of these, the golf club membership was getting the attention of the Japanese top executives, and these memberships were considered an asset. The total market value of membership was estimated at an astounding US$200 billion, more than the GDP of Taiwan. The small island of Japan had reached the peak of its great wealth.
The crash
The Central Bank of Japan encouraged commercial banks to lend more money, and banks started to lend money recklessly, which caused the economic bubble to grow. During this time, citizens of Japan were optimistic; they thought that their nation was now entering a phase of prosperity, but no one could see the consequences of aggressive lending and an increase in asset prices. By 1989, the land prices in the private sector had shot up to 2000 trillion yen from 14.2 trillion yen in 1969, and that’s when superiors noticed this. In 1989, they put a limit on lending loans related to real estate. Interest rates were increased from 2.6% to 4.25% and then settled at 6% in 1990.
source: fred.stlouisfed.org
But it was too late, land and asset prices had already collapsed. The stock market lost more than$2 trillion in 1990. In 1991, the window guidance system was abandoned, and the banks started collapsing. As the bubble burst, it caused a lot of damage. Let’s see what the consequences of this are.
1. Between 1990 and 2003, more than 21,200 businesses went bankrupt.
2. 5 million people became unemployed and never found a job.
3. The stock market experienced an 80% decline during this time.
The lost decade
Japan was slow to adapt computers because of the complexity of adapting software to the Japanese language. This is the same country that once manufactured the world’s most advanced electronic items.
The younger generation in Japan suffered the most. They were feeling pressured to achieve high grades, secure a job, and maintain a respectable life. The pressure to succeed with less opportunity made them hopeless, and some of them became hikikomori. (Hikikomori is a total withdrawal from society and seeks extreme degrees of social isolation and confinement.)
Japan has one of the oldest citizens in the world. High living costs and long working hours are causing young citizens of Japan to lose interest in getting married, leading to a declining birth rate.
Between 1991 and 2003, Japan grew by only 1.4%, and from 2000 to 2010, Japan’s growth rate was only 1%.
Conclusion
Due to negligence by leaders, an economic bubble formed and burst, causing extensive damage, with Japan still suffering repercussions. That’s from my side. I hope you have found this case study interesting.
To know more about this crisis:
Japanese asset price bubble
https://en.m.wikipedia.org/wiki/Japanese_asset_price_bubble
Plaza Accord
https://en.m.wikipedia.org/wiki/Plaza_Accord