[Public Lecture Record] Economics #17: The Bubble Economy, Its Collapse, and Long-term Recession

In our last class, we looked at the "stable growth period" where Japan overcame the oil crisis following its high economic growth and took the world by storm with energy-saving and high-tech industries.
Today's theme is "The Bubble Economy, Its Collapse, and Long-term Recession." From the late 1980s through the 1990s, the Japanese economy was suddenly plunged from "heaven to hell."
Please don't listen to this as if it were some distant party memory, like, "Isn't the bubble that era where people were waving folding fans at discos?" The many economic challenges modern Japan faces today—such as the difficulty in raising wages, the "employment stability" and "corporate bankruptcy risk" you consider when job hunting, and even the country's massive debt problem—all have theirstarting pointin the "aftermath of the bubble collapse." This is a highly targeted area in the Common Test, often linked with "monetary policy" and "deflation."

1. Why did Japan end up with a surplus of money? ~It started at a luxury hotel in New York~
Let's start with our first "question."
Why did the prices of land and stocks in Japan skyrocket to abnormally high levels, far removed from the real economy, in the late 1980s?
The trigger was thePlaza Accord, agreed upon by the finance ministers and central bank governors of the G5 nations at the Plaza Hotel in New York in 1985.
At the time, the US was experiencing a strong dollar, which made American products difficult to sell overseas and increased imports from countries like Japan, leading to a serious political issue regardingcurrent account deficits, centered on massive trade deficits. So, they decided, "Let's correct the strong dollar and make other countries' currencies (especially the Japanese yen) stronger!" As a result, the yen appreciated rapidly.
When the yen becomes stronger, Japanese products become more expensive overseas, dealing a major blow to Japanese export companies. This is theendaka (strong yen) recession. Panicked, the Bank of Japan (BOJ) implemented a low-interest-rate policy (monetary easing), lowering the official discount rate (interest rate) multiple times to support the economy. In other words, they made it easier to borrow money from banks.
From here, the economy began to roll in an unexpected direction.

[Structural Diagram 1] The mechanism from the Plaza Accord to the bubble's emergence
[Plaza Accord] ──> Rapid [Yen Appreciation] ──> Decline in exports / [Endaka Recession]
│
┌──────────────────────────────────────────┘
▼
[Low-interest-rate policy (monetary easing)] + [Financial liberalization]
│
├─> The [Land Myth] that "land prices will never fall"
└─> Banks' [Excessive lending]
│
▼
Massive funds concentrated in land and stocks ──> Emergence of the [Bubble Economy]!

Factories disappear from cities, and overflowing money turns to "speculation"
Triggered by the strong yen, many companiesmoved their production bases overseas, and from the 1990s onwards, thehollowing out of industrybecame a serious problem, leading to domestic industrial decline.
Meanwhile, this was also a period whenfinancial liberalization, which advanced interest rate deregulation and competition among financial institutions, andderegulationacross society were progressing. Banks began lending to companies and individuals more aggressively than ever before. The world was flooded with "cheap and abundant money" borrowed at low interest rates.
At the time, theland myththat "Japanese land prices will never fall" was widely believed, and banks actively engaged in excessive lending using land as collateral. As a result, massive amounts of funds with nowhere to go poured intospeculation(trading aimed at capital gains). Prices inflated far beyond their actual value—this was the birth of thebubble economy.
At the time, land prices soared so abnormally that it was said, "You could buy the entire United States just with the land prices inside Tokyo's Yamanote Line."

2. The bubble bursts, the financial system collapses
However, a bubble without substance must eventually burst. To curb the abnormally high land price surge, the government and the BOJ slammed on the brakes between 1989 and 1990. The BOJ raised interest rates sharply, and the Ministry of Finance (now the Ministry of Finance and the Financial Services Agency) issuedtotal volume control on real estate lending(so-calledtotal volume control) in 1990 to suppress the growth of real estate loans. This became a major factor accelerating the bubble's collapse.
"If land prices aren't going to rise anymore, we have to sell!" Everyone started selling land and stocks all at once. Between 1990 and 1991, both stock and land prices plummeted. The bubble burst in the blink of an eye.

[Structural Diagram 2] The bubble collapse and the negative chain reaction
[Plummeting stock and land prices]
│
▼
Massive emergence of [non-performing loans] (bank loans becoming unrecoverable)
│
▼
Banks' [credit crunch] and [loan withdrawal] (financial system dysfunction)
│
▼
Deterioration of corporate cash flow ──> Sharp increase in corporate bankruptcies
│
▼
[Decrease in capital investment] / [Deterioration of employment] ──> Toward a [deflationary spiral]

After the bubble burst, the Japanese economy entered a long period of stagnation. This period was initially called thelost decade, but because the economic slump lasted longer than expected, it is now sometimes referred to as the "lost 20 years" or "lost 30 years."
After the bubble burst, banks burdened with large amounts ofnon-performing loans(unrecoverable loans) severely restricted lending to companies for fear of their own financial deterioration. This includedcredit crunch(refusing to lend new funds to companies) andloan withdrawal(forcibly collecting already-lent money before the repayment deadline), which rapidly worsened corporate cash flow.
Now, let's look at actual data and the chronological flow to see just how serious the situation was.

[Structural Diagram 3] Chronology from the bubble era to the long-term recession
1985 ── Plaza Accord
1986 ── Endaka recession, start of low-interest-rate policy
1987 ── Bubble economy in full swing (soaring stock and land prices)
1990 ── Total volume control on real estate lending (factor that accelerated the collapse)
1991 ── Bubble collapse (start of the economic downturn)
1997 ── Financial crisis (successive bankruptcies of major banks and securities firms), enactment of the Fiscal Structural Reform Act
1998 ── Enactment of the Financial Reconstruction Act, measures to stabilize the financial system
2000s~ ── Toward the "lost 20/30 years"

Look at the graph! The way it spikes in the late 1990s is intense, isn't it? Between 1997 and 1998, major banks and securities firms went bankrupt one after another. The graph of total liabilities jumps up significantly. It was truly the moment the "safety myth" that "super-large companies and financial institutions will never go bankrupt" crumbled away.

3. The "deflationary spiral" and attempts at structural reform
As companies collapsed one after another, what did the surviving companies do? Business restructuring to cut costs, so-called restructuring (risutora). While originally meaning business reorganization, in Japan, it was used to mean "large-scale personnel cuts (layoffs)" and "curbing new hiring."
The people directly affected by this were the young people who entered society in the late 1990s to early 2000s. This is the so-called "employment ice age generation."
When companies lose profits and people refrain from shopping due to anxiety about the future, what happens to the economy as a whole?
The answer is not just that "wages go down." The following negative cycle begins to spin round and round.

[Structural Diagram ④] The Deflationary Spiral Mechanism
┌─────────────────────────────────────────┐
│ │
▼ │
Decrease in corporate profits │
│ │
▼ │
Decrease in capital investment & worsening employment (restructuring/wage cuts) │
│ │
▼ │
Decrease in income/future anxiety ──＞ Stagnation of consumption │
│ │
▼ │
Goods do not sell, leading to price cuts (deflation) │
│ │
└─────────────────────────────────────────┘
This vicious cycle is called a deflationary spiral. Looking at the trends in real economic growth rates, we have entered a serious era of low growth, hovering around 0%, a sharp turn from the approximately 10% during the high economic growth period and 4-5% during the stable growth period.

How did the government and the Bank of Japan respond? (Stabilization of the financial system)
The government did not stand idly by in the face of this unprecedented crisis. They implemented various measures to prevent a financial collapse.

1. Depositor protection: To alleviate the anxiety of depositors, the full lifting of the payoff (deposit insurance system) was postponed.

2. Enactment of the Financial Reconstruction Act (1998): A legal framework was established to handle bankrupt financial institutions.

3. Establishment of the Resolution and Collection Corporation (RCC): This entity purchased and proceeded to collect on non-performing loans.

4. Strengthening capital adequacy ratios and injection of public funds: Huge amounts of public funds (tax money, etc.) were injected to bolster bank capital and restore confidence in the financial system.

Although there was harsh public opinion asking, "Why use tax money to bail out financial institutions?", it was considered an essential measure for stabilizing the financial system to prevent the entire financial system from collapsing and paralyzing the economy.
Furthermore, as a result of repeated massive public works projects intended to stimulate the economy, the nation's fiscal deficit ballooned like a snowball. In 1997, the Ryutaro Hashimoto cabinet enacted the Fiscal Structural Reform Act, which promoted expenditure cuts as part of fiscal reconstruction, and concurrently raised the consumption tax rate from 3% to 5%. However, the timing was unfortunate as it coincided with the Asian financial crisis, which made things difficult by actually cooling down the economy.

Today's Summary and Key Points
These are today's important keywords. Reviewing just this part right before the test is highly effective!

• Plaza Accord: A 1985 agreement that corrected the strong dollar, which was a problem for the United States due to its massive trade deficit and current account deficit.

• Endaka (Strong Yen) Recession: An economic downturn caused by sluggish exports due to the rapid appreciation of the yen.

• Low-interest rate policy (monetary easing): A policy implemented by the Bank of Japan as an economic stimulus measure. It was one of the causes of the bubble economy.

• Industrial hollowing-out: A phenomenon since the 1990s where domestic industry declined due to the relocation of factories and other facilities overseas.

• Financial liberalization / Deregulation: Moves intended to stimulate the exchange of money through measures such as interest rate liberalization.

• Land myth: The belief that "land prices will never fall." This accelerated excessive lending and the bubble.

• Bubble economy: A phenomenon in the late 1980s where land and stock prices soared abnormally, detached from the real economy.

• Total volume control on real estate lending: A measure to curb real estate lending issued in 1990. A major factor that accelerated the collapse of the bubble.

• Non-performing loans: Loans for which repayment has stalled and which have become unrecoverable for banks.

• Credit crunch / Loan withdrawal: Situations where banks refuse new loans (credit crunch) or forcibly recover existing loans (loan withdrawal).

• The Lost Decade: The long-term stagnation following the bubble collapse. Now also referred to as the "Lost 20 or 30 Years."

• Restructuring (Restra): Business reorganization. In Japan, it was frequently used to mean personnel reduction (layoffs).

• Deflationary spiral: A vicious cycle where falling prices, reduced capital investment, worsening employment, and lower consumption feed into each other.

• Deposit Insurance Corporation / Financial Reconstruction Act / Resolution and Collection Corporation: Mechanisms for appropriately handling failed financial institutions.

• Capital adequacy ratio / Public funds: Public funds injected for the purpose of restoring bank credit and stabilizing the financial system.

• Fiscal Deficit / Fiscal Structural Reform Act: A law enacted in 1997 that aimed for fiscal reconstruction through measures such as expenditure cuts and an increase in the consumption tax rate (from 3% to 5%).

Exam Study Tip! For the Common Test, it is extremely important to be able to explain the causal relationships behind 'why the bubble occurred' and 'why the long-term recession happened.' 'Plaza Accord → Yen Appreciation → Monetary Easing → Bubble → Collapse → Non-performing Loans → Credit Crunch → Deflation' Make sure to grasp this sequence as one continuous story!

Next Lecture Preview: Structural Reform and Challenges of the Modern Japanese Economy
The bubble collapsed. However, this is where the Japanese economy truly began to suffer. The government pushed forward with deregulation and structural reforms, but new issues regarding inequality and employment also emerged.
In the 2000s, which we will cover next time, the Junichiro Koizumi cabinet advocated for 'structural reform without sanctuaries,' forcefully pushing ahead with the privatization of the postal services and further deregulation of the labor market.
Was 'structural reform' the savior of the Japanese economy, or did it merely spread the pain? Next time, let's look at 'Structural Reform and Challenges of the Modern Japanese Economy'!
That is all for today's class. Thank you for your hard work.