The Japanese Malaise:
Problems and Possible Solutions
Japan History

Research Report
Web Resources



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.

Historical Background

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.

Research Report

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. (Miller)

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:


     Business                 Government

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. (Musumeci)

Historical Significance

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:

Additionally, Usuke Horiguchi, director of the Asia and Pacific Department of the IMF, recommends that barriers to competition need to be removed and the putting in place of a legal and tax framework conducive to corporate restructuring.  Also, deregulation needs to continue across the economy. There are many vested interests against tampering with the current financial system, so the public sector (the one sector left out of the triangle) will have to exert its influence as never before.  Until such time, there is little indication that Japan will pull itself out of its current malaise.


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.

Web Resources

Jackson, James.  Japanís Economy: From Bubble to Bust. "CRS Report from Congress"

Horiguchi Yusuke.  IMF Remedies for Japanís ĎPost-Bubble Bluesí

Miller, Geoffrey.  The Role of a Central Bank in a Bubble Economy.

Musumeci, Vincent.  Japanís Bubble Economy:  Lessons Learnt

Surowiecki, Jim.  A Bubble Economy?

Site Created by:  Will Prigge