The Japanese Bubble — some causes and effects?

A couple weeks ago a classmate of mine clarified the whole Japanese bubble thing with a couple simple diagrams. This is my attempt to replicate them before I forget what his reasoning was. OK:

Diagram 1

The classic model of the Japanese economy (Diagram 1) was a tight-knit, government enforced structure with a number of interesting features: first, individuals couldn’t buy corporate stocks, so they had to save their wages in banks. Banks basically had to loan money to corporations regardless of those corporations’ profitability — part of this was policy, part of it was the tradition of corporate groupings or “keiretsu.” Not pictured in the diagram: corporations made money via foreign trade, which was pretty easy to do through much of the “high growth period,” partly because the Yen was pegged to the dollar at an artificially high rate.

Now in 1971 Nixon took the US dollar off the gold standard and floated it on the market, which ended the Occupation-era policy of having the Yen pegged to the dollar. So the exchange rate (which had been 360 yen to the dollar from 1950 – 1971) went down to 290 yen to the dollar by 1972

This meant that export producing industries in Japan started to suffer, since foreign folks paying foreign currency now had to pay more of it per yen.
So the government decided to introduce capital market liberalization, allowing corporations to get the capital they needed from non-traditional sources, like foreign investment and stock markets. They ditched domestic banks, which then found themselves without lenders — they should have shrunk at this point, but they were unable to do so because of strict “too-big-to-fail” type rules. So instead the banks started lending money to whomever would take it, esp. in the real estate sector. Corporations also started pumping their extra cash into real estate (Diagram 2)

Diagram 2

This elevated prices, and wages, across the board — the Bubble — which made everybody happy! Until the Bank of Japan raised interest rates, making loans more expensive, which sent artificially high prices tumbling and triggered a contraction that is still plaguing Japan.

The silver lining is that this chaos may have created the political momentum to clean up Japan’s notoriously corrupt bureaucracy and dominant political party — which make our system look like Scandanavia (or, you know, some other utopian metaphor). In 1993 the dominant party lost power for the first time since the 50’s, which everyone said was significant, but they regained it soon after. BUT this July they lost it again! And tomorrow I’m planning to go to a lecture/panel discussion that will hopefully clarify whether this is significant. We shall see.


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