Problems and Possible Solutions
This site investigates the problems leading to Japanís bubble economy
of the 1980s. It focuses on the speculation in the securities market
and real estate as well as looking at governmentís role in the problem.
This report will also offer possible solutions as proposed by leading experts
in the field and the IMF.
In 30 short years after the devastation of the Second World War, Japan
went from being a nation in ruin to the second largest economy. The
world watched in amazement as Japan moved from one stunning economic miracle
to the next. By late 1989, it seemed to be doing the impossible.
Inflation was almost nonexistent. Unemployment held low at 2.2 Ė
2.3 percent. The economy continued to grow rapidly as well as having
a large trade surplus. The Nikkei 225 soared to record heights and
seemed poised to surpass 40,000 in the new year. (Miller) Even Peter
Lynch wrote in his classic One Up on Wall Street that the Japanese success
was more that another "tulip craze." (Surowiecki) Lynch in a sense was
right. There were fundamental differences between the speculation
in Japan and in Holland four centuries before. But just his book
published in 1990, the bubble burst.
The causes behind Japanís economic woes of the past decade are many and varied. But certain themes do emerge. On the surface, much of the blame gets placed on the wild speculation of the 1980s. Rightfully so. The Nikkei was grossly overvalued. No investment seemed too outlandish to invest in. It was claimed that American physicists had achieved cold fusion. Japanese investors clamored to purchase shares of any firm that had potential relationship to cold fusion processes, thereby driving up share prices. (Cold fusion was later to be shown unproven). (Miller)
Beyond the Nikkei, the speculation spread into real estate. In
Tokyo, prices more than doubled in four years. In 1988, Tokyo residential
prices per annum rose by 70 percent while commercial rose nearly 80 percent.
Soon other areas, such as Osaka and Nagoya, followed suit. (Miller)
Much of the speculation was fueled by competition between commercial
banks, which dominated into the 1980s, and the rising influence of securities.
In the same manner, there is a close relation between the property and
equity markets at the time. The dramatic increase in real estate
prices put owning a home out of reach for the younger generation and forced
them to remain longer with their parents. This decrease in expenditures
on homes increased the savings rates, channeling a great deal of money
into equity market investments. (Miller)
Firms contributed to the inflating bubble. Often they would use the market not to fund current operations or invest, but to gather cash fur future needs. Other corporations became involved in the risky proposition of speculating on stocks in order to realize a profit. A practice known as "zaitech." (Miller)
At the same time that the securities market was booming, the banking
industry was suffering. Corporate customers were looking elsewhere
to place their money. One solution to the commercial bankís problem
was real estate. The loans needed to purchase property provided the
banks with a new source of customers. The enormous supply of possible
bank financing further increased the demand for real estate, putting further
upward pressures on property values. By doing this, what the banks
did not fully realize is that they exposed themselves to the uncertain
fortunes of the stock market, which was generating the income behind real
estate purchases. What was worse, the banks themselves speculated
heavily in the stock market. Many had been counting on unrealized
securitie profits as a way to comply with the capital adequacy guidelines.
When these profits evaporated after the crash, many banks were forced to
issue costly subordinated debts at 6-7 percent in order to meet the requirements.
Although speculation and poor investments certainly played a large role in creating Japanís current problems, there are more fundamental issues at stake that it must address if it is to ever recover. The basic governmental structures that made Japanís rise so successful are the same that led to the bubble and to the current recession.
According to the article Japanís Bubble Economy: Lessons Learnt, the
key to Japanese success was its ability to use information flows to the
advantage of business. It was the close relationship between business,
bureaucracy and the government that lowered information costs that allowed
Japanís economy to take off. (Musumeci)
Japanís ĎIron Triangleí:
But as Japan now attempts to sustain a mature economy, this so-called Iron Triangle is proving a hindrance. The relation has allowed the bureaucrats and government to be "captured" by business. What the triangle represents is a dangerous interdependence which will be very difficult to break. It works like this; the bureaucrats obtain power and benefits by serving business. Government likewise is well served by business, so it helps the bureaucrats help business. Businesses immediate interests are always served because the government and bureaucracy is working closely to serve its short-term interests.
Specific examples of the problems created by this abound. The
MOF Tan scandal is one such case which also demonstrates how it was
possible for so many bad loans to be issued in the 1980s. The banking
supervisory bureau within the MOF was responsible for the monitoring of
individual banks and the loans they were making. During the 1980s,
these banks had a number of underperforming loans. Through lavish
entertainment and bribing, the banks gained the complacency of the monitoring
officials. In this way, the government allowed the bubble to grow
by the Iron Triangleís close and corrupt relationship with one another.
As the leading economy of the Pacific Rim, the repercussions of Japanís bubble have been serious and widely felt throughout East Asia and the world. Because Japan serves as the engine for growth and the model for development, the recovery of this area requires that they reform itself. (Lingle, 94) This is a difficult proposition at best. True recovery requires that Japan overhaul its entire system and break down the Iron Triangle.
Specifically, questions that the government needs to address are as follows:
Beason, Dick and Jason James. The Political Economy of Japanese Financial Markets Ė Myth versus Reality. London: Macmillan Press Ltd, 1999.
Cargill, Thomas, Michael M. Hutchinson and Takatoshi Ito. The Political Economy of Japanese Monetary Policy. Cambridge: The MIT Press, 1997.
Lingle, Christopher. The Rise and Decline of the Asian Century Ė False Starts on the Path to the Global Millennium. Hong Kong: Asia 2000 Ltd, 1998.
Tsuru, Shigeto. Japanís Capitalism: Creative Defeat and Beyond. Cambridge: University Press, 1993.
Wood, Christopher. The Bubble Economy. New York:
The Atlantic Monthly Press, 1992.
Jackson, James. Japanís Economy: From Bubble to Bust. "CRS Report from Congress" http://www.fas.org/man/crs/94-226e.htm
Horiguchi Yusuke. IMF Remedies for Japanís ĎPost-Bubble Bluesí http://www.imf.org/external/np/vc/2000/073100.htm
Miller, Geoffrey. The Role of a Central Bank in a Bubble Economy. http://www.gold-eagle.com/editorials/cscb002.html
Musumeci, Vincent. Japanís Bubble Economy: Lessons Learnt http://www.econ.mq.edu.au/CJES/Bubble.pdf
Surowiecki, Jim. A Bubble Economy? http://aolsnapshot.fool.com/Rogue/1997/Rogue970123.htm
Site Created by: Will Prigge