Japanese Bubble Economy - Essay Example

With the prevailing global financial crisis, there is a lot to talk about international economic communities on how to prevent such a long slump that Japan experienced after the end of the bubble economy period. In the late 1980s, Japan underwent its notorious bubble economy whereby the stock and the real estate prices climbed to a stratospheric height which was as a result of a speculative mania. In 1989, the Japan nickel stock hit a record high of all -time, only to crash speculatively immediately after, leading to the countrys real estate bubble to collapse. This threw Japan into an extreme financial crisis, and the country experienced the longest financial crisis in its history. Some events led to the economic outburst which has taken long for the country to recover (Colombo).

According to economic historians, the economic bubble period begun in September 1985 when Japan signed the Plaza Accord In New York. The contract that was arrived after the accord was signed called for the depreciation of the Dollar against the Japanese yen, and it was supposed to increment US exports by making them cheaper. Also, the Plaza Accord paved the way for most of the companies in Japan to buy more foreign assets. The companies went overseas and purchased a lot of properties such as golf courses in California. In 1989 December, the benchmark Nikkei 230 stock average had reached 39,000; however, the stock market performed poorly at the start of 1990 which saw it lose more than $2 trillion by December same year and this marked the end of economic bubble period (Hirakata et al. p.31)

Major causes of bubble burst

Financial deregulation

The deregulation of finance was a key factor that contributed to a conducive environment where firms could heavily borrow to invest in commercial, private land, and golf courses. The financial deregulation encouraged acquirement of contradicting financing options for Japanese corporations thus reducing their dependency on banks for funding. The Japanese banks in 1980s diverted their major target of credit supply and started focusing on non-traded good companies which include real estate and finance and more, and all of them were not controlled by international companies (Araki p.34).

Asset Deflation

Financial liberalization and lack of sensible regulation were major factors that contributed to the increased level of assets. Between 1980 and 1985, there was dismantlement of capital movement, on the other hand, there was deregulation of interest rates and the creation of new financial establishments. Since big firms had now focused on international capital and domestic securities market for loans, the local banks found another lending prospects which were a small and medium-sized business. Most of this firms were capable of borrowing for risky projects basing on real estate security (Araki p.35).Furthermore, asset price inflation was fueled by the monetary policy that was implemented in the second half of the 1980s. The bank of Japans normal rate of discount was reduced by 50 percent various steps to 2.5% between the conclusion of 1985 and at the beginning of 1987, and this remained unchanged for a more than two years, in spite of the increased economic activities. During this period, a lot of small business was able to borrow and invest in various activities. The constant low level of general price inflation during 1985 and 1990 might have debilitated the case for financial constriction. The ministry of finance in 1989 was aware that bubbles that were being experienced in stock prices and real estate. They were confident that the level of prices could reduce at given time. Different to their belief, in 1989, total bank asset drastically weakened from 508 trillion yen to 490 trillion the following year. From 1989, the government tightened the monetary policy sharply and increased that normal discount rate by 6 percent by September 1990. That same year, the equity prices started to fall, the Nikkei index had fallen by over 60 percent from its peak at the end of 1989. The ministry of finance came up with rules which restricted total bank lending to real estate sector(Araki p.35).

Investment

In the latter half of 1980s, there was the rapid growth of investment, and an increase in the capital-output ratio in relative to its rising trend since numerous low return and high projects were started. Therefore, the investment expenditure at this particular period was extreme, prompted by the joint influence of the boom in asset prices and careless loaning rules of commercial banks. The downfall of the asset price bubble was shadowed by a sharp decrease in local demand. As capital returns reduced, investment contracted since small and medium-sized business had been predominantly unfavorably influenced by a crush on credit(Araki p.37).

Consequences of the Resulting Long-Term Economic Recession

After the crash in late 1990, the Japanese economy came to a standstill, and the economy has struggled during the recession period. The conspicuous consumption of 1980s has not returned to the same level despite a mild economic recovery in 2000,s. In 1990,s corporation was not able to invest in consumers, and they had to curb their spending. The housing loan corporation that was famously identified as jusen went bankrupt and the largest banks were forced to merge to consolidate their mounting bad loans. Furthermore, a Difficult period in 1990,s made individual frown on the affected display of wealth while big Japanese corporations such as Sony and Toyota that dominated their respective industries during 1980,s faced stiff coemption from a rival firm in the Asian region especially South Korea (Harari p.10). The companies could also not pay their employees, and they were forced to replace their entire workforce with temporary workers that received little pay with no security. In the year 2009, these non-traditional most of the workforce and make a third of it. The wages for workers for a long period have stagnated, and real basic salary for workers have reduced by 14 percent from 1997. The great economy is in its recovery phase since the 1991 crush and succeeding lost decades. The Japan gross domestic product has taken more than thirteen years to recover to the same level as 1996. And to show a huge sigh of the economic problem, the countrys output has fallen behind. Japan output per capita was 13 percent in 1991 higher than Australia, however, in 2016, the real output dropped to 13 percent below the levels of Australia. The gross output and labor efficiency of Japan have been overtaken in the last 25 years, yet it was a global leader in both(Harari p.5).

The paper has focused on the rise and fall of the bubble economy in Japan. The paper has also focused on the causes of bubble burst economy and how the consequences of the resulting long-term economic recession.

Work Cited

Hirakata, Naohisa, et al. "Japan's financial crises and lost decades." Japan and the World Economy 40 (2016): 31-46.

Araki Haruka. "The Causes of the Japanese Lost Decade: An Extension of Graduate Thesis." (2005).

Colombo, Jesse. "Japan's Bubble Economy Of The 1980S |." Thebubblebubble.com. N.p., 2017. Web. 24 Oct. 2017.

Harari, Daniel. "Japans economy: from the lost decade to Abenomics." House of Commons Library, Standard Note SN06629. London: Oct 24 (2013).